Credit unions are living in interesting times. The current landscape presents significant challenges and opportunities, and how credit unions respond will have a lasting impact on the fate of particular institutions and the sector as a whole.
In our view, there are currently five key trends:
- The increasing importance of a national strategy
- Challenges and opportunities presented by technology, including Fintech
- The importance of, and different strategic approaches to, mergers
- Emerging risks
- Legislative and regulatory developments
Provincial credit unions face significant barriers to growth because of statutory limitations on the activities they can engage in outside of their home jurisdictions. Despite this, at some point in a credit union's development, it makes sense to look beyond its provincial borders. Accordingly, credit unions are increasingly exploring opportunities to carry on business across Canada through federal financial institutions.
Some credit unions are pursuing federal opportunities via a bank subsidiary. This strategy has been adopted by Vancouver City Savings Credit Union (Vancity), which owns Vancity Community Investment Bank (formerly, Citizens Bank of Canada), and Alterna Savings and Credit Union, which owns CS Alterna Bank. Meridian Credit Union Limited has published notice of its intention to apply for letters patent incorporating a bank.
Others are electing to become federal credit unions. Federal credit unions are regulated under the Bank Act, and so are able to compete across Canada on an equal footing with banks. There are certain challenges with this approach, notably lower deposit insurance in some cases and potentially different business and powers under the Bank Act than exist under provincial credit union legislation.
So far, UNI Financial Cooperation (formerly the Caisses Populaires Acadienne) is the only federal credit union. However, Coast Capital Savings has publicly announced its intention to continue under the Bank Act as a federal credit union. Coast's members voted in favour of federal continuance at a Special General Meeting in December of last year. Just recently, on August 14, 2017, the Financial Institutions Commission of British Columbia and the Credit Union Deposit Insurance Corporation approved the credit union's application for consent to continue as a federal credit union. With this, the credit union has cleared a major hurdle in the process towards becoming a federal credit union. The next steps for Coast Capital Savings will be approvals from the Office of the Superintendent of Financial Institutions and the Minister of Finance (Canada).
It is widely accepted that technological innovations are transforming the financial services sector. This presents certain challenges for credit unions. Significant resources are required to make the investment in technology required to compete, and the returns on such investments may be uncertain. As well, there are new non-traditional players competing in the financial services space. Technology also presents an opportunity, offering the potential for expanding one's reach without the investment and commitment involved in establishing bricks and mortar branches.
There are numerous examples of credit unions leveraging technology. In 2016, the online personal lending company Grow joined forces with First West Credit Union of British Columbia and Conexus Credit Union of Saskatchewan to connect investors with individuals looking to borrow through so-called "marketplace loans". Alterna Bank recently partnered with the Vancouver-based digital lending business Lendful to offer an end-to-end digital mortgage lending platform. Northern Credit Union partnered with ASAPP Online Solutions in 2014 to create an online account-opening capability for retail accounts. Northern Credit Union has since expanded its offerings with ASAPP to include support for mobile functionality and an automated loan decision tool for small businesses.
Many of these connections between Fintech startups, financial institutions, investors and government are being made at startup incubation centres. For example, the BC Tech Association's FinTech Program seeks to foster connections between companies at all stages of development by arranging a variety of networking and educational opportunities.1 The FinTech Program is supported by a number of notable financial services businesses, including Credit 1 Credit Union, Coast Capital Savings, FICANEX Services LP, and PayPal.
Toronto boasts similar networking hubs. The MaRS Discovery District's Venture program offers a range of resources including mentoring, education, information, and funding services, as well as extensive office, laboratory and event facilities. The OneEleven innovation centre provides startups (including many in the Fintech space) with access to networking and mentoring as well as office space and computing infrastructure in order to assist them in scaling-up their business.
It is likely that the rapid pace of innovation and disruption will continue, and possibly increase. This is perhaps best evidenced by the flurry of activity in the financial services space relating to blockchain technology.
To Merge or Not to Merge?
Consolidation is a longstanding trend in the credit union sector. Since 2001 the number of credit unions and caisses populaires in Canada has gone from 1,5952 to 6233. This trend is not surprising. Credit unions face stiff competition from banks and, increasingly, non-traditional players. As well, increased resources are required for both technology and compliance infrastructure.
These pressures can motivate mergers, which offer potential synergies and improvements in scale. Mergers can also provide a way of establishing a footprint in different geographic areas. In other cases, a merger can be a way of saving a credit union that might otherwise become non-viable.
Credit union mergers can, however, pose certain challenges. Integration can consume significant resources, and it can be difficult to combine organizations with different cultures. In particular, one of the merging credit unions may lose its local or regional identity. This could involve credit decisions being centralized at a head office, and changing the name and brand of a credit union.
An approach that has emerged to address this issue is the so-called "federated model". Under this model, all of the participating credit unions cede certain elements of their business operations (such as IT systems, clearing and settlement, and compliance) to a common entity, but retain certain unique and strategic elements of their business, including branding. The federated model can involve various credit unions amalgamating and continuing to use the names of the predecessor credit unions as trade names. First West Credit Union has been an advocate of the federated model. In Ontario, Alterna Savings recently partnered with Peterborough Community Savings and Nexus Community Credit Union Limited using this model. Credit unions considering the federated model need to look closely at restrictions on possible regulatory approvals required to use trade names other than their corporate name. They also need to review their policies and procedures to ensure that they will work with the contemplated business model.
Privacy and Data Security4
Credit unions in Canada are subject to the Personal Information Protection and Electronic Documents Act (PIPEDA), which sets out how they are to collect, use or disclose a member's personal information during commercial activities. There is also provincial legislation governing credit unions with provisions requiring members' information be kept confidential.5 Individuals who believe their privacy rights have been violated can make a complaint to the Privacy Commissioner, who will then investigate the matter.6 Organizations, including credit unions, are also required to implement security safeguards to protect member information.
Credit unions should be aware of new data breach notifications expected to come into force later this year. The Digital Privacy Act, which received royal assent in June 2015, made amendments to PIPEDA regarding data breach notifications and reporting obligations. Organizations that suffer a data breach resulting in a "real risk of significant harm"7 to individuals will be required to undertake breach reporting and provide notifications to affected individuals and to government institutions and credit bureaus. Organizations must also maintain detailed records of security breach incidents, whether or not these breaches meet the threshold for reporting and notification, and must provide the Commissioner with access to, or a copy of, such record upon request. There will also be new offences for non-compliance with data breach obligations (up to $100,000 for an indictable offence).8
Credit unions can also be affected by other organizations' data breaches. For example, in 2017 a number of credit unions filed a class-action lawsuit against Chipotle in the United States. Chipotle was the victim of a data security breach, but credit unions and other financial institutions incurred costs in relation to the breach from customers who cancelled their cards, closed their accounts, stopped transactions, and requested fraud monitoring measures. Credit unions also lost interest and transaction fees and had to devote employee time to deal with customer confusion.9
Recently, CBC's Go Public reported that employees at Canada's largest banks have been pressured into using aggressive sales tactics on consumers.10 The allegations include employees having to meet certain sales targets and upselling customers on financial products. In response, the Financial Consumer Agency of Canada (FCAC) has launched a probe into the conduct of Canada's banks, whereby the Commissioner promised to "zero in on issues such as consent, disclosure and sales incentives to find out whether consumers are being treated badly."11 In addition, in June 2017 the House of Commons Standing Committee on Finance heard testimony as part of its study into "Consumer Protection and Oversight in Relation to Schedule I Banks."12.
Following Go Public's report on Canada's largest banks, it released a similar report in relation to Canadian credit unions.13 While it remains to be seen what the fallout of this will be, credit unions would be well advised to carefully review their policies and procedures to ensure they are sufficiently robust from a consumer protection perspective.
Legislative and Regulatory Developments
Legislative and regulatory changes are a fact of life for credit unions. Significant resources are required to comply with the ever expanding universe of legislative requirements and regulatory expectations. Indeed, simply staying on top of new and changing laws is itself a challenge. Set out below is a summary of some key recent developments.
OSFI Advisory on name use restrictions
On June 30, 2017, the Office of the Superintendent of Financial Institutions (OSFI) issued its Advisory on Restrictions on the use of the words "bank", "banker" and "banking" setting out how OSFI interprets and administers the Bank Act restrictions on the use of these words. A disconnect has emerged between the exclusive federal jurisdiction over banks, and the reality that provincial credit union are providing banking services and using some of the restricted words in connection with these services. The Advisory is OSFI's attempt to assert that jurisdiction, setting out a long list of names and phrases that OSFI views as prohibited under section 983.14 Indeed, the restrictions in the Advisory would significantly constraints how provincial credit unions can describe their activities.
The Canadian Credit Union Association (CCUA) was quick to criticize the restrictions in the Advisory, saying it will prevent credit unions from being able to use references to "bank", "banker" and "banking" when describing their services to consumers. Rebranding these services could mean changes to a credit union's advertising materials and websites — a move that could be costly and make it difficult for them to compete fairly with banks. The CCUA called on the federal government to reverse OSFI's Advisory.15
On August 11, 2017, the Office of the Superintendent of Financial Institutions issued a notice suspending the compliance expectations in the Advisory. On the same date, the Department of Finance launched the second stage of its consultations concerning the federal financial sector framework. Among other things, the Department of Finance is seeking views on whether prudentially regulated non-bank deposit-taking institutions (including credit unions) should be given flexibility to use the terms "bank" or "banking" to describe their activities and services in appropriate circumstances. The deadline to provide comments, for this and other consultation items, is September 29, 2017.
Once the Department of Finance has announced the outcome of its consultation on these restrictions, OSFI will communicate its revised expectations for compliance with the Advisory, as appropriate and necessary.
Changes to Canada's AML Regime
In June 2016, a series of amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act came into force which, among other things, updated the existing list of methods that reporting entities must use to verify the identity of their clients. As part of the amendments, a transitional period was provided, during which time either the previous identity verification methods or the new methods could be used. The transition period began on June 30, 2016 and was to end on June 30, 2017. The transition period has been extended until January 23, 2018.16
Effective June 17, 2017, amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations came into force, resulting in new obligations for reporting entities (including credit unions) with respect to politically exposed persons (domestic and foreign) and heads of international organizations.
Amendments to CUCPA
As part of the five year statutory review of the Credit Unions and Caisses Populaires Act, 1994 (CUCPA) a report was presented to the Minister of Finance (Ontario) in 2015 recommending a number of changes to the CUCPA and its regulations.17 The 2016 Budget announced the Government's intention to implement all of the report's recommendations, including:
- Setting the deposit insurance coverage limit at $250,000, while maintaining unlimited deposit insurance for the full amount for insurable registered deposits (such as RRSPs and TFSAs).
- Harmonizing subsidiary ownership rules with those in place for banks and permitting credit unions to wholly own an insurance agent or a registered insurance broker.
- Removing legislative barriers that impede the ability of credit unions to do business with municipalities, universities, school boards and hospitals and other sectors.
- Permitting Ontario credit unions to enter into loan syndication agreements with credit unions in other provinces (extra-provincial credit unions would be permitted to be registered in the Extra-Provincial Credit Unions Register to participate in syndicated loans in Ontario, subject to certain conditions).
- Removing differentiated rules for small credit unions (the definitions of class 1 and class 2 credit unions would be removed and class 1 credit unions would be subject to class 2 rules, but lending limits would not be more restrictive than what is currently allowed for class 1 credit unions).
The 2015 report to the Minister of Finance also noted that as a result of the piecemeal amendments that have been made to the CUCPA over the years, the clarity and workability of the CUCPA has deteriorated. The report went on to recommend that a new statue for credit unions and caisses populaires be drafted. In Budget 2016, the Government stated that it intends to propose legislation to modernize and replace the existing Act.
FSCO/DICO Mandate Review
In 2016 the Minister of Finance (Ontario) release the Expert Advisory Panel's report regarding the mandate reviews of the Financial Services Commission of Ontario (FSCO), Financial Services Tribunal (FST), and the Deposit Insurance Corporation of Ontario (DICO).18 The thrust of the report's recommendations are to:
- Create a new regulatory authority, with the suggested name of the Financial Services Regulatory Authority (FSRA), to operate as an integrated regulator of financial services with responsibility for regulation of market conduct, pension plans, and prudential matters.
- No longer have DICO be directly responsible for the prudential oversight of credit unions and caisses populaires; a function which would be transferred to FSRA.
- Have Ontario's deposit insurance scheme for credit unions and caisses populaires continue to be maintained by DICO; provided however that DICO would be operationally separate from FSRA.
The first step towards implementing these changes came with the passing of the Building Ontario Up for Everyone Act (Budget Measures), 2016, Schedule 8 of which contains the Financial Services Regulatory Authority of Ontario Act, 2016.
B.C. Financial Sector Review
In June 2015 the Ministry of Finance (British Columbia) launched a review of the Financial Institutions Act (FIA) and the Credit Union Incorporation Act (CUIA).19 The Initial Public Consultation Paper20 set out a number of key issues and specific areas for which the Ministry was seeking input and comments. This included issues facing the regulatory framework for the financial sector as a whole as well as issues facing the credit union sector in particular.
For the regulatory framework, the key issues were: financial consumer protection; market discipline and public disclosure of key financial risk information; financial literacy; technological change; out of province business (including credit unions); and regulatory powers and guidelines. With respect to the credit union sector, the key issues identified were: deposit insurance; credit union governance; capital requirements; liquidity requirements; and responsibility and regulation of central credit unions.
In March 2016, the Ministry published a high-level summary of the input it had received from stakeholders in response to the Consultation Paper.21 Once the Ministry has reviewed the issues and input received during the initial consultation period, it plans to prepare and release a second consultation paper which identifies the proposed policy and legislative changes.
While no specific dates have been provided, the Ministry anticipates that the review will take at least the same amount of time as the last FIA review, which was three years (from the date that the initial public consultation paper was released until the proposed regulations were completed and came into force). Furthermore, it is unclear how the recent change in government, coupled with ongoing instability of a minority government, will impact the substance and timing of the FIA and CUIA review.
Bill 134 in Québec
On May 2, 2017, Bill 134, An Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs ("Bill 134") was introduced in the Quebec National Assembly. Bill 134 proposes a number of amendments to the Consumer Protection Act (Québec) that will impact merchants (including credit unions/caisses populaires) that extend credit to consumers. These changes include:
- Cost of Credit Disclosure Requirements: introduces measures to harmonize the cost of credit disclosure requirements in Québec with those of other Canadian provinces. Despite this attempt at harmonization, key differences remain, and lenders operating in other Canadian jurisdictions will likely need to continue to use different forms in Québec.
- Needs Based Assessment: before entering into a contract, merchants will be required to assess the consumer's capacity to repay the credit requested.
- High-Cost Credit Contracts: merchants will have to comply with additional requirements, such as giving the consumer a copy of the documents reporting on the needs based assessment carried out and information on the consumer's debt ratio. In cases where such a contract is entered into while the consumer's debt ratio exceeds a prescribed ratio (which will be set by Regulation), the consumer will be presumed to have contracted an excessive, harsh or unconscionable obligation and can apply to have the contract annulled or the obligations under it reduced.
- Advertising: merchants will be prohibited from making false or misleading representations to consumers in an advertisement that credit may improve their financial situation or that credit reports prepared about them will be improved.
- Loyalty Programs: introduces a prohibition against any stipulation under which the exchange units received by a consumer under a loyalty program may expire on a set date or by the lapse of time.
- Open Credit Contracts: introduces rules applicable to open credit contracts, including the mandatory content of certain documents, credit rates, credit limit increases, the revocation of preauthorized payment agreements, and consumer liability in the case of loss, theft or fraudulent use of a credit card. Notably, merchants will be prohibited from increasing the credit limited granted except on the express request of the consumer (which does not include the consumer exceeding the credit limit as a result of a transaction), and stipulations in a credit contract allowing the merchant to unilaterally increase the credit limit will be prohibited.
Credit union are facing intense pressures. Consumer expectations and regulatory requirements are increasing, and significant resources are required to remain competitive. At the same time, we believe the current environment also presents significant opportunities for institutions that find effective ways to innovate and respond to these challenges.
While different credit unions are pursuing different strategies, one common element seems to be that adapting to the changing environment is a must. The one certainty is that the status quo is not an option.
4 The authors wish to thank Alex Cameron and student-at-law Chelsey Colbert for their input on privacy and data security.
5 See, for example, s 141(1) of Ontario's Credit Unions and Caisses Populaires Act, 1994, S.O. 1994, c. 11.
6 See, for example, "A credit union in Ontario should have obtained consent for credit check on spouse", PIPEDA Report of Findings #2011-004
7 Significant harm "includes bodily harm, humiliation, damage to reputation or relationships, loss of employment, business or professional opportunities, financial loss, identity theft, negative effects on the credit record and damage to or loss of property."
14 The list includes Commercial Banking Centre; Mobile Banking/Telephone Banking/Branch Banking; Bank accounts/Bank services; Automated Banking Machine; "[Non-bank Entity's name] offers business / personal banking..."; "...for all your banking needs"; "Come do your banking with us"; and "Bank at your convenience".
19 Under the FIA and CUIA there is a requirement that a legislative review be conducted every ten years.
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