Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Financial Services, April 2009
On April 26, 2009, the Minister of Finance released a consultation paper entitled Supporting Stable Financing – Consultations on Leasing seeking views on the potential merits of allowing banks and other federally regulated financial institutions to offer financial leasing for vehicles and household property. A very short consultation period is contemplated – submissions on this issue will be accepted until midnight on May 8, 2009.
As indicated in the Consultation Paper, lease financing represents an important form of financing for Canadian households and businesses. However, financial market disruption and the resulting liquidity crisis that began in August 2007 has significantly reduced the ability of many lease and finance companies to provide affordable financing options to these customers. To address this shortage, the federal government announced in its January 27, 2009 budget (2009 Budget) the establishment of the Canadian Secured Credit Facility (Facility) (see our February 2009 Blakes Bulletin on Securitization: Canadian Government to Support Vehicle and Equipment ABS and Blakes Bulletin on Securitization: Canadian Government Launches Consultation Process to Support Vehicle and Equipment Term ABS). Under the Facility, the Business Development Bank of Canada will purchase up to C$12-billion in term asset-backed securities that are secured by loans and leases on vehicles and equipment. Because the Facility is intended to be a temporary measure and to ensure that the private sector supports a diverse range of financing alternatives, the federal government also announced in the 2009 Budget that it intends to consult market participants on the potential merits of making structural changes to the legislative and regulatory regime governing leasing activities by federally regulated financial institutions.
Currently, federally regulated financial institutions provide a wide range of financial services, including consumer and commercial lending. In addition, the current regulatory framework allows federally regulated financial institutions to offer financial leasing on certain types of personal property; however, federally regulated financial institutions are prohibited from leasing light vehicles (that is, motor vehicles weighing less than 21 tonnes) and personal household property. These restrictions apply to Canadian financial institutions, foreign banks carrying on business in Canada and most subsidiaries and affiliates of such Canadian financial institutions and foreign banks. As a result, non-bank entities were providing this type of financing without competition from financial institutions. As noted above, the financial market disruption over the last two years has resulted in a significant decrease in the availability of affordable lease financing from traditional non-bank sources, particularly for vehicles and equipment for businesses and consumers. This has led the Government of Canada to consider whether the lease financing restrictions applicable to federally regulated financial institutions should be changed.
Purposes of Consultation
At issue in these consultations is whether federally regulated financial institutions could and would provide a stable source of lease financing for consumers and businesses. In particular, the Department of Finance is looking for responses to the following questions:
- How do you view the role and prospects of lease financing of vehicles in the coming years?
- Are the existing restrictions on regulated financial institutions with regard to lease financing appropriate in the future financing environment? If not, how should these restrictions be amended to support broad access to financing in a stable framework?
- If federally regulated financial institutions were allowed to provide lease financing, would you expect these entities to participate in leasing? Do you believe such participation would result in a significant increase in the availability of lease financing?
- Does financial leasing of vehicles and personal household property pose risks to financial institutions? If so, how can those risks be managed?
The Consultation Paper emphasizes that the consultation process will be focusing on lease financing (that is, where the lessor only provides the financing aspect of the transaction) and not what the Consultation Paper refers to as "operational leasing" (that is, where the lessor provides other services in addition to the financing, such as maintenance). Because the stability of the overall financial system remains the priority of the federal government, policy and prudential concerns (for example, risks associated with residual values at the end of the lease) that have been raised by market participants in past consultations on the issue of lease financing will need to be fully addressed in this consultation process.
It is not clear whether the Department of Finance will also address issues raised in connection with earlier consultations on the regulatory framework for financial leasing or consider changes to the regulatory framework to accommodate Islamic finance structures.
The Consultation Paper can be viewed on the Department of Finance website. To view the Paper, click here.
These consultations are open to anyone. As noted above, submissions will be accepted until midnight on May 8, 2009. Information on providing submissions is set out in the Consultation Paper. Subject to the consent of the submitting party, comments will be posted on the Department of Finance website to add to the transparency of the process.
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