On September 11, 2024, the Department of Finance Canada (“Finance Canada”) ended its third phase of consultations of federally regulated financial institution (“FRFI”) statutes, as part of the comprehensive financial sector legislative review announced in Budget 2022. The first phase of consultations sought views focused on impact of emerging trends in the financial sector on consumers, national security, competition and the integrity of Canada’s financial system. The second phase focused on identifying barriers to banking services faced by Canadians and prospective measures that can be taken to provide access or improve quality of access. This most recent consultation (the “Consultation”) presented proposals and sought views and written submissions in the following five key areas:

1. Supporting a competitive market structure and expanding consumer choice

• Preventing Consolidation Among Large Banks: Finance Canada proposed legislative measures to prevent consolidation among large banks, subject to prudential or financial stability exemptions.
• Facilitating the Growth of Federal Credit Unions: They also sought views on how they can work with financial sector stakeholders to encourage growth and expansion of federal credit unions, including with respect to making it easier for federally regulated credit unions to merge with provincially regulated credit unions.
• Strengthening the Ministerial Application Process: They proposed strengthening the Ministerial Application Process by: (i) implementing measures such as requiring applicants to hold public consultations in respect of applications that raise material public interest considerations; and (ii) clarifying the Minister of Finance’s authority to take into consideration an applicant’s compliance with applicable domestic or foreign regulatory requirements when making a decision (e.g., compliance with obligations related to taxation or anti-money laundering) and to impose approval conditions or require undertakings with respect employment matters.
• Fair Access to the Distribution Channel for Brokered Deposits: Finance Canada recognized that ensuring small and medium sized banks (“SMSBs”) have access to brokered deposit channels is vital for fostering competition and consumer choice. Accordingly, they are considering amendments to the Bank Act to prevent large banks from exercising control over their deposit broker subsidiaries to unduly limit SMSB access.
• Leasing Automobiles to Retail Consumers: Finance Canada also sought views on permitting FRFIs to engage in the leasing of light motor vehicles to consumers as federal legislation currently prohibits FRFIs from engaging in the leasing of motor vehicles that have a gross weight of less than 21 tonnes.

2. Enhancing consumer protections

• Preventing Financial Fraud: As digitalization and technological advances have increased the risk of financial fraud, Finance Canada sought views on whether banks should be required to prevent or delay transactions they believe to be fraudulent and/or associated with a scam, and also whether banks should be required to allow consumers to have the ability to turn off or adjust account capabilities to prevent fraud, such as the ability to complete wire transfers via a mobile application.
• Increasing Transparency and Accountability for Financial Fraud: To increase regulators’ line of sight into the adequacy of banks’ policies and procedures to protect consumers from financial fraud, and protect consumers from financial loss associated with fraud, Finance Canada sought views on:
  • Whether banks should be required to have policies and procedures to detect fraud and scams and prevent consumers from being victimized, and if so, what those should be.
  • What constitutes an unauthorized transaction and the introduction of a maximum liability threshold for account holders who are victims of unauthorized transactions, regardless of the means by which their account funds were accessed and under what circumstances consumers should be liable for funds lost due to unauthorized transactions.
  • Whether banks should be required to collect and report anonymized, aggregated data related to the nature of fraud and scams targeting their clients, and, if so, whether they should be required to report this data to the Financial Consumer Agency of Canada (“FCAC”).
• Bank Branches: As banks are increasingly offering digital banking services and reducing operations of physical branches, Finance Canada sought views on:
  • Expanding what is required to be disclosed in notices of branch closure or ceasing to open retail deposit accounts or teller-based cash disbursals.
  • Requiring banks that are closing branches to facilitate customer account transfers and waive associated transfer costs.
  • Expanding the data-reporting requirements for banks with respect to their branch networks.
  • Whether the requirement for banks with branches and physical points of service to open basic retail deposit accounts upon presentation of prescribed ID should also apply to banks offering access through digital channels.
  • Whether to amend the limits on cheque holds to allow more funds to be available immediately, reduce hold periods and vary the hold period depending upon the amount and manner of deposit.

3. Modernizing the financial sector framework

• Prohibiting or Restricting Interlocking Directorates in the Financial Sector: Given the unique role of FRFIs in the Canadian economy, Finance Canada sought views on prohibiting or restricting interlocking directorates within the financial sector to address competition concerns and ensure that decision making is in the best interest of a FRFI.
• Updating Public Holding Requirement Thresholds: Finance Canada is considering updating the threshold at which the public holding requirement is triggered (currently, FRFIs with an equity threshold of $2 billion must have 35% of their voting shares publicly listed and widely held) and sought views on what the threshold should be.
• Updating Statutory Thresholds: Finance Canada is considering updating several key statutory thresholds including increasing limits on specialized financing activities, limits on investment powers, and under the Insurance Companies Act, the ownership of farmland, timberland and similar assets, and potentially moving certain thresholds to guidelines so that they can be more quickly amended.
• Application Transparency: Measures to provide for a written update, upon request, to applicants where no decision has been made by the Minister of Finance or Superintendent  of Financial Institutions (the “Superintendent”) within 120 days of receipt of a complete application are under consideration.

4. Adapting to geopolitical risks

• Enhancing the Oversight of Financial Sector Risks Related to National Security: Finance Canada is considering measures to enhance the oversight of financial sector risks related to integrity and security, including national security, and the creation by statute of a committee to facilitate consultations among members on how to address these risks and provide authorities for the exchange of information with necessary safeguards.
• Enhancing the Minister of Finance and the Superintendent of Financial Institutions’ Compliance Authorities: Currently, if the Superintendent is of the view that an FRFI is committing or is about to commit an act that is unsafe or unsound in conducting its business, the Superintendent may direct the bank to cease or refrain from engaging in such activity, or to perform such acts as are necessary to remedy the situation. However, this authority relates to “conducting the business” of an FRFI but does not extend to its “affairs,” which is a defined term that encompasses governance matters such as relationships between an FRFI and shareholders, members, directors and officers. To address this gap, Finance Canada is considering expanding OSFI’s authority to include an act that may threaten the integrity or security of an FRFI and the affairs of an FRFI and also expanding the authorities of the Minister of Finance and the Superintendent that refer to an FRFI’s policies and procedures to protect itself against threats to its integrity or security to include a reference to the adherence by an FRFI to these policies and procedures.

5. Upholding world-class regulation

• Enhancing Federal, Provincial, and Territorial Collaboration and a Strong and Predictable Regulatory Framework: Finance Canada sought views  on providing regulatory predictability through coordinated periodic announcements on likely forthcoming regulatory actions, conducting and publishing impact statements of regulatory actions, developing a forum for coordinating and collaborating on international issues, and sharing of information about integrity and security risks.
• Artificial Intelligence (“AI”): Recognizing the rapid acceleration of AI within the past couple of years, Finance Canada is working on strengthening federal leadership on the safe and responsible use of AI in the financial sector which would be led by an AI expert. In particular, this effort would aim to engage a broad range of domestic and international stakeholders, identify and assess potential risks of AI, and develop a federal strategy to harness the advantageous capabilities of AI in the financial sector while mitigating potential risks.

We will closely follow how industry feedback may be reflected in legislative changes of FRFI statues.

By strategically leveraging our deep industry expertise, we enable our clients to traverse Canada’s complex, highly regulated financial services environment in achieving their business goals. Please contact the authors of this article if you have any questions or for assistance. For more information about our firm’s Financial Services expertise, please see our group’s page.