Budget 2022: Financial Institutions Update
The 2022 federal budget (the “Budget”) includes a number of measures directed to the financial services sector, including measures in respect of anti-money laundering (“AML”), complaints handling, interchange fees, and climate related disclosures, as well as a number of other anticipated changes to financial sector legislation. Of relevance to participants in the insurance industry, the Budget also proposes a new income-based dental care program and a national pharmacare program.
Please also refer to our tax group’s separate update on the Budget for a discussion of tax measures affecting financial institutions.
Anti-Money Laundering Measures
The federal government has proposed several measures in connection with Canada’s AML regime:
- Extending scope of AML regulation to payment service providers (PSPs) and the crowdfunding platforms – The federal government proposes to bring forward new regulations that extend AML obligations to PSPs and crowdfunding platforms.
- Extending scope of AML regulation to the mortgage lending sector – The federal government proposes to extend AML requirements to all businesses conducting mortgage lending in Canada within the next year, citing the growth in mortgages issued by lending businesses not regulated under current AML legislation that applies to other financial institutions, such as banks.
- Canada Financial Crimes Agency – The federal government proposes to establish a new Canada Financial Crimes Agency, which will become Canada’s lead enforcement agency in the area of financial crimes. Public Safety Canada will undertake initial work to develop and design the new agency, with further details to be announced in the 2022 fall economic update.
- Strengthening AML regime – The federal government also proposes to make further legislative changes to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”), the Criminal Code, and other legislation, and will conduct a comprehensive review of the AML regime over the coming months.
The Budget will provide additional funding to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) in order to implement new AML and anti-terrorist financing requirements for crowdfunding platforms and payment service providers, support the supervision of federally regulated financial institutions (“FRFIs”), build expertise related to virtual currency, modernize its compliance functions, and update its financial management, human resources, intelligence, and disaster recovery systems.
- Amendments to AML legislation – The federal government also proposes to strengthen the PCMLTFA, Criminal Code and other legislation to:
- enhance the ability of authorities to detect, deter, investigate, and prosecute financial crimes;
- ensure that the government is well placed to manage emerging threats outside the scope of the current AML/ATF regime; and
- ensure the government has the tools necessary to preserve financial integrity and economic security.
- Beneficial ownership registry – The federal government is accelerating by two years its plans to amend the Canada Business Corporations Act (“CBCA”) to implement a public and searchable beneficial ownership registry, which will now be accessible before the end of 2023. The registry will cover corporations governed under the CBCA and will be scalable to allow access to the beneficial ownership data held by provinces and territories that agree to participate in a national registry. The federal government further intends to work with provinces and territories to advance a national approach to a beneficial ownership registry of real property, similar to other countries such as the United Kingdom. To ensure that corporate data provided to the registry is accurate and timely, the government will also examine approaches that support the validation and verification of the information in the registry.
Digitalization of Money Review
The federal government proposes to launch a financial sector legislative review focused on the digitalization of money and maintaining financial sector stability and security.
The first phase of the review will be directed at digital currencies, including cryptocurrencies and stablecoins, to be led by the Department of Finance Canada. The review will examine, among other factors:
- how to adapt the financial sector regulatory framework to manage new digitalization risks;
- how to maintain the security and stability of the financial system in light of evolving business models and technological capabilities; and
- the potential need for a central bank digital currency (CBDC) in Canada.
Separately, the government proposes to invest in FINTRAC and strengthen the PCMLTFA, the Criminal Code, and other legislation to investigate and prosecute financial crimes connected with the digitalization of money.
The federal government proposes to introduce legislative amendments to the Bank Act and the Financial Consumer Agency of Canada Act to provide for a single, non-profit external complaints handling body in banking and to strengthen the external complaints handling system.
The Budget states that banks should not be able to choose the complaints handling body they participate in, and the system should not be run on a for-profit basis.
The federal government will continue its consultations with key stakeholders with respect to developing solutions to lower the cost of fees for merchants by lowering the cost of credit card fees in a way that benefits small businesses and protects existing reward points of consumers.
The federal government is committing to moving towards mandatory reporting of climate-related financial risks across a broad spectrum of the Canadian economy, based on the international Task Force on Climate-Related Financial Disclosures (“TCFD”) framework. In particular, the Office of the Superintendent of Financial Institutions (“OSFI”) will consult with FRFIs on climate disclosure guidelines this year. OSFI will also:
- require FRFIs to publish climate disclosures, aligned with the TCFD framework, using a phased approach starting in 2024; and
- expect FRFIs to collect and assess information regarding climate risks and greenhouse gas (“GHG”) emissions from their clients.
Amendments to Financial Sector Legislation
In addition, the federal government proposes to amend the Bank Act, Insurance Companies Act, Trust and Loan Companies Act and Canada Deposit Insurance Corporation Act to:
- facilitate access to capital for property and casualty insurance companies;
- ensure that approval requirements for financial sector transactions apply regardless of how they are structured;
- adjust the time limited permissions of the investment regime to ensure they are used appropriately;
- strengthen governance at the Canada Deposit Insurance Corporation; and
- update proxy solicitation provisions for certain FRFIs.
Accounting Standards for Insurance Contracts
The federal government proposes legislative amendments to the Income Tax Act to address the impact of IFRS 17, the new international accounting standard for insurance contracts. The proposed amendments will confirm support of the use of IFRS 17 accounting standards for income tax purposes, with the exception of a new reserve known as the contract service margin, subject to some modifications. Without this exception, profits embedded in the new reserve would be deferred for income tax purposes. The federal government estimates that this measure will increase federal revenues by $2.35 billion over the next five years.
The federal government is also proposing relieving transitional rules and consequential changes to protect the minimum tax base.
Changes Impacting the Life and Health Insurance Industry
As anticipated, the Budget proposed a new income-based dental care program as well as a pharmacare program:
- Dental care – the Budget proposes to provide dental care for Canadians with family incomes of less than $90,000 annually, starting with those under 12 in 2022, expanding to those under 18, seniors and persons living with a disability in 2023, with full implementation by 2025. No co-pays would be required for those earning under $70,000 annually.
- Pharmacare – the Budget provides $35 million over four years for Prince Edward Island to advance the implementation of a universal pharmacare program. The federal government also proposes to continue ongoing work towards a universal national pharmacare program, which would include tabling legislation and working to have it passed by the end of 2023, and then tasking the Canadian Drug Agency to develop a national formulary of essential medicines and a bulk purchasing plan.
We will monitor for steps to implement these proposals. For more information about how proposed regulatory changes in Budget 2022 affect financial institutions, please reach out to a member of our Financial Services group.