In its 2009 Budget, the Canadian Government stated its intention to consult market participants on the potential merits of changing the legislative and regulatory framework for financial leasing activities by federally-regulated financial institutions. On April 26, 2009, the Minister of Finance released a consultation paper seeking views on whether federally- regulated financial institutions - such as banks, trust and loan companies and insurance companies - should be permitted to enter the auto leasing market. The paper asks specific questions and requested input from all stakeholders. We attach a link to the consultation paper "Supporting Stable Financing - Consultations on Leasing" released by the Department of Finance.
Historically, the Canadian banks and other regulated financial institutions including foreign banks operating in Canada were prohibited from entering the independent auto and light truck leasing market (both consumer and commercial). The continuation of this prohibition has largely been influenced by political considerations. The independent car leasing industry has long resisted having banks and other regulated institutions providing auto leasing financing, on the belief that the independent commercial leasing industry could not compete adequately. In order to enhance competition and provide for a viable independent leasing industry, the federal government acceded to this request.
The current financial market problems have caused many of the commercial financing companies that provided auto leasing services either to leave this sector or greatly reduce availability. Accordingly, it has been increasingly difficult for Canadian lessees to find willing lessors and competition has dramatically decreased. The Federal Government is now requesting comments as to whether it should amend regulations in order to permit the federal financial institutions to engage in the financial leasing of autos to assist consumers and ultimately the auto industry. While not set out in the consultation paper, a significant issue likely to be raised by stakeholders is the size of the residuals which regulated financial institutions will be able to undertake. Typically, auto leasing has relatively large residuals compared to other forms of equipment finance. It is not atypical in a three year lease for the residual to be approximately 40% to 50% of the original cost. Current regulations do not allow a regulated financial institution to hold a residual of greater than 25% on any particular permitted transaction or to have an overall residual in their financial leasing portfolio of greater than 10%. If regulated financial institutions were to enter the auto leasing industry in a significant way, it is likely that these thresholds would have to be reviewed.
These changes may have a significant impact on the leasing environment in Canada generally.