Budget 2023: Financial Institutions Update
The 2023 federal budget (the “Budget”) includes a number of measures directed to the financial services sector, including (i) measures lowering the criminal rate of interest, (ii) financial consumer protection measures, including in respect of bank fees and credit card interchange fees, (iii) anti-money laundering/anti-terrorist financing (“AML/ATF”) measures, (iv) proposed amendments to federal financial sector legislation, and (v) measures intended to address crypto-asset risks.
Lowering of Criminal Rate of Interest
The federal government intends to put forward amendments to the Criminal Code to lower the criminal rate of interest from the current rate to 35% annual percentage rate (APR), and to conduct consultations on whether the criminal rate of interest should be further lowered. This is a significant change which could have widespread impact on the Canadian loan industry.
In addition, the government announced that it intends to modify the current Criminal Code payday lending exemption to require payday lenders to charge no more than $14 per $100 borrowed. It will also launch consultations on additional revisions to the Criminal Code’s payday lending exemption.
Financial Consumer Protection Measures
The budget included several measures to further strengthen the protection of Canadian financial consumers.
The government announced that it will work with regulatory authorities to continue to ensure the transparency of bank business practices, particularly as they relate to the transparency of prices charged to consumers.
Following the lead of the US Government, the Budget included plans to amend the Bank Act and the Financial Consumer Agency of Canada Act to buttress the rights of consumers when dealing with their banks.
Following the publication of its Consultation Document: Strengthening Canada's External Complaint Handling System in 2021 and the Financial Consumer Agency of Canada’s (“FCAC”) industry review on The Operations of External Complaints Bodies, the government is proposing to introduce legislative measures to designate a single non-profit external complaint body for banks which will be selected through a FCAC-led process.
Code of Conduct to Protect Canadians with Existing Mortgages
Citing the impact of elevated interest rates on Canadian mortgage holders and its commitment to helping Canadians stay in their homes, the government announced that it will be taking steps to ensure that federally-regulated financial institutions (“FRFIs”) provide existing mortgage holders with fair and equitable access to relief measures which include extended amortizations periods (even beyond 25 years), adjusted payment schedules and the authorization of lump-sum payments.
In connection with this initiative, the FCAC recently issued a guideline to ensure that mortgage holders who are facing hardship are not subjected to unnecessary penalties, internal bank fees or interest charges. For more information on the guideline please consult our recent blogpost.
Credit Card Transaction Fees
The Budget announced a commitment by Visa and MasterCard to lower credit card transaction fees for small businesses, without impacting the reward points offered by Canada’s large banks and enjoyed by consumers. The announcement specified that the commitment would see lower fees of up to 27% for over 90% of card-accepting businesses, which should save them an estimated $1 billion over five years. The government expects payment processors to pass on these reductions to small businesses.
The government also expects other credit card companies to follow suit and lower the transaction fees they charge small businesses.
More details, including eligibility criteria, should be available in the coming weeks.
Modernization Amendments to Federal Financial Sector Legislation: Addressing Foreign Interference and Sector Integrity and Security
The Budget included a reference to the government’s intention to amend the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act and the Officeof the Superintendent of Financial Institutions Act to “modernize the federal financial framework” to address developing risks to this sector.
Notably, the federal government proposes to introduce legislation to:
- Expand the mandate of the Office of the Superintendent of Financial Institutions (“OSFI”) to include supervision of FRFIs to assess whether they have “adequate” policies and procedures to protect themselves “against threats to their integrity and security” including, in particular, protection against “foreign interference”;
- Expand the range of circumstances and situations where OSFI can take control of a FRFI to include situations where “the integrity and security” of the institution is at risk, where all shareholders have been precluded from exercising their voting rights, or where there are national security risks; and
- Expand the existing authority for the Superintendent of Financial Institutions (Canada) to issue a direction of compliance to include acts that “threaten…the integrity and security” of the FRFI.
The Budget states that the federal government may also amend the Canada Deposit Insurance Corporation Act “to provide expanded authorities to increase deposit insurance and related measures in the event of a market disruption.”
Diversity Disclosure Requirements
As part of the Budget, the government proposes to introduce legislation to amend the Bank Act, the Insurance Companies Act, and the Trust and Loan Companies Act that will incorporate the principles of the diversity disclosure requirements included in the Canada Business Corporations Act (“CBCA”).
The CBCA requires that certain federally-incorporated publicly traded companies disclose to their shareholders and to Corporations Canada information related to the diversity of their boards of directors and senior management (see our prior blog post here). In this context, “senior management” includes:
- board chairs and vice-chairs;
- chief executive officer or chief financial officer;
- a vice-president in charge of a principal business unit, division or function, including sales, finance or production; and
- anyone who performs a policy-making function within the corporation.
Under the CBCA, while corporations have latitude to disclose information in respect of any other groups they believe contribute to diversity of their boards or senior management teams, they are required to report on the representation of 4 designated groups defined in the Employment Equity Act, on their board of directors and senior management teams:
- Indigenous peoples (First Nations, Inuit and Métis);
- persons with disabilities; and
- members of visible minorities.
Under the CBCA, the corporation is required either to disclose information about its policies and targets in respect of these groups, or explain why it does not have a policy and/or targets. Information to be disclosed includes the following:
- whether the corporation has adopted term limits or other mechanisms of board renewal;
- whether it has a written policy relating to the identification and nomination of directors from the designated groups and, if so, a description of the policy;
- whether and, if so, how the board or nominating committee considers diversity on the board in identifying and nominating candidates for election or re-election to the board;
- whether and, if so, how the corporation considers diversity when making senior management appointments;
- whether the corporation has targets for representation on the board and among senior management for each of the designated groups and, if so, its progress in achieving those targets; and
- the number and percentage of directors from each of the designated groups on the board and among senior management.
We expect that similar requirements will apply to FRFIs.
The government has also proposed to introduce legislation that would permit virtual-only meetings for FRFIs, and allow for the introduction of conditions to ensure participation. While virtual-only meetings were exceedingly rare prior to the COVID-19 pandemic, advances in technology and the smooth functioning of these meetings has changed the regulatory view of requirements for in-person meetings.
We expect that this legislation or enabling regulations will include requirements for, among other things, facility for meeting participants to vote.
Parliamentary Review and Public Consultations
In the wake of the Cullen Commission, the federal government intends to launch a parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”) in 2023, which will include a public consultation (the “2023 AML/ATF Consultations”) which will review the potential need for additional asset seizures measures (such as unexplained wealth orders), the need for measures to support investigations and prosecutions, the need for measures to enhance information sharing, and a consideration of the recommendations from the Cullen Commission.
The government has also pledged in the Budget to review the mandate of the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) to determine whether it should be expanded to counter evasion of Canadian sanctions, and to provide an update in the anticipated 2023 fall economic update. The government will also review whether FINTRAC’s mandate should be expanded to include financing of threats to Canada’s national and economic security; we expect that this will be a part of the parliamentary review.
AML/ATF Legislative Amendments
The federal government plans to introduce a number of amendments to the Criminal Code and the PCMLTFA to provide law enforcement and FINTRAC with additional tools to combat money laundering and terrorist financing, including measures to:
- Provide law enforcement the ability to freeze and seize virtual assets with suspected links to crime;
- Improve financial intelligence information sharing between law enforcement and the Canada Revenue Agency (“CRA”), and between law enforcement and FINTRAC;
- Introduce a new offence for structuring financial transactions to avoid FINTRAC reporting;
- Strengthen the registration framework, including through criminal record checks, for currency dealers and other money services businesses (“MSBs”) to prevent their abuse;
- Criminalize the operation of unregistered MSBs;
- Establish powers for FINTRAC to disseminate strategic analysis related to the financing of threats to the safety of Canada;
- Provide whistleblowing protections for employees who report information to FINTRAC;
- Broaden the use of non-compliance reports by FINTRAC in criminal investigations; and
- Set up obligations for the financial sector to report sanctions-related information to FINTRAC.
The federal government also proposes to make amendments to PCMLTFA to require FINTRAC to disclose information to the Minister of Foreign Affairs, in certain circumstances.
In addition, the federal government announced plans to:
- Provide new powers under the PCMLTFA to allow the federal Minister of Finance to impose enhanced due diligence requirements to “protect Canada’s financial system from the financing of national security threats”, and allow the Director of FINTRAC to share intelligence with the federal Minister of Finance to help assess financial integrity risks or national security risks posed by financial entities;
- Improve sharing of compliance information among FINTRAC, OSFI, and the federal Minister of Finance; and
- Designate OSFI as a recipient of FINTRAC reports relating to threats to Canada’s security, where this is relevant to OSFI’s responsibilities for financial institution oversight.
Additional amendments to the PCMLTFA and/or the Criminal Code may also be put forward following the 2023 AML/ATF Consultations.
Canada Financial Crimes Agency
As previously announced in the 2022 Budget, the federal government intends to create a new Canada Financial Crimes Agency (“CFCA”), which will become the lead enforcement agency against financial crime. The Budget states that further details on the structure and mandate of this new agency will be provided in the 2023 fall economic update.
Federal Beneficial Ownership Registry
The Budget references the recent introduction of Bill C-42, which seeks to put in place the necessary measures to implement a publicly accessible federal beneficial ownership registry. Bill C-42 includes amendments to the CBCA and the PCMLTFA.
In addition, the Budget notes that the “federal government will continue calling upon provincial and territorial governments to advance a national approach to beneficial ownership transparency to strengthen the fight against money laundering, tax evasion, and terrorist financing.”
For details on sanctions and international trade measures proposed in the Budget, please see our separate blogpost here.
Crypto-Asset Exposure Disclosure Requirements
The Budget includes a number of measures focused on the crypto-asset sector:
- OSFI will consult with FRFIs on potentially issuing guidelines requiring FRFIs to disclose their crypto-asset exposures;
- OSFI will require federally regulated pension funds to disclose their crypto-asset exposures; and
- The federal government also intends to work with the provinces and territories to raise the need for potential crypto-asset or related activities disclosure requirements for Canada’s largest pension plans.
The federal government also continues its review of the digitalization of money (which was announced in the 2022 budget), and will put forward additional measures in respect of crypto-assets further to such review. Further details on these measures will be announced in the 2023 fall economic update.
The Budget introduced two insurance-related measures that relate to climate change, based on a need for an improved federal disaster insurance program that reflects the reality that natural disasters are difficult to insure against.
Accordingly, the government proposes to work with the insurance industry to protect Canadians from costs related to disaster recovery and making insurance affordable. In the Budget, the federal government announced its intention to launch, with provinces and territories, a new approach to address gaps in natural disaster protection and to help Canadians access affordable insurance. In addition, the government proposes to:
- Provide $31.7M over three years to Public Safety Canada and the Canada Mortgage and Housing Corporation to work with the Department of Finance to set up a low-cost flood insurance program, aimed at protecting those at high risk of flooding and without access to adequate insurance. This would include both reinsurance through a federal Crown corporation and a separate insurance subsidy program for private insurance. Important discussions will need to take place regarding federal-provincial participation, cost-sharing and risk mitigation; and
- Have the Department of Finance and Public Safety Canada engage with industry on solutions to earthquake insurance and other insurance market challenges that relate to climate.
McCarthy Tetrault’s Expertise
By leveraging our deep industry expertise and experience, we help our clients navigate Canada’s complex, highly regulated financial institutions environment to achieve their business goals. Please contact the authors or any other member of our Financial Institutions Regulatory Matters group if you have any questions or for assistance.