Ontario's Minister of Finance recently announced that the Ontario government will accept the 15 recommendations set out in a legislative review report (Report) to amend Ontario's credit union legislation, The Credit Unions and Caisses Populaires Act, 1994 (Credit Unions Act). In its 2016 Ontario Budget, the Ontario government confirmed its intention to implement the Report's recommendations, which aim to align Ontario's credit union legislation with international best practices, allow credit union ownership of a wider spectrum of subsidiary businesses, and enhance consumer protection. The Report means to address recent changes in the credit union industry, including consolidation of credit unions, an increase in their asset size, and the development of new and innovative business lines that generate non-interest income.
Ontario's Ministry of Finance announced the legislative review in October 2014 and the Parliamentary Assistant to the Minister of Finance issued the Report in November 2015. If adopted, the recommendations will usher in significant changes to Ontario's credit union legislation since the last legislative review of the credit union sector in 2009.
No proposed amendments to the Credit Unions Act or related regulations have yet been published.
The Report contains 15 recommendations in nine different areas. We discuss in detail the recommendations that are likely to have the biggest impact on the business of Ontario credit unions.
The Report recommends adopting capital adequacy requirements for Ontario's credit unions consistent with the Basel III international capital standards developed by the Bank for International Settlements. The Report proposes a five-year transition period for Ontario credit unions to reach the Basel III 10.5 per cent minimum risk-weighted capital ratio. Under the proposed new capital framework, investment shares issued by credit unions would qualify as Tier 1 regulatory capital, if certain eligibility criteria are satisfied. This would include a mandatory regulatory approval for investment share redemptions and an unconditional right by the credit union to refuse redemptions. The Report proposes a five-year transition period during which outstanding investment shares would qualify as Tier 1 capital, but newly issued investment shares would need to satisfy the proposed eligibility criteria to count as Tier 1 capital. As a result, Ontario credit unions would need to ensure that new offerings of investment shares conform to the eligibility requirements set out in the Report, once the recommendations in the Report are formally adopted. Canada's federal bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), has adopted the Basel III capital framework for Canadian banks, including for federal credit unions (of which there are currently none), but OSFI is yet to announce how the Basel III requirements would apply to the unique legal and capital structure of cooperative financial institutions, such as federal credit unions and cooperative credit associations.
The Report is also proposing that the current four per cent leverage ratio would remain in place as a supplement to the risk-based capital requirement, although off-balance sheet assets would be included in the calculation. The minimum leverage requirement adopted by OSFI for Canadian banks is three per cent.
The Report does not contemplate the introduction of a non-viability contingency capital conversion requirement for any capital instruments issued by Ontario credit unions, unlike the federal capital framework.
The Report recommends repealing the group capital provisions of the Credit Unions Act, under which two or more credit unions may enter into an agreement with a league for the purposes of meeting the capital adequacy requirements, with the approval from Deposit Insurance Corporation of Ontario (DICO).
Lending and Investment
In terms of lending and investment rules, the Report recommends permitting Ontario credit unions to enter into loan syndication agreements with credit unions in other provinces. Under the current rules, Ontario credit unions are only permitted to enter into a syndication agreement with other Ontario credit unions or with certain listed entities, such as a league.
The Report also recommends that the investment powers of credit unions be broadened by allowing them to wholly own a wider spectrum of subsidiary businesses, such as insurance brokerages. Although the Report does not provide many specifics on this proposal, the objective is to put credit unions on equal footing with the investment powers of banks.
The Report recommends aligning Ontario's credit union consumer protection framework with that in place federally for banks. Specifically, the Report recommends disclosures to members similar to those required federally for banks, which could include: disclosures on account fees, deposit-type products (e.g., index-linked Guaranteed Investment Certificates), and mortgage default insurance. In addition, the Report suggests regulatory prohibitions related to: coercive tied selling, negative option billing, maximum cheque holding periods, or minimum account balances as conditions for loans.
The Report also suggests some voluntary commitments from credit unions, including publishing annual accountability statements, providing notice of branch closures, and submitting complaints data to the regulator, similar to the federal requirements for banks. These changes are in response to the absence of a third-party dispute resolution framework, such as an ombudsman, for resolving credit union member complaints.
Lastly, the Report suggests working with credit unions to explore the role credit unions can play in protecting and educating consumers of payday loans by providing lower-cost alternatives and education initiatives to improve consumer financial literacy. This recommendation comes at the same time as the Minister of Government and Consumer Services introduced Bill 156, which will amend, among other legislation, the Payday Loans Act, 2008. See our December 2015 Blakes Bulletin: Regulating 'Alternative Financial Services' in Ontario for more details.
The Report recommends increasing Ontario's provincial deposit insurance coverage limit to C$250,000 for basic deposits and limiting the deposit insurance coverage for each category of registered accounts (registered retirement savings plans, registered retirement income funds and tax-free savings accounts) at C$250,000. Currently, the deposit limit in Ontario for basic deposits is C$100,000, while cash deposits held in registered accounts are subject to unlimited deposit insurance.
The Report also recommends:
- That the Ministry of Finance lead an initiative to address provisions in regulations under various statutes that do not include credit unions as permissible financial institutions. This recommendation aims to put credit unions on equal footing with banks under Ontario regulations.
- That the Ontario government work with the Ministry of Municipal Affairs and Housing to consider changes to the investment rules for municipalities in order to remove barriers to municipalities from doing business with credit unions.
- That differentiated rules for small credit unions be removed from the Credit Unions Act. Currently, the Credit Unions Act applies more restrictive rules to credit unions with assets of less than C$50-million if they do not engage in commercial lending.
- In terms of corporate governance, no enhancements to corporate governance standards were recommended, although the Report recommends requiring credit unions to report to members on gender composition of boards.
- That Ontario maintain the ability to enter into reciprocal agreements on credit unions with other governments.
- That the Ontario government consider recommendations of the "FSCO-FST-DICO Mandate Review Panel" with a view to clarifying the roles of the Financial Services Commission of Ontario and DICO with respect to the credit union system in Ontario.
Neither the Report nor the Minister's announcement specify the next steps for the recommendations' implementation. We would expect that since Ontario credit unions were consulted in connection with the Report, the next step would be draft legislation.
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