Canada finally has its first federal credit union. On July 1, 2016, the Caisse populaire acadienne ltée continued as a federal credit union under the Bank Act. In connection with moving to a federal charter, 15 New Brunswick credit unions and two related entities amalgamated.
In Budget 2010 the federal Government committed to introducing a framework that would allow credit unions to incorporate and continue federally. It was intended that allowing credit unions to operate nationally would promote the continued growth and competitiveness of Canada's credit union sector and would broaden choices for consumers of financial services.
With the passage of Bill C-9, An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures ("Bill C-9"), the Bank Act was amended to provide for such a framework. The amendments came into force in December 2012. While a number of credit unions have been known to be considering this option, it has taken over three years for the first federal credit union to come into existence, and notably it was not one of Canada's larger credit unions.
There are various reasons why take-up of the federal credit union alternative has been slow. One of the challenges facing provincial credit unions contemplating continuance is the difference between provincial and federal deposit insurance regimes. Eligible deposits with federally chartered banks (including federal credit unions) are insured by the Canada Deposit Insurance Corporation (CDIC) up to a maximum of $100,000. Deposits with provincial credit unions are insured by provincial deposit insurance corporations, which in many cases have deposit insurance limits greater than the $100,000 CDIC limit. Indeed, in some provinces, such as B.C., which is home to some of Canada's largest credit unions, deposit insurance coverage is unlimited.
Anticipating this concern, Bill C-9 introduced transitional deposit insurance coverage under the Canada Deposit Insurance Corporation Act ("CDIC Act") that applied to credit unions that continued under the Bank Act. Specifically, section 12.1 of the CDIC Act was amended so that CDIC would insure "pre-existing deposits" held by the credit union to the extent the deposits would have been insured by the applicable provincial deposit insurer. This transitional coverage is temporary, and with respect to transaction or demand accounts/deposits, ends after 180 days. For term deposits, the coverage ends on maturity.
Despite the transitional coverage under the CDIC Act, in a 2014 open letter to the Credit Union Central of Canada the Minister of Finance recognized that the differences in provincial and federal deposit insurance coverage remains a challenge for credit unions looking to continue federally. In addition, the Minister also noted that differences in provincial and federal insurance networking rules was also a concern for credit unions contemplating federal continuance. Specifically, while some provinces allow credit unions to share premises with insurance affiliates, this practice is not permitted by federal credit unions under the Bank Act.
In an effort to address these challenges, the Minister indicated that the federal Government would provide temporary transitional support to eligible credit unions looking to continue federally by offering extended deposit insurance and a short term funding facility, as well as an extended transition period to comply with federal insurance networking rules.
In furtherance of this commitment, amendments were made to the Bank Act in June 2016 through the adoption of Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures. These amendments provide the Minister with the authority to guarantee the repayment of a loan that a federal financial institution makes to a federal credit union. Furthermore, the Minister now has the authority, for the purpose of facilitating a credit union's continuation, to relax certain requirements under Part III and Part VI of the Bank Act, where the Minister is of the opinion that the credit union will act in a manner that substantially complies with the requirements. Part III deals with Incorporation and Continuance and Part VI deals with Corporate Governance, Shareholders and Members.
It remains to be seen what else the federal Government might have planned to address the concern of credit unions with respect to extended deposit insurance coverage and any extension to the transition period to comply with federal insurance networking rules. Despite any such concerns, Caisse populaire acadienne ltée has shown that federal continuance can be done. It will be interesting to see if other credit unions follow suit, both in terms of continuing as federal credit unions and in terms of combining this option with amalgamations with other credit unions.
Background in relation to federal credit union options
In December 2010 we released a System Brief together with the Credit Union Central of Canada entitled "Federal Credit Unions: Strategic Considerations for Provincial Credit Unions" that addressed advantages, disadvantages and differences between being a federal credit union and a provincial credit union. The key areas discussed were the difference between the federal and provincial deposit insurance regimes, whether the federal regulatory and legislative framework was more or less onerous than provincial frameworks, the impact on the governance structure of moving to a federal charter and the options that a provincial credit union has in order to pursue a federal charter. Other matters discussed included lending, leasing, investments, subsidiaries, insurance retailing, capital adequacy, raising capital and name.
Interestingly, there are several possible options for a provincial credit union to continue as a federal credit union or create a federal credit union while continuing to exist as a provincial credit union. A few of these options are: multiple provincial credit unions continuing as federal credit unions and then amalgamating as one federal credit union; the purchase by a federal credit union of some or all of the assets of a provincial credit union; a partnership /joint venture between a federal credit union and one or more provincial credit unions; and sponsoring a federal credit union while continuing to be a provincial credit union. In relation to sponsorship, there is a fundamental restriction that a provincial credit union cannot control a federal credit union. However, permitted options could include a provincial credit union capitalizing a federal credit union by investing in debt, membership and non-membership shares (note that holders of non-membership shares can be given the right to elect up to 20% of the federal credit union's directors) and entering into various services and strategic alliance agreements. We have significant experience advising credit unions on these matters, including various options relating to continuance as federal credit unions and possible sponsorship and merger opportunities.