Budget 2015: Financial Institutions Update
The 2015 federal budget announces a number of measures directed to financial institutions. These include a new federal financial consumer code, a bail-in regime for domestic systemically important banks, a national securities regulator initiative (which our securities group will address separately on the Canadian Securities Regulatory Monitor blog), increased financial sector oversight, credit union regulation and retail payment systems oversight. While these initiatives are significant, for the most part the budget provides little in the way of details.
Consumer Protection Framework for Banks
The Government confirmed that it intends to amend the Bank Act to put in place a comprehensive federal financial consumer protection framework applicable to banks only, as first promised in the 2013 budget. In December 2013, the Government followed up with a Consultation Paper, which set out a number of underlying principles for the federal consumer protection framework. Many of these principles have been reiterated in the budget.
The budget is short on details but indicates that the code will include the following:
- Additional disclosure requirements for banking products and services, including requiring additional use of information boxes;
- Prohibitions of specified business practices (such as high pressure sale tactics);
- Cooling-off periods applying to a greater range of financial products and services. Currently, a cooling-off period is only available for deposit accounts, although the two-day disclosure requirement for mortgages provides consumers with a type of cooling-off period;
- Broader corporate governance requirements, resulting in an expansion of the board’s duties to all consumer protection measures. Currently those duties are limited under the Bank Act to the establishment of procedures for meeting disclosure requirements and handling customer complaints and, under OSFI Guideline E-13, to the general oversight of regulatory compliance management;
- Additional requirements relating to “transparency and accountability”, which could include additional public reporting requirements on complaints and on measures taken to assist vulnerable consumers; and
- A requirement that advertising be “clear and accurate”. Regulations under the Bank Act already address disclosure in advertising of specific aspects of loans and revolving credit, and there is, of course, the prohibition against materially false and misleading advertising in the Competition Act. It will be interesting to see how the proposed positive obligation will be framed, and how this duty will evolve in a competitive environment.
The 2015 budget proclaims the Government’s intention that “the Bank Act provide the exclusive set of rules governing consumer protection for banks.” This statement of exclusivity appears to be in response to the recent Supreme Court of Canada decision in Bank of Montreal v. Marcotte, in which the Court held that certain provisions of Quebec’s Consumer Protection Act applied to federally regulated banks (see Marcotte – the banks and provincial laws). Until the proposed text of the legislation to achieve this exclusivity is available, one can only speculate on its potential effect on the current state of the law as set out in the Marcotte decision.
As the Government has previously indicated, the Financial Consumer Agency of Canada will monitor compliance with the code.
Taxpayer Protection and Bank Recapitalization Regime (Bail-In Regime)
Consistent with Canada’s commitments with respect to G-20 post-financial crisis reforms, the Government has confirmed its intention to expand resolution powers relating to Canadian systemically important banks (namely the six largest Canadian banks), including by implementing the Taxpayer Protection and Bank Recapitalization Regime (the “bail-in” regime).
The key features of this regime were outlined in the proposal released in August 2014, which we described in further detail in a prior legal update “Department of Finance Releases Proposal for Canadian Bail-In Regime”. Consistent with the August proposal, the proposed regime contemplates statutory conversion of “eligible liabilities” (which consist of unsecured debt that is tradable and transferable and has an original term to maturity that is 400 days or more, issued after a certain date) and does not contemplate conversion of deposits. The proposed new capital requirement referenced in the August proposal, the minimum loss absorbency requirement, will also be instituted. There will be a transition period before the bail-in regime becomes effective.
Importantly, the budget confirms for the first time that adoption of a holding company structure will not be required. The August proposal queried whether such a structure (which is typical in other jurisdictions such as the U.S.) should be mandated in Canada for systemically important banks, given that the structure of resolution regimes in such other jurisdictions (such as the “single point of entry” regime in the U.S.) is fundamentally based on such structure. Requiring financial institutions to convert to such a structure would have been very disruptive and costly to any affected financial institution.
The Government announced that it will put in place regulatory measures intended to limit portfolio insurance extended through the substitution of mortgages in insured pools, tie the use of portfolio insurance to CMHC securitization vehicles, and prohibit the use of government-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC.
Financial Sector Oversight
The Government will propose legislative amendments to “modernize, clarify and enhance the protection of prescribed supervisory information that relates to federally regulated financial institutions”, in order to increase confidence in the supervisory process and the stability of the financial system. This is an important initiative because the prescribed supervisory information has been central to relations between the federal regulator and each regulated entity.
The Government will also review Part IV of the Financial Administration Act, which relates to public debt, with the aim of ensuring the legislation reflects “modern market practices for the prudent management of Canada’s finances”, and statutes relating to federal financial sector oversight and to Crown corporations to ensure their “effective governance and operations.”
Retail Payment Systems
The budget references a number of recent changes affecting retail payment systems: the commitment obtained from Visa and Mastercard in November 2014 with respect to interchange fees, the recent release of the updated Code of Conduct for the Credit and Debit Card Industry in Canada (which we described in further detail in a recent legal update, Updated Code of Conduct for the Credit and Debit Card Industry in Canada) and the release of a consultation paper on the oversight of Canada’s national payment systems, Balancing Oversight and Innovation in the Ways We Pay: A Consultation Paper.
The Government also signalled that it is closely monitoring payment innovation and is prepared to introduce additional regulation to ensure the safety of the payment system while continuing to foster innovation. As was stated in the budget: “[p]ayment innovations offer benefits to consumers, such as greater convenience and speed, but they must be operated in a responsible manner so that Canadians continue to have confidence in the payment system. The Government is currently consulting on the oversight of retail payment systems to support competitive and innovative ways to meet the payment needs of Canadians while ensuring that the payment system remains safe.” It will be very interesting to see how the Government deals with a payment landscape that continues to evolve at a rapid rate.
Voluntary Mortgage Disclosure Requirement
The Government announced that it intends to work with non-bank mortgage lenders to expand disclosure in respect of mortgage prepayment, similar to federally regulated financial institutions’ voluntary commitments under the Code of Conduct for Federally Regulated Financial Institutions—Mortgage Prepayment Information. Consumers would be well served by consistent disclosure requirements, but it is unclear what levers the Government intends to use to achieve this result.
Credit Union Regulation
The Government announced that it intends to continue engaging with stakeholders to ensure that the necessary measures are in place to support the growth of the credit union sector in Canada, following its earlier enactment of the federal credit union framework.
Cybersecurity initiatives were announced in the budget that will be of interest to financial institutions. For more detail on these, please see McCarthy Tétrault’s blog: “New Cybersecurity Legislation in Federal Budget”.
White Collar Crime
The Government also announced its intent to pass legislative amendments relating to white-collar crime to allow the Financial Transactions and Reports Analysis Centre of Canada to disclose relevant information to provincial securities regulators.
The budget also includes financial industry-related commitments that are not legal or regulatory in nature, relating to financial literacy and the national counterfeit enforcement strategy.
Financial institutions can expect a number of important regulatory and legislative changes to follow in the near future (depending of course on the outcome of any federal election), as the Government takes steps to implement the various initiatives outlined in this budget.