Canada: New Framework For Federal Credit Unions Taking Shape

On July 5, 2012, the Finance Minister announced the release of guidelines and a package of five proposed regulations to implement the regulatory framework applicable to federal credit unions. The release and publication of these proposed guidelines and regulations constitute next-to-final steps taken by the Canadian government to establish the framework it had initially proposed in the 2010 federal budget to allow, under the Bank Act, provincial credit unions to be continued federally as a new form of credit union bank and new federal credit unions to be established.

The proposed guidelines and regulations were published in the Canada Gazette on July 7, 2012, in draft form and are subject to a 30-day review and comment period. They include consequential amendments to the Bank Act regulations and the following:

  • Guidelines Respecting Control in Fact for the Purposes of Section 377.2 of the Bank Act;
  • Prospectus (Federal Credit Unions) Regulations;
  • Regulations Amending the Canadian Payments Association Election of Directors Regulations;
  • Disclosure on Continuance Regulations (Federal Credit Unions);
  • Federal Credit Union Conversion Regulations; and
  • Regulations Amending Certain Regulations Made Under the Bank Act.

We understand that the Canadian credit unions, together with the "legal godfather" of the Canadian credit union movement, Joe Dierker, had substantial input on the regulations and that they believe the regulations will further the objective of the Canadian credit unions to strengthen their role as important financial services providers to millions of Canadians.

Each of the draft guidelines and regulations are discussed in greater detail below.

Disclosure on Continuance Regulations (Federal Credit Unions)

A provincial credit union making an application to be continued as a federal credit union must, according to this draft regulation, comply with detailed notification requirements prior to the members' vote authorizing such application. A notice must be given by the applicant credit union to each of its members and customers. The draft Disclosure on Continuance Regulations (Federal Credit Unions) specifies the process, content and publication requirements applicable to this notification requirement.

Guidelines Respecting Control in Fact for the Purposes of Section 377.2 of the Bank Act

The proposed guidelines were released for review and comment concurrently with the regulations package. The Guidelines Respecting Control in Fact for the Purposes of Section 377.2 of the Bank Act sets out the policy objectives and factors that the Finance Minister is to consider in deciding on whether an acquisition would lead to an investor obtaining control in fact in a transaction where the purchaser acquires a significant minority interest in a federal credit union.

The Finance Minister's decision as to whether a purchaser acquires control in fact must be made on a case-by-case basis. The factors to be considered according to the proposed guidelines include the types of relationships, agreements, undertakings or arrangements that could lead to control in fact. The impact analysis statement of the guidelines mentions that no individual factor or combination of factors should be determinative in the Finance Minister's decision and that each factor must be examined in light of the policy objectives listed in the guidelines. These include policy objectives such as the preservation of the federal credit union's mode of operations on a co-operative basis and its ability to manage its operations and develop its strategic vision by taking into account its best interest.

Prospectus (Federal Credit Unions) Regulations

The Prospectus (Federal Credit Unions) Regulations sets out the prospectus and minimum disclosure requirements applicable to federal credit unions before proceeding to a distribution of securities. This proposed regulation references provincial prospectus requirements and exemptions and makes them applicable to federal credit union.

Regulations Amending the Canadian Payments Association Election of Directors Regulations

This proposed regulation amends the provisions of the Canadian Payments Associations Election of Directors Regulations on the election process of directors for the Canadian Payment Association Board by members of the Canadian Payment Association (CPA). The proposed amendments to this regulation are consequential amendments to reflect changes made to the banking and co-operative classes of CPA members made to paragraphs 9(3)(a) and (b) of the Canadian Payments Act. Similar draft amendments to By-law No. 1 (General) made under the Canadian Payments Act have also been released concurrently with this regulation. The level of participation of credit unions as members in the governance of the CPA remains unchanged as a result of these proposed amendments.

Federal Credit Union Conversion Regulations

This proposed regulation sets out the requirements applicable to the "demutualization" process of a federal credit union into a bank with share capital. This regulation specifies the information that must be included to the conversion proposal to be approved by the Superintendent of Financial Institutions (Superintendent) and members of the federal credit union, and to the subsequent conversion application. It also grants the Superintendent certain powers that may be exercised prior to the approval of the conversion proposal. These powers include the possibility for the Superintendent to order various measures to the converting credit union to facilitate the members and shareholders' decision on conversion approval.

This proposed regulation also provides certain requirements meant to ensure that the conversion process is conducted in an even-handed manner. This includes the equal treatment of members, the analysis of the conversion's impact and certain restrictions imposed on management to prevent certain parties from benefiting in certain ways from the conversion process.

Regulations Amending Certain Regulations Made Under the Bank Act

This draft regulation makes consequential amendments to existing Bank Act regulations to allow them to apply to federal credit unions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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