Audit And Review Processes In RPAA Compliance

Payment Service Providers (PSPs) and Money Services Businesses (MSBs) are operating differently in Canada as a result of the Retail Payment Activities Act (RPAA). Entities must put in place strong audit and review procedures to ensure RPAA compliance. 

Let’s look at the audit and review processes under the RPAA that help PSPs operate seamlessly in Canada.

Understanding The RPAA Compliance Framework

The RPAA establishes a thorough framework for monitoring PSPs doing business in Canada. Its main goals are to protect money, maintain operational transparency, and reduce the risks connected to payment operations. 

Audits and reviews are essential components of the compliance program that regulated organizations must create and maintain in order to achieve these goals.

These systems help pinpoint areas that need development and guarantee that the organization's procedures comply with RPAA regulations.

The Role Of Audits In RPAA Compliance

An audit is a methodical analysis of a company's financial operations, operational procedures, and compliance program. 

According to the RPAA, audits are an essential instrument for guaranteeing compliance with rules since they evaluate how well internal controls and procedures handle the risks associated with payment activities.

Key Elements Of RPAA Audits

1. Scope

The audit should focus on RPAA-specific compliance areas, such as:

• Appropriate management and protection of end-user finances
• Compliance with reporting and data storage requirements
• Frameworks for managing financial and operational risks

2. Internal vs. External Audits

• Internal Audits: Conducted by the organization’s compliance team to ensure ongoing adherence.
• External Audits: Performed by third-party professionals to provide an unbiased assessment and meet regulatory expectations.

3. Frequency

Periodically planned audits should be followed by follow-up audits brought on by significant operational changes, the introduction of new products, or non-compliance with regulations.

4. Documentation and Reporting

Thorough documentation of the audit results is important to ensure proper distribution to the relevant parties. For example, compliance officers must receive all documentation to help them determine whether a PSP is meeting regulatory guidelines.

Review Processes: Continuous Compliance Monitoring

Reviews entail continuous monitoring of compliance activities, whereas audits are conducted on a periodic basis. These procedures are intended to detect possible problems before they become more serious and to guarantee real-time compliance with RPAA regulations.

Core Components Of Review Processes

1. Policy And Procedure Review

Regular updates to compliance policies ensure they remain aligned with evolving RPAA regulations and industry best practices.

2. Transaction Monitoring

Continuous review of payment transactions to detect anomalies or suspicious activities that may indicate non-compliance or fraud by the PSP.

3. System And Operational Checks

Evaluating whether the technical infrastructure—such as data storage systems and reporting tools—meets RPAA requirements.

4. Employee Training Reviews

Ensuring staff are well-versed in RPAA regulations and their role in maintaining compliance. Regular training reviews help assess the effectiveness of these programs.

Audit and Review Processes for PSPs and MSBs

Under the RPAA, PSPs are subject to particular obligations and challenges. For example, third-party service providers (TPSPs) are frequently used by entities to assist their operations. 

These providers have a big influence on compliance audits and reviews, regardless of whether they are custodial (keeping end-user assets) or non-custodial (for example, providing liquidity or KYC software solutions).

Addressing Third-Party Risks

1. Third-Party Agreements

To reduce regulatory risks, contracts with TPSPs must specify compliance duties and reporting requirements in detail.

2. Due Diligence Reviews

Conduct regular reviews of third-party providers to ensure they operate within the RPAA framework, focusing on:

• Safeguarding measures for funds
• Data handling and storage practices
• Incident response readiness

3. Risk-Based Assessment 

To assess the particular risks connected to TPSPs, use a risk-based approach (RBA), modifying supervision procedures according to the provider's function and operational impact.

Reporting Obligations In RPAA Compliance Audits and Reviews

Under RPAA, all registered MSBs are required to report to the Bank of Canada. Effective reporting is necessary to ensure supervision of activities that the PSP is performing.

1. Annual Report

All PSPs must prepare an annual report and submit it to the Bank of Canada. The report must include the following information:

• Risk management framework details
• Fund safeguarding information such as details of account providers and the methods the PSP is using for protecting funds

2. Significant Change Report

Before a PSP can make a significant change in their retail payment activities, they must notify the Bank of Canada. Different changes can affect operational risks and may compromise the safeguarding of end-user funds. So it is necessary to report such changes to ensure they meet compliance regulations under RPAA.

The PSP must also include:

• Reason for the change
• PSP’s analysis of how this change would affect their operation risks and funds protection methods
• Any new policies that they will introduce because of the change

3. Incident Reports

RPAA's main purpose is to mitigate transaction risks associated with retail PSPs.  That is why thorough incident reports must be submitted regularly to reduce the impact of major incidents that can affect the fund security of end users.

A compliant incident report must detail:

• The nature and manner of the incident
• Impact of the incident on individuals or entities under the RPAA
• Corrective measures that can be taken by the involved people to overcome the incident

Implementing a Robust Audit and Review Framework

PSPs and MSBs must focus on their risk management response and funds safeguarding when implementing an effective framework for RPAA compliance:

1. Risk Management And Incident Response Framework

The risk management and incident response framework must be in writing. It should ensure the PSP can perform its retail payment activities without any deterioration of systems. A PSP must also outline the resources they require to implement this framework such as:

• Human resources including skills and training of personnel
• Financial resources

Once the framework is approved by senior officers and PSP’s board of directors, it can be used yearly to reduce transaction risks and manage financial incidents.

2. Framework For Safeguarding Of Funds

A PSP must implement a written framework for safeguarding funds according to the RPAA. The main purpose of such a framework is to ensure end users can access funds without any delays. It also helps with paying end users according to feasibility if specific incidents occur.

Information that this framework must describe includes:

• PSPs system information
• Policies by PSPs and MSBs
• Control methods for achieving objectives under RPAA

Benefits of Effective Audit And Review Processes

RPAA compliance offers numerous benefits to PSBs and MSBs in Canada such as:

1. Combat Money Laundering

RPAA enhances the transparency of transactions by PSPs and MSBs, ensuring a reduction in illegal activities such as money laundering. An effective audit and review process allows the Bank of Canada to supervise providers thoroughly.

2. Offers Oversight Based On Risks

RPAA encourage PSPs to focus on the transaction impacts of their end users and enhances the efficiency of payment systems. The regulatory authorities assess the risk level that consumers may face because of PSP’s policies. With annual reporting and constant approvals,  RPAA allows service providers to evaluate issues and correct them.

3. Enhanced Risk Management

As part of risk management and incident response frameworks, PSPs are required to perform a thorough analysis of their third-party service providers. Independent reviewing every year also helps MSBs and PSPs improve their financial system and maintain RPAA compliance. 

4. Promotes Stability Of Financial Systems

A stable and efficient financial system drives economic growth in Canada and benefits its residents. The inclusion of security measures under RPAA makes retail payments safer for consumers and businesses. 

The requirement of notices and approval by the Bank of Canada before PSPs can implement any changes ensures that new policies reduce the impact of unforeseen incidents, enhancing the overall stability of financial systems.

Conclusion

RPAA requires PSPs to maintain payment accounts, hold end-user funds, and initiate payments upon requests of end users. If any entity violates this act, action against them can be taken in the form of financial penalties, court orders, debt fees, and more.

This is why it is necessary to fully comprehend the intricate audit and review process in RPAA compliance. Luckily, you don’t have to look far if you need professional help to ensure you’re RPAA-compliant. Contact us now to understand RPAA requirements and implications with our experts.