What might need to change in the imaging environment? (Duplicate Items, Part 4)
In the cheque imaging world, duplicate payment items (duplicates) are risky business. As explained in Part 1 of this series, the CPA has opened industry dialogue on this issue to explore ways to manage the risk effectively. We believe a collaborative approach is essential to maximizing the benefits of cheque imaging for Canadians.
In Part 2 we shared lessons learned from the U.S. transition to imaging, and high-level concerns about duplicates in the U.S. imaging environment. In Part 3 we discussed elements of the current Canadian framework for dealing with duplicates, and how these affect financial institutions (FIs) and their customers.
In this article, we take a closer look at key policy considerations. What might need to change as image capture and payment exchange gain traction in Canada?
Key policy considerations
CPA rules allow FIs to return certain payment items through the clearing system if for any reason payment is refused or cannot be obtained. This is an important risk control mechanism, particularly for payments where authorization and validity can't be determined prior to clearing and settlement.
The CPA follows specific criteria and a number of guiding principles when establishing rules that provide for recourse through the clearing system. These are fundamental to ensuring a sound payments system:
1. Safeguarding access to deposit accounts
FIs play a key role in safeguarding access to deposit accounts by examining payment items and ensuring their eligibility for clearing.
Clearing rules should support this principle.
2. Know your customer (KYC) policies and practices
FIs are responsible for knowing their customers. Among other advantages, KYC policies and practices help ensure that only eligible items are entered into the clearing system. For example, while automation of the cheque clearing process has created tremendous efficiencies, it also means that FIs may not scrutinize each individual payment item prior to clearing and settlement. Effective KYC policies help FIs manage this risk and play a role in helping to ensure that only eligible items are originated by their customers.
Clearing rules shouldn't impede an FI's responsibility to employ effective KYC practices.
3. Roles and responsibilities
A sound payment system must consider the roles and responsibilities of the various parties involved in a payment transaction.
While FIs are responsible for safeguarding access to deposit accounts, account holders should also be vigilant about monitoring account activity. This is why return timeframes in the CPA rules are reasonably limited. After the timeframe for recourse under CPA rules has expired, it's the payor's responsibility to seek recourse outside of the clearing system.
Elements of the Canadian framework that may need to change
As the Canadian financial industry considers options for dealing with duplicates in the imaging environment, it should consider:
- The impact technology has had on the roles and responsibilities of the various parties involved;
- Who is in the best position to prevent or detect fraud or error when thinking about recourse and liability; and
- How the CPA rules should provide appropriate incentives to manage risk.
The CPA believes that the following elements of the Canadian framework for the treatment of duplicates require careful consideration as image capture and payment exchange gain traction in Canada.
What FIs can do
1. Capacity to prevent and detect duplicates
Based on lessons learned from the U.S. experience, it's essential for the Canadian financial sector to enhance duplicate prevention and detection in order to minimize unintended impact to customers and speed up resolution. Opportunities for enhancement through duplicate detection software and other methods exist at the depositing customer's FI, at payment processing centers, and at the paying customer's FI1.
What the CPA framework could address
2. Definition of a duplicate
The current definition of a duplicate in the CPA rules is "an authorized Item that has been paid more than once." Given the enhanced focus on duplicate prevention and detection, it may be appropriate to amend the definition to focus on presentment of the payment item.
3. Duration of the return timeframe for duplicates
CPA rules permit an extended return timeframe for duplicates - up to 90 calendar days. This was deemed appropriate when duplicates were rare in Canada, resulting only from isolated internal processing errors at FIs.
However, the U.S. experience has shown that while image-based clearing and remote deposit capture (RDC) services offer unsurpassed convenience and efficiency, they also introduce new and different causes of duplicates, including fraud and customer RDC error. U.S. imaging experts have shared that the number of duplicates being detected by duplicate detection software far exceeds what they'd anticipated prior to the rollout of RDC. The pain point of resolving these issues is high for both FIs and their customers. Given the increased risk of duplicates in the imaging environment, it is important to consider whether the CPA's 90 day return timeframe remains appropriate in order to manage the risk effectively.
What regulators and legislators should consider
4. Bills of Exchange Act (BEA)
The BEA was written in the age of paper payment transactions. Under its current "holder in due course" provisions 2, cheque writers may be exposed to increased risk as image capture and payment exchange gain traction in Canada. How will Canadian courts interpret the "holder in due course" provisions in terms of responsibility and liability for duplicates in the imaging environment? Is further clarification required?
In light of Canada's transition to an imaging environment, updates to other elements of the BEA, such as provisions for "crossed cheques", which may interfere with the legibility of cheque images, may also need to be considered.
Stay up to date
While this article marks the end of our series on duplicates, the CPA's work in this area is just beginning.Subscribe to CPA updates or follow us on Twitter (@cdnpay) to stay up to date.
1For more information on opportunities to prevent and detect duplicates, see Part 2 of this series. back to reference
2 For more information on the increased risk for cheque writers under the "holder in due course" provisions, see Part 3 of this series. back to reference