Canada: Federal Budget 2016 – Financial Services Regulatory Update

On March 22nd, the recently elected Liberal Government introduced its first budget since being elected last October.  In the Budget Plan, the Government has promised certain measures that will be relevant to banks, insurance companies and other providers of financial services and products.  Most of the proposed measures are similar to proposals that were raised by the previous Conservative government.  The financial sector measures announced in the Budget Plan are summarized below.

Consumer Protection

A new consumer chapter will be introduced into Bank Act to bring together the various consumer protection provisions in a consolidated framework and to provide a set of guiding principles, reflecting that banks should act fairly and responsibly and that consumers should be able to make informed financial decisions for themselves.  These guiding principles would represent a change to the current mostly rules-based approach to consumer protection.  The Budget Plan does not provide further details on what might be included in the new consumer protection chapter.  A similar but more detailed proposal was outlined in the 2015 federal budget.  Although the government has changed, the previous proposal may give an indication of what is to come.

The Budget Plan also states that the Government intends to have a system of exclusive rules to ensure an efficient national banking system from coast to coast to coast.  This statement appears to reflect an intention by the Government to reassert its jurisdiction over banks following the Supreme Court of Canada's September 2014 decision in Bank of Montréal v Marcotte, in which the Court held that Quebec's Consumer Protection Act is generally applicable to banks. However, the Government states that it will collaborate with provinces, territories, and stakeholders to support the implementation of the framework as well as to enhance consumer education and financial literacy.

Bank Bail-in Regime

In August 2014, the previous government launched a consultation about whether Canada should adopt a bail-in regime applicable to the large domestic systemically important banks.  In its final budget plan released in 2015, the previous government indicated that it intended to introduce legislation to implement a regime and that the regime would not include the conversion of insured deposit liabilities. The legislation had not been released at the time that the election was called.

The Budget Plan confirms that the Government will introduce a bail-in regime to protect taxpayers in the unlikely event of a large bank failure.  The regime would allow the Government to convert some or all of the long-term debt of a failing bank into common shares to recapitalize the bank and allow it to continue to operate.  The Government proposes to introduce new legislation for the bail-in regime.  In addition to new legislation, some elements of the regime will be implemented via regulations and guidelines and stakeholders will have an opportunity to comment on those elements.

Concerns over Household Indebtedness

The level of household indebtedness, particularly indebtedness related to home ownership, continues to be a concern of the Government.  In December 2015, the Government announced measures designed to slow the escalation of house prices in Toronto and Vancouver.  The Budget Plan does not contain any new measures in connection with house prices.  However, the Government states that it will provide additional money for Statistics Canada to develop statistics on the purchases of homes by foreign buyers.  These statistics will enable the Government to determine the extent to which foreign investment is contributing to the escalation in house prices.

Capital Markets Regulation

The Budget Plan states the Government will release a revised draft of the previously proposed Capital Markets Stability Act by this summer.  This legislation is aimed at allowing the government to monitor and respond to systemic risks in Canada's capital markets.

The previous government had been committed to establishing a federal securities regulator, including by entering into cooperation agreements with certain of the provinces and the creation of a coordinated regulatory regime with aspects of securities regulation covered by federal legislation and aspects covered by provincial law.  The current Budget Plan does not mention the status of the proposed federal securities regulator.

Renewing Financial Sector Legislation

The federal financial institutions statutes, including the Bank Act and the Insurance Companies Act, contain sunset provisions mandating renewal of the legislation by Parliament every five years.  The current five-year period is set to expire in March 2017.

In order to provide more time for the new government to consider the changes that it might wish to make to the broader regulatory regime, the Government is proposing to introduce legislation to extend the current statutory sunset date by two years to March 29, 2019.

Federal Credit Unions

Since 2012, legislation has existed that would make it possible for a provincially regulated credit union to convert to federal credit union with the power to operate across the country.  However, to date, only one group of credit unions from New Brunswick has formally announced an intention to pursue this option.  The previous government had identified some potential impediments to conversion related to differences in the provincial and federal regimes, such as the rules relating to deposit insurance and insurance networking.  The Budget Plan states that legislative measures will be introduced to provide targeted protection against transitional risks and facilitate a smooth entry process, although there is no indication of whether these measures will address the impediments that were previously identified.

Next steps

The Budget Plan does not set out any timing for the introduction of legislation to implement these measures. The Liberals have promised that the current government would not follow the practice of the past government of introducing omnibus bills to address many proposals at once.  If the Government honors this commitment, many separate bills will be required to introduce legislative amendments to implement the various measures.  The implementation of the measures will be impacted by the relative priorities that the Government places on these and the other measures announced in the Budget Plan.

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