Canada: Rejuvenation Of The Act Respecting Insurance And The Act Respecting Trust Companies And Savings Companies - An Overview

Last Updated: May 30 2013
Article by Sylvie Bourdeau

On April 30, 2013, the Minister of Finance and the Economy, Nicolas Marceau, tabled the Report on the application of the Act respecting insurance and the Act respecting trust companies and savings companies1(the "Report") in the National Assembly. A public consultation was then launched on May 7. Anyone interested in commenting on the Report can submit a brief before July 1, 2013. All proposals and comments received will be used as the basis for a complete review of the two laws.

Bill 31, An Act to amend various legislative provisions mainly concerning the financial sector,2 was tabled before the National Assembly on May 9. Bill 31 contains one of the changes proposed in the Report.3 Given the recent tabling of Bill 31 and the ongoing consultation on the Report, it is very unlikely that a bill containing the other proposals will be tabled in the course of this parliamentary session. It remains to be seen whether the other proposals will be tabled before the end of 2013.

This bulletin presents an overview of the 52 proposals made in the Report along with the changes proposed by Bill 31. The bulletin focuses on the aspects of the proposals that we consider to be most important. According to the Report, the proposals are intended to modernize An Act respecting insurance4 (the "IA") and An Act respecting trust companies and savings companies5 (the "ATCSC") and ensure the industry's development.

Harmonization

The first proposal6 seeks to harmonize the wording of the two statutes covered by the Report and to integrate provisions of the Business Corporations Act7 (the "BCA") that require adaptations. The goal of the first proposal is to increase legislative consistency and ensure that the IA and ATCSC include all provisions that apply to the financial institutions they govern. This would allow insurers that are not governed by the BCA to benefit, at least in part, from the legislative rejuvenation of that statute.

Constitution

It is proposed that the capital required to constitute an insurance company under section 27 IA be raised from $3,000,000 to $5,000,000, although the Autorité des marchés financiers (the "AMF") would still be able to require more where justified by the risks.8 The third proposal9 suggests that the legislation specify the factors to be taken into consideration to authorize the constitution of an insurer. These changes also apply to trust companies and savings companies.10

Third Party Protection

The presumptions in favour of third parties under section 13 BCA would be incorporated into the IA and the ATCSC.11 The presumptions would allow third parties to assume that the insurance company (or trust company or savings company, as the case may be) exercises its powers according to its statutes, by-laws and any unanimous shareholder agreement, that the information contained in documents filed with the enterprise registrar is true and that the senior management and officers of the insurance company, trust company or savings company, as the case may be, validly hold their positions and legally exercise their powers. No similar provision currently exists in the IA or the ATCSC.

Incorporation/Organization

The provisions of the BCA involving the first meeting would also be introduced into the IA and ATCSC, after being adapted to the financial sector by adding obligations specific to the reality of financial institutions, such as the appointment of an actuary and the setting up of an ethics and audit committee.12 Finally, it is also proposed that the AMF be given sole responsibility for issuing the certificate upon application for constitution or amendment of articles. This responsibility is currently shared by the AMF and the Minister.13

Transfer of Shares

Section 43 IA provides that the Minister's written authorization is required where an insurance company wishes to allot its voting shares or register their transfer where doing so would directly or indirectly give a person and his associates 10% or more of the voting rights attached to the shares or directly or indirectly increase the voting rights attached to the shares already held by a person and his associates to at least 10% or a multiple of 10% if the person does not already control the company, or give a person and his associates control of the company. The ATCSC contains a similar provision.14 In order to adapt them to multi-tiered financial conglomerates, it is proposed to stipulate what constitutes a transaction within the meaning of these sections and to what extent an indirect change of control is subject to approval. The Report also suggests expressly providing that a limited partnership may hold shares of an insurance company, a trust company or a savings company.15 The Report recommends that it be specified in both the IA and the ATCSC that the financial institution is responsible for submitting the authorization application and what information and documents must accompany the application.16 This information is currently available for insurance companies in the Guide de présentation d'une demande d'autorisation au ministre des Finances concernant l'attribution ou le transfert d'actions avec droit de vote par une compagnie d'assurance à charte québécoise[ 17 guide for submitting an application for authorization to the Minister of Finance concerning the allotment or transfer of voting shares by an insurance company with a Quebec charter,which is only available in French and must be filled out as per the requirements found in the IA.

The last paragraph of section 43 IA and of section 69 ATCSC, respectively, currently provide that the restrictions on transfers of the voting shares of a financial institution or of the person who controls it do not apply where the voting shares are listed on a Canadian stock exchange and the transfer would not give control to a person and his associates. This exception would be eliminated in light of the shareholders' significant financial capacity to provide the financial support that financial institutions need.18

Continuation

It is currently difficult for an insurance company constituted in Quebec to continue under another jurisdiction since the IA does not allow it. Insurance companies therefore have no choice but to proceed by way of a private interest bill. The procedure for the continuance of a financial institution under Quebec's jurisdiction is also very onerous, imposing requirements similar to those for constituting an insurance company. Proposal 10 would therefore introduce a streamlined continuance mechanism (import and export).19 To the extent that Quebec laws present advantages that laws in other jurisdictions do not provide, financial institutions in other jurisdictions could be interested in Quebec's legislative regime and decide to continue under its jurisdiction. Trust companies and savings companies are also covered by this proposal.

Amalgamation

Proposals 11 to 14 concern the amalgamation and conversion of insurers, trust companies or savings companies. It is proposed that the statutes specify the factors to be taken into consideration to authorize the amalgamation or conversion, considering that the entities in question are already licensed to do business and are members of a compensation organization. The Minister in charge of authorizing such transactions already considers some of these factors, but it is now being proposed that the industry be aware of them. The purpose is therefore to facilitate the process while adequately protecting the interests of policy-holders. We invite you to examine the factors proposed in the Report for further information.20

It is also proposed that both statutes specify the amalgamation or conversion process for financial institutions based on sections 276 to 287 BCA, which provide that the amalgamating corporations must enter into an amalgamation agreement and specify the required contents.21 Finally, it is proposed that amalgamating insurance companies be required to obtain an assessment from an independent external actuary of the actuarial liabilities of each amalgamating entity as well as those of the amalgamated entity.22

Section 175 IA prohibits the amalgamation of an insurance company with a company that is not an insurer. Proposal 14 would make such an amalgamation possible, provided the amalgamated company is an insurance company.23 This change would provide greater flexibility in the reorganization of financial groups.

The ATCSC still contains provisions that restrict the ownership of voting shares by non-residents,24 which are contrary to the free circulation of capital principle so valued in Quebec. As the equivalent provisions of the IA were repealed in 2002, it is proposed that the same be done for the ATCSC.25

Winding-Up

The sixteenth proposal26 targets the winding-up process and suggests that it be modernized and streamlined, and that it be monitored by the AMF.

Administration of an Insurer, a Trust Company or a Savings Company

Chapter 7 of the Report sets out Proposals 17 to 33. First, the Report recommends specifying in the IA and the ATCSC what books, accounts and records must be kept at the financial institution's head office (inspired by sections 31 to 39 BCA), the contents thereof, who may have access to them, and what conditions apply to the use of those contents.27 It also suggests that a retention period of six years after the end of the fiscal year during which financial statements, annual reports and the records of already settled insurance claims be kept.28 No provision to this effect currently exists.

The current statutes stipulate that a majority of the members of audit committees may not be directors or officers of a legal person to whom it is related. This provision requires the creation of two separate audit committees even where the related legal persons are both financial institutions and one is the sole shareholder of the other and the parent company's financial statements are shown on a consolidated basis. It is therefore proposed to stipulate that, in this specific situation, the same persons can sit on the two audit committees.29

The Board of Directors

Several proposals involve the Board and its constitution, obligations, duties and even remuneration. With respect to the Board's composition, the majority of its directors would now be required to reside in Canada (and no longer in Quebec, as is currently required for insurers).30 The IA and the ATCSC provide that the paid officers and employees of an affiliated legal person may not account for more than one third of the members of the Board. It is proposed that this threshold be increased to a percentage not exceeding 50% where the sole shareholder of the subsidiary is also a financial institution.31

With respect to the Board's obligations, which are currently dispersed throughout the law, it is proposed that they be consolidated in a single provision to facilitate consultation.32 Proposal 25 involves the introduction in the IA and the ATCSC of a provision similar to section 118 BCA, which lists the powers of the directors that cannot be delegated because of their importance. A list of powers is suggested and essentially contains the same elements as those set forth in the BCA, although certain additions specific to financial institutions have been made.33 It is also proposed that the members of the board of directors be explicitly required to see to compliance with the applicable laws, which specifies the compliance obligations of directors.34 Section 108 ATCSC already provides for this obligation.

Under section 285.3 IA, a director or officer is presumed to have exercised the care, prudence, diligence and skill that a reasonable person would have exercised if he acted in good faith and based his decisions on an expert's opinion or report. It is proposed to complete this provision so that the presumption would also apply where the director relies on the report, information or opinion provided by an officer of the corporation whom the director believes to be trustworthy and competent in the performance of his duties, a legal advisor, chartered accountant or other person engaged as an expert that he believes worthy of trust within his field of professional competence, or the opinion of a Board committee of which the director is not a member and that he believes worthy of trust.35 Section 110 ATCSC already protects an officer or director where he relied on an expert's report, if he has acted in good faith, on reasonable grounds and after reasonable inquiry.

The IA and the ATCSC require that the Board have at least seven directors sitting on the board of directors at all times. It is proposed that a provision be added to allow directors, provided they constitute a quorum and the AMF is informed of the situation, to fill the vacancies when the number of directors falls below the required minimum of seven.36 Along the same lines, it is proposed that a provision be added to the two statutes allowing a director or shareholder to apply to a court where the Board, or the meeting of shareholders, is at an impasse and is unable to make a decision, thus compromising the operation of the business. Such a procedure would be taken at the expense of the financial institution.37

Meetings of Shareholders, Participating Policy-Holders and Members

The IA and the ATCSC already contain a number of provisions relating to meetings, but they are incomplete. They therefore require that financial institutions adopt additional rules in their by-laws which, in the absence of specific indications, vary from financial institution to financial institution. Consequently, the Report proposes the adoption of special harmonized provisions respecting meetings of shareholders and members that will specify, among other things, the method of convening participating policy-holders and members, notification deadlines as well as the quorum required to hold such a meeting.38 It is also proposed to specify certain topics which may be discussed at annual meetings without needing to be mentioned in the notice of meeting.39

Investments

Chapter 8 of the Report is devoted to the investments insurance companies, trust companies and savings companies can make and includes several interesting elements that broaden their powers. It is proposed to henceforth allow financial institutions to hold directly any proportion of the equity or voting rights of a legal person that operates exclusively in the real estate sector, as long as the insurance company and the legal persons that it controls jointly control the legal person in question.40 The ATCSC still contains quantitative ratios limiting the investments of trust companies and savings companies. These ratios have been replaced in the IA by the obligation, for insurers, to adopt an investment policy and to comply with sound and prudent management practices. It is proposed that the same be done for the ATCSC.41 The Report also proposes including in the IA a provision allowing one or more financial institutions that are members of a financial group to invest in varying proportions in a limited partnership whose limited partner and general partner are also members of the same financial group.42

The IA currently provides that where an activity other than insurance generates more than 2% of the gross revenue of an insurance company, the Minister may require the company to form a subsidiary to carry on such activity.43 As this requirement can be very costly and this threshold very quickly reached, it is proposed that both the requirement and the threshold be eased as was done in the ATCSC44, which give this power to the Minister. It is therefore proposed that the two provisions be harmonized to give the AMF the power to require that a subsidiary be set up where, in its opinion, the carrying on of such activity, because of its nature or scope compared with the financial institution's other activities, makes the application of oversight and control standards ineffective.45

The Report provides for a relaxation of sections 62 IA and 191 ATCSC, which limit the capacity of financial institutions to pledge property as collateral. They prevent a financial institution from participating in securitization programs and from acquiring certain products where transactions require collateral. It is therefore proposed that financial institutions be given the possibility of pledging property as collateral for the needs of securitization programs or for derivative contracts,46 subject to the regulations under the IA and the ATCSC which could impose quantitative and qualitative limits on the property that may be pledged as collateral.

Public Protection Measures and AMF Powers

Chapter 947 primarily deals with the roles and intervention powers of the AMF. It is proposed that the AMF's powers of intervention, as well as the circumstances under which it may exercise these powers, be clarified in the IA to stipulate that where a financial institution experiences financial difficulties likely to endanger its solvency, it must implement the voluntary compliance program required and approved by the AMF, and that the AMF be given the power to issue a freeze order to prevent a person from disposing of certain property where insolvency seems inevitable.48 The ATCSC already contains such provisions.49 It is also proposed that the AMF's powers of intervention be broadened when an insurer, trust company or savings company is part of a financial conglomerate in order to allow the AMF to obtain information regarding a parent company and its subsidiaries.50 The AMF would also become responsible for issuing authorizations that are currently under the responsibility of the Minister in respect of certain operations that have no impact on the financial sector.51

The Auditor

Given the key role played by the external auditor, it is proposed that the IA be amended to allow the external auditor to attend meetings of shareholders, members and participating policy-holders, and to be heard.52 It is also proposed that a provision be added to the IA allowing a director or shareholder to invite the auditor to a meeting, to require directors who are informed of facts that may have entailed important amendments to the company's financial statements to inform the auditor and to enable the auditor to change his report if new facts are brought to his attention after filing his report. If the auditor becomes aware or is notified of an error or misstatement in the financial statements, he would be required to inform the directors.53 The ATCSC already contains similar provisions.54

Transfers Between Participating Funds and Non-Participating Funds

Proposal 46 of the Report has already been introduced in section 2 of the Bill 31. This section would add to the IA provisions allowing an insurance company that issues policies with participation in profits ("Policies") to make a transfer from its participating fund to a surplus account or a retained earnings account provided it has established a participating fund surplus management policy (the "Management Policy") that has been approved by its board of directors. Before the transfer, the designated actuary must produce a report certifying that the transfer is in conformity with the Management Policy. This report must be sent to the AMF at least 30 days before the date of the transfer. The AMF may forbid the transfer or allow it subject to certain conditions if it considers it advisable in the interest of the participating policy-holders.55 It may also require any relevant information or document in order to implement these provisions. Where it considers it advisable, the AMF may give written instructions to an insurance company that issues Policies concerning the management of participating fund surpluses. This amendment is significantly more advantageous than the current situation and the statutes that apply to insurers in several other jurisdictions.56

Elimination of Irritants and Miscellaneous Amendments

Chapter 10 contains other proposed changes of various topics: the easing of the requirements for foreign insurers that only offer reinsurance services in Quebec;57 the creation of disclosure and information requirements for insurers that take on the management of an uninsured employee benefit plan;58 and the amendments to the statute to reflect the changes in financial terminology.59

Reorganization of the Statutes

The last proposal involves an in-depth reorganization of the IA and the ATCSC to facilitate consultation and make the Acts more user-friendly by separating administrative provisions from those dealing with the AMF's oversight and powers of intervention.60

Conclusion

In many ways, the proposals would lead to a more flexible regime and significantly rejuvenate the IA and the ATCSC. The AMF would also be given a greater role. Several oversight powers would be transferred from the Minister to the AMF, which should simplify procedures and lead to quicker authorizations in some cases. The introduction and adjustment of the applicable provisions of the BCA, the IA and the ATCSC would allow financial institutions to identify their obligations more quickly and allow insurance companies not governed by the BCA to benefit therefrom. Finally, Bill 31, with its provisions to transfer amounts from a participating fund to a surplus account or a retained earnings account, represents an innovation. All that remains now is to keep a close eye on the pace at which the next steps unfold, namely the adoption of Bill 31, its coming into force, and the tabling of the bill amending the IA and the ATCSC.

Footnotes

1 On-line: http://www.finances.gouv.qc.ca/documents/autres/en/AUTEN_loiassusoc.pdf (consulted on May 8, 2013).

2 Bill 31 (introduced on May 9, 2013), 1st Sess., 40th Legis. (Qc), s. 1-5.

3 Québec, National Assembly, Journal des débats de l'Assemblée nationale, 1st Sess., 40th Legis., May 9, 2013, "Présentation de projets de loi -Projet de loi n° 31", 10:13 a.m. Specific consultations should be held for Bill 31, .

4 R.S.Q., c. A-32.

5 R.S.Q., c. S-29.01.

6 Report p. 25.

7 R.S.Q., c. S-31.1.

8 Proposal 2, Report p. 27.

9 Report p. 28.

10 S. 15 ATCSC.

11 Proposal 4, Report p. 29.

12 Proposal 5, Report p. 30.

13 Proposal 6 , Report p. 30; s. 23, 93.20 IA and 14 ATCSC.

14 S. 69 ATCSC.

15 Proposal 7, Report p. 31.

16 Proposal 8, Report p. 32.

17 AMF, March 2008, on-line: http://www.lautorite.qc.ca/files/pdf/formulaires-professionnels/assureur/guide-tranfert-actions-ass-fr.pdf (consulted on May 14, 2013).

18 Proposal 9, Report p. 32.

19 Report p. 33.

20 Proposal 11, Report p. 35.

21 Proposal 12, Report p. 36.

22 Proposal 13, Report p. 36.

23 Proposal 14, Report p. 37.

24 S. 72-81 ATCSC.

25 Proposal 15, Report p. 37.

26 Report p. 37.

27 Proposals 17-19, Report p. 39-40.

28 Proposal 20, Report p. 41.

29 Proposal 23, Report p. 43.

30 Proposal 21, Report p. 41, s. 54 par. 3 IA. Trust companies and savings companies would see the percentage of Canadian residents of their boards go from 75% to a majority.

31 Proposal 22, Report p. 42.

32 Proposal 24, Report p. 44.

33 Report p. 45.

34 Proposal 29, Report p. 47.

35 Proposals 26 and 27, Report p. 45-46, ss. 121 and 159BCA.

36 Proposal 33, Report p. 49; s. 146 BCA.

37 Proposal 32, Report p. 49; s. 146 BCA.

38 Proposal 30, Report p. 48.

39 Report p. 48.

40 Proposal 34, Report p. 51.

41 Proposal 35, Report p. 52.

42 Proposal 36, Report p. 52.

43 S. 33.3 IA.

44 S. 173 ATCSC.

45 Proposal 37, Report p. 53.

46 Proposal 39, Report p. 55.

47 Report p. 57.

48 Proposal 40, Report p. 62.

49 S. 324 and 329 and ff. ATCSC.

50 Proposal 41, Report p. 63.

51 Proposal 43, Report p. 64.

52 Proposal 44, Report p. 64.

53 Proposal 45, Report p. 65.

54 S. 278-280 ATCSC.

55 Proposal 46, Report p. 67; s. 2 of Bill 31.

56 Insurance Companies Act, S.C. 1991, c. 47.

57 Proposal 47, Report p. 68.

58 Proposal 48, Report p. 68.

59 Proposal 51, Report p. 70.

60 Proposal 52, Report p. 72.

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