On February 6, 2009 the Canadian federal government tabled Bill C-10, the Budget Implementation Act, to implement measures announced in the 2009 budget. The Bill proposes the enactment of significant amendments to several financial institution (and other related) statutes.
Canadian Lenders Assurance Facility
By amending the Financial Administration Act (FAA), Bill C-10 provides the government direct authority to pay on the guarantee under the Canadian Lenders Assurance Facility (CLAF) that was announced in November 2008. The amendments also permit the Minister of Finance (Minister), with the Governor in Counsel's approval, to purchase securities, make a loan or provide a line of credit to, guarantee any debt obligation or financial assets of, or provide loan insurance or credit insurance for the benefit of any entity for any debt, obligation or financial assets of the entity. The CLAF will be extended to December 31, 2009.
The amendments also authorize payment out of the Consolidated Revenue Fund for any contract entered into under the new authority, including any contract entered into after November 30, 2008.
Canadian Life Insurers Assurance Facility
The government is also proposing the creation of the Canadian Life Insurers Assurance Facility (CLIAF) to provide insurance on the wholesale term borrowing of federally regulated life insurance companies. Modelled on the Canadian Lenders Assurance Facility, the CLIAF will also be made available to provincially regulated life insurers on the same commercial terms as other eligible institutions, on the approval of the Minister and with an indemnity from the relevant provincial government.
Canadian Secured Credit Facility
While Bill C-10 does not expressly mention the Canadian Secured Credit Facility (CSCF) announced as part of the 2009 budget, the amendments to the FAA (mentioned above) will give the government the authority to invest the $12 billion earmarked for the CSCF program in the 2009 budget.
The CSCF is supposed to be run under "high standards for transparency and credit enhancement" to protect the taxpayer. It is to be priced on commercial terms and is expected to generate a positive return for the government.
Only federally regulated financial institutions are to be eligible to sell into the facility. Provincially regulated financial institutions may be eligible on the Minister's approval. It is not clear whether the government is contemplating an expedited licensing process for the lending arms of car companies, which are not federally regulated financial institutions. The government will also consult market participants about amending the legislative and regulatory regime to permit leasing activities by federally regulated financial institutions. Other firms interested in the CSCF facility must establish a plan to become subject to federal regulation. For now, Bill C-10 proposes to amend the Trust and Loan Companies Act to allow leasing companies that convert to trust or loan companies to continue those activities.
New Measures for Consumers
Bill C-10 will prohibit a bank from marking up the cost of mortgage default insurance that it obtains for its borrowers. The government also may make regulations mandating the form and content of disclosure relating to mortgage insurance. Moreover, regulations may be made about any dealing between a bank and its customers or the public. New requirements for credit cards, while not expressly mentioned under Bill C-10, presumably could be addressed by this new broadly worded authority.
Power to Acquire Shares
Bill C-10 would permit the government to acquire shares of a bank if the Minister and Governor in Council were to conclude that to do so was necessary to promote stability in the financial system. While the government holds any shares of a bank, the Minister may impose terms and conditions: for the compensation of senior officers; on the payment of dividends; and on the bank's lending policies and practices. The Minister may also appoint or remove any senior officer. The continued holding of the shares must be reviewed no later than the second anniversary of the investment.
The government also has the power to suspend the operation of any provision of the Bank Act applicable to a bank under the Bill. This change will also be added to the Trust and Loan Companies Act and the Insurance Companies Act.
Further Safeguards for Financial Stability
The government proposes that the Canada Deposit Insurance Corporation (CDIC) will receive the following:
- the power to establish a bridge institution wholly owned by the CDIC where a CDIC member is no longer viable. Rather than proceeding with a liquidation or sale of the troubled institution, the CDIC would transfer the "good" assets of the troubled institution to the bridge institution and leave the "bad" assets behind. Then, CDIC would attempt to sell the bridge institution and the troubled institution would be wound up. Coupled with the third bullet below, this measure could ensure continued employment or the continued presence of a particular institution;
- an increase in its borrowing limit from $6 billion to $15 billion (with further escalation in the future) to reflect the growth of insured deposits;
- the authority to request the Governor in Council allow CDIC to resolve a failure in ways that may not result in a lowest-cost solution to CDIC;
- the authority to request that the Minister direct CDIC to take specific action to prevent adverse effects on financial stability;
- the power to hold or own shares in its member institutions, subject to the approval of the Minister, where this would promote the stability of the financial system in Canada;
- greater flexibility in the timing of examinations made in preparation for possible remedial actions (currently, failure must be imminent).
The government is proposing to designate the new Tax-Free Savings Accounts as a separate category of deposit insurable by CDIC and, therefore, subject to their own separate $100,000 insurance limit.
The government will honour its G20 commitment to implement reform in five broad areas to address the causes and weaknesses that led to the market turmoil:
- strengthening transparency and accountability;
- enhancing sound regulation;
- promoting integrity in financial markets;
- reinforcing international cooperation; and
- reforming international financial institutions.
The government will be making recommendations to support a "macroprudential orientation" for regulatory frameworks, taking a system-wide view of how government regulation and other interventions in the financial sector affect business cycles and the broader economy.
Other Measures to Strengthen Canada's Financial System
Since 1992, the government has included a sunset provision in federal financial services legislation requiring that the legislation be reviewed by Parliament and re-enacted every five years. While the current legislation is set to expire in April 2012, the government intends to make technical and consequential amendments to "improve the financial sector framework" and to keep it in line with international measures directed towards upholding global security, including measures that safeguard the financial system from illicit financing. No specific measures were included in Bill C-10 suggesting that further legislation may be forthcoming.
John Jason is a partner in the Business Law Department and is a respected adviser to banks, insurers and other financial institutions, as well as policy-making and regulatory bodies.
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