The Economic Action Plan 2014, as the federal government calls its budget, tabled in the House of Commons on February 11, 2014 contains a number of statements regarding financial services regulatory reforms. This bulletin highlights the statements that are of particular interest to private-sector players.
HOUSING FINANCE FRAMEWORK
The Government of Canada announced its intention to continue to adjust the housing finance framework to restrain the growth of taxpayer-backed mortgage insurance and securitization. Among these measures:
- reduction of the amount of guarantees that Canada Mortgage and Housing Corporation (CMHC) is authorized to provide under its 2014 securitization programs to C$80 billion for market National Housing Act Mortgage Backed Securities and C$40 billion for Canada Mortgage Bonds; and
- measures to implement Economic Action Plan 2013 initiatives to tie portfolio insurance to the use of CMHC securitization vehicles and prohibit the use of government-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC.
COMPETITIVE FINANCIAL SERVICES LANDSCAPE
Following consultations in 2013 with the industry and other stakeholders, the government proposed to improve the ability of new entrants and small banks to compete. These measures include:
- review by the Office of the Superintendent of Financial Institutions (OSFI) of the approval process for establishing a new bank with a view towards streamlining it; and
- improvement of the ability of smaller banks to access funding from CMHC (e.g. CMHC's new allocation methodologies have refocused portfolio insurance and securitization programs towards small lenders).
Another potential measure contemplated would be to require large banks to provide access to deposit products from small federally regulated banks and trusts through dealers.
FEDERAL REGIME FOR CREDIT UNIONS
The government proposed to amend the federal regime for credit unions by establishing a streamlined process for amalgamating two or more provincial credit unions into one federal credit union. The government also proposed to clarify the federal mandate and announced that the joint supervision of provincial credit union centrals by the OSFI will cease. Consultations with provinces and the industry will be held regarding a two-year transition plan.
PROPERTY AND CAUSALITY DEMUTUALIZATION FRAMEWORK
The government renewed its promise to establish a property and causality (P&C) demutualization framework that will provide for an orderly and transparent process and ensure that policyholders are treated fairly and equitably. Before introducing legislative and regulatory changes, the government will continue to consult stakeholders, suggesting further delay in the implementation of final rules.
DEPOSIT INSURANCE FRAMEWORK
The government is launching a comprehensive review of Canada's deposit insurance framework. The stated purpose of this review is to ensure that deposit insurance adequately protects the savings of Canadians in light of the lessons learned from the recent financial crisis and significant changes in the global banking landscape.
OVER-THE-COUNTER DERIVATIVES AND FINANCIAL BENCHMARK REGULATION
The government proposed to amend the Bank Act to create a regulation-making authority for banks regarding over-the-counter derivatives and financial benchmarks.
GOVERNANCE OF CANADA'S PAYMENTS SECTOR
The government is developing a comprehensive risk-based approach to the oversight of the Canadian payments system. The government proposed to amend the Canadian Payments Act to introduce changes to the governance and accountability structures of the Canadian Payments Association and amend the Payment Clearing and Settlement Act to expand and enhance the oversight powers of the Bank of Canada. Public consultations are expected to be held in the spring of 2014.
CHANGES IN THE PAYMENT CARD MARKET
The government referred to the Competition Tribunal's recent findings regarding the Visa and MasterCard networks and announced that it proposes to "work with stakeholders" to reduce credit card acceptance costs for merchants, while encouraging the merchants to lower prices for consumers.
The government will also consult stakeholders as a prelude to increasing the requirements of the Code of Conduct for the Credit and Debit Card Industry in Canada.
ANTI-MONEY LAUNDERING & ANTI-TERRORIST FINANCING REGIME AND ECONOMIC SANCTIONS REGIME
The government will introduce legislative amendments and regulations aimed at strengthening Canada's anti-money laundering and anti-terrorist financing regime and improving Canada's compliance with international standards. These amendments include:
- introducing new regulations for virtual currencies, such as Bitcoin;
- making online casinos subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act; and
- enhancing the ability of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to disclose potential threats to the security of Canada to federal partners.
The government also stated that its financial sanctions regime requires improvement and proposed to adopt new administrative measures and legislative and/or regulatory amendments as necessary to increase the effectiveness of its regime and reduce the burden on the private sector, in particular, smaller businesses.
BASIC BANKING SERVICES
The government announced that it wishes to further increase its regulation of basic banking services, including the following measures:
- changing the requirements for low-cost accounts;
- expanding no-cost basic banking services for youths, students and vulnerable groups;
- prohibiting charges for monthly printed credit card statements provided by banks; and
- building Canadians' awareness of their right to cash Government of Canada cheques free or charge at any bank in Canada.
DEVELOPMENT OF A COMPREHENSIVE FINANCIAL CONSUMER CODE
The Minister of State (Finance) will conduct national consultations to obtain Canadians' views on how to better protect consumers of financial products as a prelude to developing a "financial consumer code."
FINANCIAL CONSUMER AWARENESS
The government announced its intention to work with the provinces to support their efforts to regulate all payday lending-type high interest products and maintain the integrity of the policy framework for such lending.
Collateral Charge Mortgages
Given the increasing number of consumers that choose collateral charge mortgages, the government will require enhanced disclosures to the consumers so that they better understand the costs and consequences of these mortgages relative to traditional mortgages.
Powers of Attorney
Acknowledging that seniors are more vulnerable to financial abuse, the government will require enhanced disclosures by banks to seniors on the costs and benefits of using powers of attorney or joint accounts and more robust bank processes and staff training.
Important changes and measures in the financial services sector are therefore expected over the coming months. Although the government sometimes states that it will consider the compliance burden on the private sector and even expresses an intention to reduce this burden on some levels, most of the proposed measures will add to the existing compliance burden of the majority of financial institutions. The government should take into account this compliance burden and operational realities applicable to financial institutions' retail businesses in implementing the proposed measures and amendments, especially with respect to consumer provisions.
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