The recently published federal budget (titled "Canada's Economic Action Plan 2013")
included high level guidance regarding the Government's
priorities for the regulation of financial institutions, services
and markets. The details of how these areas will be regulated will
become clear only when the applicable legislation and regulations
are introduced. Below is a brief overview of the main points of
emphasis in the budget as they apply to financial institutions.
Developing a Financial Consumer Code
The Government intends to develop a "comprehensive
financial consumer code" that would consolidate financial
consumer protection rules that now appear in various legislation
and related regulations. The code would be administered by the Financial Consumer Agency of Canada (FCAC). We
can expect consultation with stakeholders to begin in 2013.
Domestic Systemically Important Banks
In March, 2013, the Office of Superintendent of Financial
issued an advisory designating Canada's six major banks as
domestic systemically important banks (DSIBs). Due to the potential
impact that the failure of a DSIB could have on the domestic
economy, each DSIB will be subject to a risk-weighted capital ratio
requirement equal to a 1% common equity surcharge as well as
enhanced supervisory and disclosure requirements.
The budget also described the Government's intention to
implement a "bail-in" regime for DSIBs, including
provision for the "very rapid conversion of certain bank
liabilities into regulatory capital" in the event a DSIB's
viability is threatened. Following questions regarding the meaning
of "certain bank liabilities", the Department of Finance
has clarified that it is referring to regulatory capital of the
bank (which includes preferred shares and subordinated debt) which
will be converted into common equity of the bank in case of a
"bail-in". Such a conversion will be consistent with the
Basel III capital rules now in effect in Canada which require that
any regulatory capital (other than common equity) issued by banks
should be convertible into common equity upon the occurrence of
Canadian Payments System
The Government intends to continue its review of elements of
Canada's payments system following the report of the Task Force for the Payments Systems
Review. Recently, the FCAC
issued Commissioner's Guidance to clarify three issues
related to the Code of Conduct for the Credit and Debit Card
Industry in Canada (the "Code"). The budget includes the
Government's intent to finalize an addendum to the Code
mobile payments and to review the governance framework for the
payments sector generally together with the Bank of Canada.
Canadian Financial Institutions in a Global Marketplace
The Government has indicated its intention to promote the
strategic expansion of Canadian financial institutions
internationally. In recognition of the global nature of financial
markets, it will also propose allowing Canadian financial
institutions greater flexibility to appoint non-residents as
members of board committees, though the requirement that a majority
of members be Canadian residents will remain.
The Role of Mortgage Portfolio Insurance
The Government will continue to address the role of mortgage
portfolio insurance in Canada's housing market. It intends to
do so by:
Limiting the insurance of low-ratio mortgages to those that are
used in conjunction with securitization programs sponsored by the
Canada Mortgage and Housing Corporation (CMHC); and
Prohibiting any use of any CMHC insured mortgage as collateral
in any securitization program other than those sponsored by
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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