Electronic Funds Transfer Systems

• Author: M.H. Ogilvie
• Profession: Chancellor's Professor and Professor of Law, Carleton University
• Pages: 339-370

339

Chapter 9

ELECTRONIC FUNDS

TRANSFER SYSTEMS

a. IntroduCtIon

The latest stage in the evolution of payment systems between humans

from barter to precious metals to money to negotiable instruments is

the development of payment by computerized electronic funds tr ansfer.

Indeed, Paget describes electronic funds transfer as the third of three

great ages of payment, succeeding payment by cash and paper-based

payment.1 Just as banks have been central to cash and paper-based pay-

ment systems, so, too, have they been central to payment by electronic

funds tran sfer (EFT). Yet, despite all the recent marketplace excitement

around the computerization of banki ng services, it is important to state

at the outset that EFT is simply another method of effecting payment,

of transferring economic value, and while its implementation has re-

sulted in some new legal rules resulting from changes in banking prac-

tice, it has little impact on the underlying concepts in the law about

the legal relationship between bank and customer. Each party to the

contract is bound by the same duties and standards of care in giving

and implementing payment inst ructions electronically as in giving a nd

receiving instructions by paper.

1 Mark Hapgood, ed., Paget on Banking, 12th ed. (London: Butter worths, 2003) at

284 [Paget].

BANK AND C USTOMER L AW IN CA NADA340

In contrast to the United States, where the Electronic Funds Transfer

Act was passed in 1978,2 or the United Kingdom, where there is a grow-

ing body of common law, as well as various European Union directive s,3

in Canada there is neither legislation nor a substantial body of caselaw

def‌ining the law in this area. Rather, in Canada the rules governing

EFT remain within the realm of banking industry practice. The rela-

tive absence of caselaw may suggest that those rules are working well

and have led to few disputes in the courts. On the other hand, the cost

of litigation may have deterred most potential litigants. It is diff‌icult

to judge. However, the absence of law means that a text such as this is

largely limited to descr ibing the various services offered, and the se will

be covered in this and the next two chapters (Chapters 9 to 11).

The focus of this chapter is the infrastructure of the electronic and

paper payments system, to which s ome references were made f rom time

to time in the previous chapter, which assumed but did not explicitly

address its exi stence. Whether customer payment or collection instruc-

tions are delivered electronically or by paper to the customer’s bank,

the actual transmission of economic value between and among banks

requires an industr y-wide inf rastructure to facilitate that tra nsmission.

The main infrastructures in Canada are operated by the Canadian Pay-

ments Association (CPA),4 of which all deposit-taking f‌inancial institu-

tions are members, so as to have access to the networks which permit

them to offer payment and collection services to their customers. The

major networks operated by the CPA include the Automated Clearing

and Settlement System (ACSS), the United States Bul k Exchange System

(USBES) for funds denominated in U.S. dollars, and the Large Value

Transfer System (LVTS) for transfers in excess of $25 million. However,

not all economic value in Canada is transmitted through CPA systems.

In 2011, CPA transmitted 55 percent of the volume of payments and

77 percent of the value of payments in Can ada. But other payment meth-

ods, such as the credit card networks, “on-us” intra-bank transactions,

and pre-paid cards, transmitted together 45 percent of the volume of

2 Title XX of the Fina ncial Institutions Reg ulatory and Interest Rate Control Act of

1978 [FIRIRCA], Pub. L. No. 95-630, 92 Stat. 3641, 3728 (1978), 15 U.S.C.S. 1693.

At the state level, t his is governed by Artic le 4A of the Uniform Commercial Code.

3 EC Directive 97/5 on Cross Border Cre dit Transfers, [1997] OJ L43/25, intro-

duced through Cros s Border Credit Transfer Regul ations, 1999, S.I. 1999/1876;

EC Directive 1998/ 26/EC, Settlement Final ity in Payment and Secur ities Settle-

ment Systems, [1998] OJ L 166/11; EC Directive 2000/31/EC, Ele ctronic Com-

merce Directive, [200 0] OJ L 178/1; EC Directive 20 07/64/EC, Pa yment Services

Directive [2007] OJ L 319/5.

4 Chapter 3, Section E.

Electronic Fund s Tran sfer Systems341

payments and 23 percent of the value of payments in Canada. Of that

45 percent, 26 percent related to credit cards and 16 percent to “on-us”

items.5 Chapter 10 will examine customer card based payment instruc-

tions issued on a transaction-by-transaction basis and encompassing

current established systems, as well as those recently introduced but

whose permanence is still unknown. Chapter 11 will examine other

payment mechanisms frequently used by customers, such as credit

cards, travellers’ cheque s, and bankers’ drafts. Prior to disc ussing these

systems, it is f‌irst necessary to examine the regulatory framework for

them, including relevant constitutional issues.

B. the reguLatIon of payment systems

The question of who may regulate derives from the question of which

level of government in Canada has constitutional jurisdiction to regu-

late electronic funds transfer. This jurisdiction is not expressly set out

in the Constitution Acts, but the answer must be the federal govern-

ment, for a number of reasons: (i) the paramount and exclusive au-

thority of Parliament over banking pursuant to section 91(15); (ii) the

other provisions in the Constitution Act, 1867, which suggest a strong

federal jurisdiction over payment methods, through sections 91(14),

(16), (18), and (20), relating to currency and coinage, the issue of paper

money, bills of exchange, and promissory notes, and legal tender; (iii)

the jurisdiction of Parliament over trade and commerce pursuant to

section 91(12) because payment systems are the circulation system

for commerce and must necessarily be national in nature; and (iv) the

general authority of Parliament in relation to matters of national im-

portance, whether framed under section 91(10)(a), “other works and

undertakings,” the “peace, order and good government” power under

section 91 or the residual power under section 91. This is not to sug-

gest that there may be some overlap or conf‌lict with provincial powers,

especially under section 92(13) “property and civil rights,” in relation

to consumer or contract issues, but the national interest in a single

federal regulatory regime in a matter as important as the payments sys-

tem would suggest the overwhelming importance of a single, national

regulatory regime.

Until the 1990s, there was virtually no Parliamentary oversight of

the payments system. The Canadian Bankers’ Association (CBA) and,

5 Canadian Pay ments Association (CPA), Annual Report 2011 (Ottawa: Canadia n

Payments As sociation, 2012) at 45.