On August 26, 2016 the Department of Finance Canada issued a consultation document requesting input on its upcoming review of the Federal financial sector. The consultation document provides a good overview of the status of the many moving parts of and ongoing change in our financial sector. This is the first stage of a two-stage consultation process. Submissions on this stage are to be provided by November 15, 2016 and will inform the development of a policy paper for the second stage in 2017.

By way of background, one of the unique features of the primary Acts governing Canada's financial institutions is that they contain a "sunset clause" – a provision that permits banks and federal trust companies and insurance companies to carry on business for only five years at a time. The most current sunset was March 29, 2017. The rationale for this time horizon is that it forces Parliament to review the financial institution statutes at regular intervals. Parliament extended this sunset to 2019 as part of the most recent budget in order to provide additional time for it to consult and conduct a review of Federal financial services legislation.

The Intertwining of Financial Services Legislation

At first glance, it may appear that the consultation document devotes considerable detail to a discussion of the various pieces of financial services legislation. However, in doing so, it clearly shows how intertwined the various players are – large banks; small and medium-sized banks; trust and loan companies; life insurance companies; property and casualty insurance companies; mortgage lenders and mortgage insurers; foreign financial institutions; credit unions and caisses populaires; securities dealers and exchanges; financial market infrastructures including payment, clearing and settlement systems which facilitate core transactions of financial institutions (payments, securities and derivatives); payment card network operators which facilitate retail payments; other financial sector entities and financial sector regulators (Bank of Canada, CDIC, OSFI and FCAC). It is noteworthy that not all these players are federally regulated, and so there are limits on what the Federal Government can do.

By providing that backdrop, the consultation document reminds us of not only this intertwining but also of the complexity and mutual dependency of the system. The consultation document focuses on several trends:

  • increased concentration which is changing the competitive landscape
  • internationalization of Canadian financial institutions – Canada's financial institutions are increasing their presence outside Canada
  • the evolving financial marketplace for consumers largely because of technology
  • financial innovation and the emergence of financial technologies (Fintech), both independently and in partnership with financial institutions
  • demographic changes – the financial sector is adapting to Canada's aging population and the millennial generation
  • emerging risks, such as increased urbanization, terrorism and climate and environmental change pose potential for loss from catastrophic events, and cyber threats

Policy Objectives of Review

The consultation document identifies three core policy objectives:

  • stability: the sector is safe, sound and resilient in the face of stress
  • efficiency: the sector provides competitively priced products and services, and passes efficiency gains to customers, accommodates innovation, and effectively contributes to economic growth
  • utility: the sector meets the financial needs of an array of consumers, including businesses, individuals and families, and the interests of consumers are protected

What We Can Expect to See

To us, there are several key and intertwined themes that will emerge in the comment period ahead:

  • ensuring a level playing field: in the face of Fintech innovation – how to ensure a level playing field that allows for creativity and innovation and at the same time allows all players equal access where all such players are regulated based on function
  • consumer protection: as there are continued new products and services – how to ensure that consumers are protected
  • safety, soundness and stability: preserving Canada's strong financial services record as it encourages innovation but ensures the safety, soundness and stability of the system

The intertwined nature will lead to some interesting points of view:

  • banks will be asking for clearer rules around their ability, as they are significantly regulated, to innovate and compete with those not similarly regulated
  • banks will be arguing for a level playing field in relation to financial services participants, particularly in the payments space, where many are unregulated, which compete with banks
  • consumers will expect transparency in products and services offered to them and cost savings passed on to them
  • regulators will want to ensure the safety, soundness and stability of all systems including the payment system and will want to protect consumers
  • there will be pressure for more access to the payments system by non-traditional payment participants
  • there will be pressure on policymakers to regulate fees and interchange on credit cards and other consumer products