Finance Minister Joe Oliver tabled his first budget on April 21, 2015 (Budget). Several proposals in the Budget will be of interest to financial services clients, including proposals for a consumer protection framework for banks, expanding the voluntary mortgage prepayment commitment to non-banks, a national financial literacy strategy, a bank recapitalization framework, regulation of retail payment networks and access to basic remittance services.
CONSUMER PROTECTION FRAMEWORK FOR BANKS
The government proposes a new financial consumer protection framework for banks that will provide:
- Broadened general requirements for clear and simple disclosure of information, and expanded use of summary information boxes for banking products and services. There were no details on which additional products and services will require summary information boxes. Currently, information boxes are required for consumer loans and prepaid payment products, suggesting that information boxes may be required for optional products and services, deposit accounts, registered products and deposit-type instruments. Banks will be required to revise impacted documents and processes in order to comply with additional information box requirements. Aside from new summary information box requirements, there was no indication as to which additional general requirements for clear and simple disclosure may be required and how this will enhance the current requirements to provide disclosure that is clear, simple and not misleading.
- Improved access to basic banking services by allowing a broader range of personal identification to open an account. This proposal is limited to basic banking services and we expect it will be aligned with existing identity verification requirements under anti-money laundering laws and anticipated changes to those requirements.
- Expanded prohibitions on certain business practices, including high pressure sales situations, and cooling-off periods for a greater range of products. No guidance was provided as to which business practices would be prohibited. We note that there is currently a prohibition against tied selling that refers to imposing undue pressure or coercing a person. Presumably any new prohibitions would be outside of the tied selling context and would only apply where fees or other charges are payable. Regarding cooling-off periods, while the Budget did not specify which products would be affected, it included an example about savings accounts. Implementing and tracking cooling-off periods will add yet another layer of development and cost for banks.
- Expanded corporate governance requirements so that boards of directors' duties relate to all consumer protection measures. This will close a perceived gap in the duties now prescribed under the Bank Act. Currently, the directors' specific duties relating to consumer protection are limited to (1) establishing procedures to provide required disclosures to bank customers and for complaints handling and (2) establishing procedures to resolve conflicts of interest, including techniques for the identification of potential conflict situations and restricting the use of confidential information, which is not limited to consumer-customers but does relate to the protection of personal information.
- Improved transparency and accountability, for example through enhanced public reporting on complaints and on measures taken to address the challenges faced by vulnerable Canadians. Banks will be required to provide public reports on an annual basis demonstrating how their business activities meet the spirit of the consumer protection principles to be set out in the Bank Act.
- A requirement that advertising be clear and accurate. It is not clear how this would enhance or supplement the existing prohibitions against false and misleading advertising set out in the Competition Act. Perhaps the goal is to extend the existing requirements that certain prescribed disclosures be made in a language and presented in a manner that is clear, simple and not misleading.
The framework will be achieved by consolidating the existing consumer protection provisions in the Bank Act, which will beanchored by a set of principles (which are to be set out in the Bank Act) to guide bank conduct. At this stage, it remains to be seen to what extent the consumer provisions under both the Bank Act and its regulations will be consolidated—which could eliminate duplication and unintended differences in the current multiplicity of regulations—and the extent to which such consolidation will include changes to the consumer provisions beyond those highlighted in the Budget. A key provision in these announcements will be the definition of consumer. The government has not indicated whether this will be limited to natural persons acting for a purpose other than that of carrying on business. The framework will be overseen by the Financial Consumer Agency of Canada.
The Budget states that in creating the framework, the government is delivering on its commitment in Economic Action Plan 2013 (2013 budget) to implement a comprehensive financial consumer code.
The government is also proposing to make amendments to the Bank Act intended to address the Supreme Court of Canada's decisions in the Marcotte cases. (See our September 2014 Blakes Bulletin: Marcotte: Can the Provinces Regulate Banking in Canada?) This proposal builds on the government's efforts to ensure that banks should only be required to comply with federal consumer protection laws (and not provincial consumer protection laws). For example, the government intends that the financial consumer framework be comprehensive and the Bank Act provide the exclusive set of rules governing consumer protection for banks. In 2012, the government added the preamble to the Bank Act with similar language and intent; however, this did not sway the Supreme Court of Canada in the Marcotte cases. It remains to be seen whether the proposed new amendments to the Bank Act will have the desired effect. The Budget states that the government will continue to engage with provinces and territories. If such engagement includes discussions on Marcotte, and the provinces and territories agree with the government's position, this would be a very positive development for banks.
EXPANDING THE VOLUNTARY MORTGAGE PREPAYMENT DISCLOSURE COMMITMENT
The Budget states that the government will invite all mortgage lenders to agree to provide enhanced information about prepaying mortgages, similar to the voluntary commitment made by the banks to this effect. As it would appear that the invitation will be extended to all mortgage lenders, we anticipate that the government will be engaging with not only other federally regulated mortgage lenders such as federal trust and loan companies, insurance companies and the retail association, but with provincially regulated mortgage lenders as well.
FINANCIAL LITERACY STRATEGY
Building on its strategy to enhance the financial literacy of seniors, the government will be releasing a national strategy for Canadians of all ages, in coordination with the Financial Literacy Leader. The Budget highlights the commitment from Canada's banks to establish a five-year Financial Literacy Partnership Fund of C$10 million to provide grants to eligible community organizations for projects that work to improve the financial literacy capabilities of Canadians.
BANK RECAPITALIZATION (OR 'BAIL-IN') FRAMEWORK
The government reiterated its intention to introduce a new bank recapitalization (or "bail-in") regime for Canada's six largest banks, which have been designated by the Office of the Superintendent of Financial Institutions (OSFI) as domestic systemically important banks or D-SIBs. Originally announced in an August 2014 Consultation Paper, the proposed bail-in regime will introduce a new statutory conversion power authorizing the government to convert a D-SIB's long-term unsecured liabilities into common shares in the event of non-viability of the D-SIB. The government confirmed that only unsecured liabilities that are tradable and transferable and have an original term to maturity of 400 days or more will be subject to the statutory conversion. Deposit liabilities will be exempt, and liabilities issued and not renegotiated before the implementation date will be grandfathered. The proposed new statutory conversion power will supplement the existing non-viability contingency capital requirement that applies to all federal deposit-taking institutions and requires the conversion of noncore capital instruments, such as preferred shares and subordinated debt, into common shares on the non-viability of the institution.
The government confirmed that a new minimum loss-absorbency requirement will be introduced for D-SIBs. According to the August 2014 Consultation Paper, this would be a new capital measure that D-SIBs must meet through the sum of their regulatory capital and bail-in eligible senior unsecured debt. The recent international consultations by the Financial Stability Board on the Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution are expected to inform the government's approach to developing this new capital measure.
The government will also introduce legislative amendments to the Canada Deposit Insurance Corporation Act provisions governing the resolution and recovery of banks in Canada, together with associated regulations and guidelines. Although the August 2014 Consultation Paper suggested that a holding-company structure could be introduced for D-SIBs, the government clarified in the Budget that no holding-company requirement will apply to Canadian banks as part of the changes to bank resolution and recovery laws.
REINFORCING THE HOUSING FINANCE FRAMEWORK
The government proposes to implement regulatory measures that limit the extension of portfolio insurance through the substitution of mortgages in insured pools, tie the use of portfolio insurance to Canada Mortgage and Housing Corporation (CMHC) securitization vehicles and prohibit the use of government-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC. The government included a substantially similar proposal in Economic Action Plan 2013 and, as before, there are no details on how such proposals will be implemented. This is all part of the efforts of the government to limit consumer debt—particularly mortgage debt—and limit government exposure to the housing market.
FINANCIAL SECTOR OVERSIGHT
The government proposes to modernize, clarify and enhance the protection of prescribed supervisory information that relates to federally regulated financial institutions. Confidentiality of information exchanged with supervisors is essential to ensuring fulsome disclosure. The current legislation has proven to be insufficient to maintain the intended confidentiality and too restrictive with respect to circumstances in which supervisory information may properly be shared.
The government indicated that it will continue working with stakeholders on the implementation of the federal credit union framework and the transition of provincial credit union centrals out of OSFI's federal oversight.
REGULATION OF RETAIL PAYMENT SYSTEMS
The Budget makes reference to a new consultation on the oversight of Canada's retail payment systems, which was announced earlier last week. The Consultation Paper, entitled Balancing Oversight and Innovation in the Ways We Pay, considers how Canada's retail payment systems should be regulated. The proposed government oversight would apply to "national retail payment systems," the scope of which is not fully defined: it would include major debit and credit card networks that are national or substantially national in scope and could extend to other providers of payment services, such as telecommunications and Internet companies offering payment services.
It is proposed that national retail payment systems would be regulated in three respects: operational risk, market conduct and efficiency in the retail payments sector. The regulation of operational risk would target management of risk by the payment systems, as well as measures to ensure data security, user privacy and safeguarding of user funds. However, no specific proposals have been introduced so far.
The market conduct regulation would ensure end-user protection, which must be consistent across all payment systems. In this respect, the Consultation Paper seeks comments on whether the current reliance on voluntary codes—including the recently amended Code of Conduct for the Credit and Debit Card Industry in Canada (see our April 2015 Blakes Bulletin: Amendments to Code of Conduct for Credit and Debit Card Industry)—should be supplemented by legislation. A mandatory registration or licensing of payment service providers is also raised as an option, which, if implemented, would presumably be independent from the current registration requirement for money services businesses under the anti-money laundering legislation. In addition, the Consultation Paper seeks comments on whether the rules of the Canadian Payments Association should be extended to "on-us" payments by financial institutions (where payments are made between two customers of the same financial institution).
Regulation of efficiency in the retail payments sector would aim at discouraging abuse of market power by prominent retail payments systems and encourage adoption of technical standards facilitating inter-operability of domestic and international payments systems.
The consultation period ends on June 5, 2015.
ENSURING CANADIANS HAVE ACCESS TO SAFE, RELIABLE AND LOWER-COST REMITTANCE SERVICES
The government proposes measures to help ensure Canadians have access to safe, reliable and lower-cost remittance services when sending money to developing countries. As part of these measures, the Budget proposes the development of a remittance price comparison website that will provide information on fees charged across service providers. The government suggests that it will work with financial institutions to evaluate possible options to expand access to lower-cost remittance services. These measures would likely impose ongoing reporting requirements on providers of remittance services and may have an impact on the price of such services, in particular if the intent is to require providers to offer a basic, low-cost service option. It is not clear why or how these initiatives would focus on remittances to developing countries only.
MODERNIZING CANADA'S CORPORATE GOVERNANCE FRAMEWORK
The government proposes amendments to the Canada Business Corporations Act (CBCA) relating to gender diversity, director elections, shareholder communications and corporate transparency. The Budget states that amendments to related statutes governing cooperatives and not-for-profit corporations will also be introduced to ensure continued alignment among federal laws. Notably, the Budget does not include mention of the Bank Act, Trust and Loan Companies Act or the Insurance Companies Act, even though such statutes' corporate governance frameworks are modelled off of the CBCA.
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