Canada: New Financial Services Consumer Protection

Federal Government Introduces Proposed Amendments to Financial Services Statutes, Including Financial Consumer Protection Framework

The Budget Implementation Act, 2018, No. 2  (the "Second Budget Bill") was introduced on October 29, 2018 and includes amendments to various financial services statutes, pursuant to the recent Budget and in addition to the first Budget Implementation Act, 2018, No. 1, previously summarized in our  recent legal update.  These proposed amendments represent a major change in federal financial services consumer protection regulation.

The Second Budget Bill includes a number of amendments to the Bank Act, the Trust and Loans Companies Act and the Insurance Companies Act (collectively, the "Financial Services Statutes") including most notably the introduction of the anticipated Financial Consumer Protection Framework (the "Framework"), as well as related amendments to the Financial Consumer Agency of Canada Act, replacing an earlier proposed version of the framework, following a comprehensive report by the Financial Consumer Agency of Canada ("FCAC") on best practices in financial consumer protection, summarized in our recent legal update.

1. Financial Consumer Protection Framework

The Second Budget Bill introduces a new Part XII.2 (Dealings with Customers and the Public) to the Bank Act, consolidating and enhancing the consumer protection provisions of the Bank Act, including bringing within the text of the Bank Act certain provisions previously found in regulations, such as those relating to access to basic banking services (previously set out in the Access to Basic Banking Services Regulations) and prepaid payment products (previously set out in the Prepaid Payment Products Regulations). The Second Budget Bill also contains broad regulation-making powers relating to the Framework and the new Part XII.2 will be supplemented by new regulations, which have not yet been released. 

Fair and Equitable Dealings

The Second Budget Bill includes a number of requirements relating to fair and equitable dealings, including:

  • Consumer Protection Compliance Policies and Procedures and Training – Banks will be required to establish and implement policies and procedures to ensure products and services offered or sold to natural persons "other than for business purposes" are "appropriate for the person having regard to their circumstances, including their financial needs", and ensuring that its officers and employees (and any person who offers or sells the bank's products or services in Canada) are trained with respect to the policies and procedures. In addition, a bank must ensure that employee compensation does not interfere with employees' ability to comply with such policies and procedures.
  • Prohibition of Certain Conduct - Certain conduct will be prohibited, namely, imposing undue pressure on a person as a condition for obtaining another product or service (tied selling), taking advantage of a person or engaging in any prescribed conduct (to be prescribed in regulations).  Banks and their affiliates will still be permitted to offer a product or service on more favourable terms if a person obtains more than one product or service. 
  • Express Consent Requirement – Banks will be required to obtain express consent prior to providing a person with a product or service.  Use of the product will not constitute express consent.  Banks need to enter into an agreement with the person and provide the person with a copy of the agreement prior to providing the product or service if the product or service is to be provided on an ongoing basis.
  • Customer Cancellation Rights – Banks will be required to permit customers with whom they are entering into an agreement to provide a product or service (other than prescribed products or services) on an ongoing basis with a 14 business day cooling off period (or such other period as may be prescribed), in the case of an agreement entered into by mail or by telephone, or a 3 business day cooling off period (or such other period as may be prescribed) in the case of an agreement entered into in another manner. Customers who choose to cancel within the cooling off period may do so without charge. Banks will also be required to permit customers to cancel retail deposit accounts, deposit-type instruments, credit card accounts, and prescribed products and services in accordance with prescribed requirements. 
  • Customer Balance Alerts – Banks will be required to provide electronic alerts to any customer who is a natural person where the balance of that person's deposit account falls below a threshold set by the person (or a prescribed amount), or if that person's line of credit or credit card account (other than a credit card or line of credit for business purposes) falls below a threshold set by the person (or a prescribed amount), unless in each case the person has opted out of receiving such alerts.
  • Misleading Advertising – Banks will need to ensure that any advertisement made in Canada is accurate, clear and not misleading.
  • Arrangements with Affiliates, Agents and Intermediaries – Banks will be required to ensure that affiliates, representatives, agents and intermediaries that sell or further the sale of a product or service of the bank comply with the provisions of the Framework.

Disclosure Requirements

The Second Budget Bill requires disclosure to be made "in a manner, and using language, that is clear, simple and not misleading".  Banks will also be required, before entering into agreement with a person online or by mail, to provide a contact number for a resource person, which must be a person who is knowledgeable about the terms and conditions of the agreement.  Banks will also be required, for products and services provided on an ongoing basis and not specifically addressed in the Framework, to disclose the features of that product or service, a list of all charges and penalties, the customer's rights and obligations with respect to that product or service and certain other prescribed information.  The Framework also includes disclosure requirements applicable to renewals or rollovers of existing products or services, and promotional offers, in each case relating to an agreement entered into for a purpose other than a business purpose.  Specific disclosure requirements will apply to deposit accounts, deposit insurance, financial instruments and notes, credit products, prepaid payment products, optional products or services, registered products, mortgage insurance and advertising. In addition, as noted below, the Framework will require disclosure of prescribed information (to be addressed in the regulations) in connection with commercial lending transactions. 

Banks will be required to disclose their voluntary codes of conduct and public commitments that they have adopted.  Banks with equity of $1 billion or more, will be required to file a written statement with the FCAC within 135 days of the end of each financial year containing certain prescribed information, including (i) information with respect to the contribution of the bank and its prescribed affiliates to the Canadian economy and society, (ii) the names of any voluntary codes of conduct and public commitments it has adopted that are designed to protect the interests of its customers, (iii) a description of any measures taken to provide products and services to low-income persons, senior persons, persons with disabilities and persons who face accessibility, linguistic or literacy challenges, and (iv) a description of consultations undertaken by the bank with customers and the public in relation to products and services, emerging issues and matters in respect of which the bank has received complaints.

Redress Mechanisms and Penalties

The Second Budget Bill introduces additional redress mechanisms and significantly increases the size of penalties that may be imposed by the FCAC.  The Second Budget Bill requires banks to credit back any charge or penalty not properly disclosed (with interest at the Bank of Canada's overnight rate), or for which express consent was not obtained, where such consent is required. 

In addition, the Second Budget Bill includes amendments to the Financial Consumer Agency of Canada Act (the "FCAC Act") increasing the size of FCAC penalties to $1,000,000 in the case of a violation committed by a natural person and $10,000,000 in the case of a violation committed by a financial institution or payment card network operator.  In determining the penalty amount, the FCAC will take into account the ability of the person who committed the violation to pay the penalty.  The Second Budget Bill also sets out the purpose of such a penalty, which is to promote compliance and not punish. FCAC administrative penalties can be appealed to the Federal Court. 

The FCAC will also be required to make public the nature of a violation, the name of the person who committed it and the amount of the penalty imposed and will have the option of publishing reasons for the decision, including the relevant facts, analysis and considerations that formed part of the decision.

Complaints Process

The Second Budget Bill brings provisions regarding complaints, including the requirement to have in place procedures for dealing with complaints and to file the procedures with the FCAC, within the scope of the Framework.  Banks will also be required to: (i) provide complainants with a written acknowledgment of the date on which a complaint is received and other prescribed information, (ii) maintain records of certain information relating to complaints for a period of 7 years; (iii) report to the FCAC certain information relating to complaints, within 60 days of each quarter end, and (iv) make publicly accessible on its website within 135 days of each financial year end certain aggregate information on complaints.  

Applicability of Framework to Commercial Transactions

Many of the provisions in the Framework apply not only to natural persons and personal banking, but also appear to apply to "persons" including commercial entities and to business transactions. The regulations once issued may clarify what obligations do and do not apply to commercial entities and business transactions. Certain provisions on the other hand are clearly limited to "natural persons" and uses other than for "business purposes".

In particular, the Framework includes a provision requiring a bank, before entering into a credit agreement with a person other than a natural person, to disclose certain prescribed information. This would create a new disclosure requirement as the current disclosure requirements in respect of credit are limited to consumer credit. Again, the regulations once issued should help clarify the nature and scope of this new disclosure requirement.

2. Whistleblowing

The Second Budget Bill introduces a new Part XVI.1 (Whistleblowing) to the Bank Act, providing any employee of a bank who has reasonable grounds to believe that a person has committed or intends to commit a "wrongdoing" (see below) may report the particulars to the bank, FCAC, the Office of the Superintendent of Financial Institutions ("OSFI"), any government agency or body that supervises or regulates financial institutions or law enforcement agency.  The person to whom this is reported must keep the identity of the whistleblower confidential, except that such person may disclose the employee's identity to the FCAC, OSFI or other government body or law enforcement agency if the FCAC, OSFI or other government body or law enforcement agency considers the disclosure of the employee's identity is necessary for purposes related to an investigation, in which case every reasonable effort must be made to inform the employee of such disclosure.  An employee must not be dismissed, suspended, demoted, disciplined, harassed or otherwise disadvantaged as a result of reporting such wrongdoing or refusing to do, or seeking to prevent, anything related to the wrongdoing provided that such person is acting on the basis of reasonable belief.  A bank must also establish whistleblowing policies and procedures.  A "wrongdoing" is defined as a contravention of any provision of the Bank Act, its regulations, a voluntary code of conduct that a bank has adopted, or a policy or procedure established by a bank.

3. Enhanced Powers of FCAC

The Second Budget Bill contains provisions expanding powers of the FCAC by way of amendments to the FCAC Act, introduces a new section to the FCAC Act setting out the purpose of the Act, and includes amendments to the objects of the FCAC, including a provision stating that one of the objects of the FCAC is to "strive to protect the rights and interests of consumers of financial products and services and the public, taking into account the need of financial institutions to efficiently manage their business operations".

Most notably, as discussed above under Redress Mechanisms and Penalties, the FCAC Act was amended to provide the FCAC with the ability to impose penalties in much greater amounts, and to require the FCAC to disclose the nature of a violation, the name of the person who committed it and the amount of the penalty imposed.

4. Other Amendments to Financial Services Statutes

Clarifications to Scope of Legal Privilege

The Second Budget Bill also includes amendments to each of the Financial Services Statutes and to the Office of Superintendent of Financial Institutions Act to clarify that providing privileged information to OSFI will not result in a waiver of such privilege and that OSFI will not be permitted to use privileged information as evidence in a proceeding if the privileged information was disclosed to OSFI by a financial institution, its holding company or a person who controls or is affiliated with such entity. Furthermore, OSFI will not disclose privileged information to any person whose powers, duties or functions include the investigation or prosecution of an offence under any Act of Parliament or of the legislature of a province, or the investigation of, or conduct of proceedings in respect of, a violation under any such Act. "Privileged information" is defined as "information that is subject to a privilege under the law of evidence, solicitor-client privilege or the professional secrecy of advocates and notaries or to litigation privilege."

Expanded Investment Powers

The Second Budget Bill contains provisions amending the Financial Services Statutes to establish thresholds below which the acquisition of control of, or acquisition or increase of substantial investments in, certain entities, by banks, federally regulated insurance companies and federal trust and loan companies will not require the approval of OSFI. 

The Second Budget Bill also contains provisions amending the Financial Services Statutes to permit investments in the Canadian Business Growth Fund (CBGF), a fund established earlier this year by Canadian banks and insurance companies to provide capital to Canadian entrepreneurs and Canadian mid-market businesses.

Electronic Consent to Receipt of Electronic Documents

The Second Budget Bill contains provisions amending the Financial Services Statutes to provide that the consent to the provision of electronic documents and any notice related to that consent may be provided in electronic form.

Coming Into Force

The amendments contained in the Framework will come into force on a date to be fixed by order, which shall not be before April 11, 2019.  The amendments to the Financial Services Statutes other than the Framework will come into force on royal assent.

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