On April 21 2015 the government tabled the federal budget, Economic Action Plan 2015 (Budget 2015) in the House of Commons. In Budget 2015 the government promises a number of measures that will be relevant to banks and other federally regulated financial institutions.
Budget 2015 sets out the government's intentions for the much-anticipated financial consumer protection framework. The government proposes to amend the Bank Act to strengthen and modernise Canada's financial consumer protection framework and consolidate the existing financial consumer provisions of the Bank Act. The new financial consumer protection framework will include:
- broadened general requirements for the clear and simple disclosure of information and expanded use of summary information boxes for banking products and services;
- improved access to basic banking services by allowing a broader range of personal identification to open an account;
- expanded prohibitions on certain business practices – including high-pressure sales situations – and cooling-off periods for a greater range of products;
- expanded corporate governance requirements so that boards of directors' duties relate to all consumer protection measures;
- improved transparency and accountability - for example, through enhanced public reporting on complaints and on measures taken to address the challenges faced by vulnerable Canadians; and
- a requirement that advertising be clear and accurate.
The government also proposes to amend the Bank Act to include a set of principles to guide bank conduct. Banks will be required to report annually on how their business activities meet the spirit of the principles.
In Budget 2015 the government states its intention for the Bank Act to provide the exclusive set of rules governing consumer protection for banks. In particular, the government states that:
"One comprehensive set of rules will allow banks to efficiently deliver national products and services and provide consumers with the benefit of knowing they have the same uniform protection when they deal with their bank anywhere across the country."
This statement is apparently a response to the Supreme Court's September 2014 decision in Bank of Montréal v Marcotte, in which the court held that Quebec's Consumer Protection Act is generally applicable to banks.(1)
If the proposed changes are implemented as described above, banks will be required to make various changes to their documents, practices and procedures. In particular, they will likely have to:
- revise customer-facing material;
- review account-opening identity verification procedures;
- implement certain cooling-off periods; and
- update board and employee training to address the new consumer protection measures.
In 2012 banks made a voluntary commitment to provide borrowers with certain disclosures relating to their ability to pre-pay their mortgages. Budget 2015 states that the government intends to invite all non-bank mortgage lenders to agree to provide their borrowers the same information about prepaying mortgages.
Budget 2015 reiterates the government's intention to implement a bail-in regime for systemically important banks (referred to as the taxpayer protection and bank recapitalisation regime). The key features of the regime are as follows:
- A statutory conversion power will allow for the permanent conversion of eligible liabilities of a non-viable bank into common shares.
- Deposits will not be subject to the regime. Only unsecured debt that is tradeable and transferable, has an original term to maturity of 400 days or more and is issued or renegotiated after an implementation date will be subject to conversion.
- A minimum loss absorbency requirement will ensure that systemically important banks can withstand significant losses and emerge from a conversion well capitalised.
- It will include comprehensive disclosure and reporting requirements.
The bail-in regime will be included in legislative amendments to enhance the resolution toolkit for domestic systemically important banks, with regulations and guidelines to follow.
Budget 2015 also confirms that the bail-in regime will not require banks to adopt a holding company structure.
The government also intends to ask systemically important banks to prepare resolution plans that set out how each bank could be resolved in the unlikely event that recovery actions fail.
Budget 2015 states that new regulatory measures will be implemented to restrain the use of mortgages insured by the Canada Mortgage and Housing Corporation (CMHC) in securitisation vehicles. The measures will include:
- limiting the extension of portfolio insurance through the substitution of mortgages in insured pools;
- tying the use of portfolio insurance to CMHC securitisation vehicles; and
- prohibiting the use of government-backed insured mortgages as collateral in securitisation vehicles that are not sponsored by the CMHC.
At present, banks, insurers and other federally regulated financial institutions are subject to regulations that require them to keep confidential certain types of communication that they might have with the Office of the Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation. Budget 2015 states that legislative amendments will be introduced to modernise, clarify and enhance the protection of this information. There is also a reference to two inter-agency committees that play a role in supervising federal financial institutions and the intention to review the statutes that provide for that oversight, as well as governing certain crown corporations to ensure effective governance and operations.
Budget 2015 mentions that a federal credit union framework has been incorporated into the Bank Act and, more recently, a transition has been initiated away from the joint regulation of provincial credit union centrals by both the federal government and the provinces. Budget 2015 further states the government's intention to continue engaging stakeholders and working collaboratively with the credit union sector on its future development and on ways to meet the needs of this evolving sector. Specific details are not provided.
Budget 2015 notes that recent steps that have been taken with respect to payment systems, including the revisions to the Code of Conduct for the Credit and Debit Card Industry in Canada and the voluntary undertakings by the credit card networks with respect to interchange fees. Also noted is the consultation on the oversight of retail payment systems, which is currently underway. Despite this reference to these developments, no new measures are announced.
The proposals have not yet been implemented into law. Recent practice has been for the government to introduce omnibus legislation implementing various proposals announced in the budget within a few weeks of the budget plan's release. It is also common for the government to delay or shelve some proposals. These developments should continue to be monitored as the financial services regulatory environment becomes more complex.
For further information on this topic please contact John Jason, Sharissa Ellyn, Marc Duquette or John W Teolis at Norton Rose Fulbright Canada by telephone (+1 416 216 4000) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Norton Rose Fulbright Canada website can be accessed at www.nortonrosefulbright.com/ca/en/.
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