The Retail Payment Activities Act (RPAA) establishes a strong compliance framework for money services businesses (MSBs) and payment service providers (PSPs) in Canada's changing regulatory environment. In this ecosystem, third-party service providers (TPSPs) are essential because they frequently offer many services as part of these businesses' operations.
The operations of TPSPs frequently have a significant effect on RPAA compliance, whether they are offering custodial or non-custodial services, managing end-user funds, or offering liquidity and Know-Your-Client (KYC) solutions. In order to guarantee regulatory congruence, this blog explores the function of TPSPs under the RPAA and describes how MSBs and PSPs might manage these connections.
Looking to strengthen your MSB operations further? Start with our guide on Understanding the MSB License in Canada.
What Is The Retail Payment Activities Act?
To improve the security and effectiveness of Canada's payment systems, the RPAA creates a compliance framework. Although PSPs are the main focus of the RPAA's regulation, MSBs are also held responsible for their alliances, especially with TPSPs whose activities have an impact on compliance. The administration of TPSPs is a primary concern for regulated organizations since they are an essential link in the compliance chain that deal with money, data processing, or regulatory requirements.
To learn more about the broader implications of the RPAA for fintech companies and PSPs, read our detailed RPAA Executive Summary.
How MSBs And PSPs Rely On Third-Party Service Providers
A variety of tasks are carried out for MSBs and PSPs by TPSPs. They can be divided into one of two major groups based on their role:
1. Custodial vs. Non-Custodial Service Providers
- Custodial Service Providers: On behalf of PSPs or MSBs, these TPSPs hold end-user funds. Financial institutions that oversee a group of customers' accounts or digital wallets are two examples. Custodial providers must follow strict data protection and risk management procedures since they bear direct responsibility for protecting funds.
- Non-Custodial Service Providers: These include organizations that provide necessary services without keeping client funds, like liquidity providers and KYC software suppliers. For example, a liquidity provider enables smooth transaction settlements, while a non-custodial KYC provider guarantees adherence to anti-money laundering (AML) regulations by authenticating client identities.
2. Payment Service Providers As Third-Party Service Providers
PSPs are frequently used by MSBs as TPSPs in their operations. For instance, a PSP could be used by an MSB to handle payment gateways, process transactions, or enable international remittances. The PSP may act as a partner and service provider in certain situations to guarantee adherence to RPAA requirements.
For insights into PSP registration and compliance preparation, refer to our guide on PSP Registration with the Bank of Canada.
The Role Of TPSPs In RPAA Compliance
According to the RPAA, MSBs and PSPs must ensure that their TPSPs adhere to legal requirements, particularly in cases where the services rendered have a substantial influence on compliance. This duty applies to TPSPs engaged in:
1. Managing End-User Funds
- Fund safeguarding procedures must be put in place by TPSPs acting as custodial service providers in order to secure end-user assets.
- MSBs are responsible for ensuring custodial TPSPs follow the operational risk management guidelines and reporting requirements set forth by FINTRAC.
2. Data Collection, Processing, And Storage
TPSPs frequently deal with private client information, such as transactional and personal data. Important factors for compliance include:
- Data Protection Standards: To prevent unwanted access, TPSPs need to have robust cybersecurity measures in place.
- Cross-Border Data Handling: MSBs and PSPs are required to evaluate jurisdictional risks and guarantee adherence to Canadian privacy rules for TPSPs handling data outside of Canada.
3. KYC And AML Compliance
TPSPs that provide KYC software or AML compliance solutions are crucial for regulatory compliance. These vendors:
- Assist PSPs and MSBs with customer identity verification in accordance with FINTRAC regulations.
- Enable real-time transaction monitoring to identify questionable activity.
4. Operational Risk Management
TPSPs impact operational risk in a number of ways, such as scalability and service dependability. For instance:
- Liquidity Providers: Liquidity providers are essential to MSBs' ability to settle transactions smoothly. If the TPSP is unable to provide liquidity on time, MSB activities may be disrupted and RPAA provisions may be broken.
- Payment Gateways: Strong mechanisms must be put in place by PSPs acting as TPSPs in order to reduce downtime and avoid interruptions to operations.
Best Practices For Managing TPSPs
It is recommended that MSBs and PSPs implement thorough management procedures for their TPSPs in order to comply with RPAA regulations.
1. Conduct Comprehensive Risk Assessments
Before engaging a TPSP, evaluate:
- Inherent Risks: Concerns related to the type of services rendered, like improper handling of funds or data breaches.
- Residual Risks: Risks that persist following the implementation of mitigation measures, such as compliance audits or improved security protocols.
You can read more about the Risk Based Approach (RBA) here.
2. Formalize Relationships Through Robust Agreements
TPSP agreements should clearly define roles and responsibilities, including:
- Data Management: Specify protocols for data collection, storage, and processing, ensuring compliance with Canadian privacy laws.
- Compliance Obligations: Outline the TPSP’s responsibilities for adhering to FINTRAC and RPAA standards.
- Incident Reporting: Clearly define the procedures and timeframes for reporting security or operational incidents.
3. Monitor And Audit TPSPs Regularly
MSBs and PSPs should:
- Conduct periodic audits to assess TPSP compliance.
- Put in place continuous monitoring mechanisms to keep tabs on TPSP performance and compliance with established guidelines.
Neglecting TPSP compliance could lead to serious repercussions. Learn about potential FINTRAC fines and penalties for MSBs.
The Cost of Neglecting TPSP Compliance
Non-compliance by TPSPs can result in:
- Regulatory Penalties: FINTRAC imposes penalties for violations of compliance obligations, even if the fault lies with the TPSP.
- Operational Disruptions: Failures by custodial or non-custodial TPSPs can halt critical operations, damaging business continuity.
- Reputational Harm: The related MSB or PSP's reputation may be damaged by events such as data breaches or financial mismanagement by a TPSP.
Building A Compliance-Centric Culture With TPSPs
To mitigate risks, PSPs and MSBs should treat TPSPs as extensions of their compliance framework. Practical steps include:
- Joint Training Programs: Ensure TPSPs understand their compliance obligations under the RPAA.
- Collaborative Risk Management: Assist TPSPs in creating risk-reduction plans customized for their operations.
- Regular Updates: Share information on regulatory changes and how they impact the TPSP’s responsibilities.
Conclusion
Particularly when offering vital services like custodial fund management, payment processing, or AML compliance, TPSPs are essential to the operations of MSBs and PSPs. Because of the opportunities and hazards that come with their involvement, the RPAA requires appropriate oversight. MSBs and PSPs can comply with RPAA standards, protect their operations, and uphold regulatory trust by taking a proactive stance that includes formalizing agreements, doing risk assessments, and cultivating a compliance-first culture.
It's time to assess how third-party service providers affect your compliance framework if your company uses them. Long-term success in Canada's payments ecosystem depends on a strong cooperation with TPSPs, which goes beyond a simple legal necessity.
Want to find out more? Contact us for RPAA compliance help today
