Federal financial consumer protection framework – not quite there yet…

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Note:  This is the second in a series of monthly articles intended to parse the new federal financial consumer protection framework[1] (the “Framework”). To view other articles in the series scroll down to the bottom of this article.

As we wait for the new Framework to come into force, we thought we would spend some time going through its sections, sequentially, and discussing their potential impact on banks.  However, before we start unpacking Division 1 of Part XII.2, we consider some of the amendments to the Bank Act that aim to strengthen governance.

Governance

Currently, banks are required to designate a committee of the board of directors to monitor the procedures they must establish to provide the disclosure required under the Bank Act and for dealing with complaints (paragraphs 157(2)(e) & (f)).  While the new paragraph (157(2)(e)) maintains the requirement for a committee, it increases the committee’s responsibilities in that it must now:

  • require that management establish procedures to comply with all of the consumer provisions of the Framework, rather than with only the disclosure and complaints handling requirements;
  • review such establish procedures to determine whether they are appropriate to ensure compliance with the consumer provisions; and
  • report annually to the committee on the implementation of the procedures and on any other activities that are carried out in relation to the protection of bank customers.

Subsections 195.1(1) and (2) dictate that the committee must be represented by no less than three directors, the majority of whom must have no affiliation with the bank and no bank officer or employee may be members of the committee.

Bank auditors will be entitled to receive notice of committee meetings, attend committee meetings and participate in committee meetings.

Banks will need to report on their governance activities relating to the Framework. They will be required to report to the Commissioner of the Financial Consumer Agency of Canada (“FCAC”) on:

  • the committee’s mandate, responsibilities and procedures put in place by management to ensure compliance with the consumer provisions; and
  • the activities undertaken by the committee during each fiscal year to fulfill its new responsibilities.

Finally, the committee will also be required to report to the board of directors, after each meeting, on the matters it has reviewed.

Impact

The new governance requirements introduced by paragraphs 157(2)(e) & (f) and section 195.1 of the Bank Act likely found their genesis in FCAC’s report on retail bank sales practices, which took the position that banks lacked the appropriate governance and controls to properly understand their sales practices and market conduct risks.

To accommodate the changes described above, banks will need to review and update existing processes, procedures and policies and create new ones to ensure that all of the consumer provisions are covered.  They will also have to create new governance documents to capture the oversight committee’s new responsibilities and composition  requirements. In addition to the work that will be required on policies and procedures, effort will also have to be put towards complying with the increased governance-related reporting obligations. 

Finally, there is the matter of how the “standard of appropriateness” under paragraph 195.1 (3)(a) as it relates to the procedures to be established by the banks with respect to the consumer provisions is to be interpreted and applied.  Clarification through regulation or FCAC guidance would go a long way to reducing ambiguity and uncertainty. 

Be sure to keep an eye out for the next installment of our articles on the new Framework.

 

[1] Division 10, Bill C-86, Budget Implementation Act, 2018, No. 2.

Federal Financial Consumer Protection Framework Article Series and Related Insights

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