The Budget Implementation Act, 2018, No. 1 (the “Budget Bill”) was introduced on March 27, 2018 and includes amendments to various financial services statutes, pursuant to the recent Budget, summarized in our recent legal update.
The Budget provided that, in connection with the current 2019 Bank Act review, certain legislative amendments to implement targeted proposals resulting from the recent review of the federal financial sector framework would be introduced as a priority, including amendments providing greater flexibility for financial institutions to undertake Fintech activities (expanding the business of banking), providing prudentially regulated deposit-taking institutions (such as credit unions) with the right to use generic banking terms (“bank”, “banking”) under a specific set of rules and to provide for further enforcement tools and clarify existing provisions, and permitting life and health insurance companies to make long term investments in infrastructure. The Budget Bill seeks to implement these proposals.
Financial Technology (Fintech) Activities
Business and Powers
The Budget Bill includes amendments to the business and powers provisions of federally regulated financial institutions (“FRFIs”) under the Bank Act, the Trust and Loans Companies Act and the Insurance Companies Act. The amendments permit a bank, trust company or insurance company to specifically engage in the following activities (subject to the regulations, which have not yet been issued):
- any activity that relates to the provisions of financial services by the FRFI or any of its affiliates;
- designing, developing, manufacturing, selling and otherwise dealing with technology if those activities relate to a permitted activity by the FRFI or its affiliates, or the provision of financial services by any other entity;
- collecting, manipulating and transmitting information; and
- providing identification, authentication or verification services.
These provisions are intended to enlarge materially the scope of permitted Fintech-like activities in which a FRFI can engage. In particular, the power relating to information expands considerably the scope of information that can be collected, manipulated and transmitted. In addition, the specific grant of a power to provide identification services opens the door for FRFIs to play a key role in the provision of digital identity services. Regulations not yet released may limit these new powers.
Networking and Referrals
The Budget Bill also expands the ability of FRFIs to engage in networking and referral activities. The networking power will now extend to any permitted entity (as opposed to a narrower category of permitted entity in the past). In addition, the amendments will create a new power allowing FRFIs to make customer referrals to other entities (even if they are not financial institutions or permitted entities). These new networking and referral powers may be limited by regulations yet to be implemented.
The Budget Bill also adds provisions to the permitted investments sections to permit a FRFI to acquire control of, or acquire or increase a substantial investment in, an entity if a majority (as defined in the regulations, which have not yet been issued) of the entity’s business consists of financial services activities or other activities in which the FRFI is permitted to engage.
The Budget Bill includes a number of amendments to the Bank Act and the Office of the Superintendent of Financial Institutions Act relating to the prohibition on use of bank terminology (“bank”, “banking”, etc.) by non-banks under the Bank Act. These amendments include:
- clarifying that the restriction also applies to domain names and identifying marks;
- permitting limited use of such terminology by certain prudentially regulated entities, namely trust and loan corporations, credit unions and cooperatives, centrals and ATB Financial, subject to certain prescribed requirements (which will include requirements to disclose the relevant type of entity, its jurisdiction, and whether it participates in a deposit insurance system in Canada); and
- providing the Office of the Superintendent of Financial Institutions (“OSFI”) with greater enforcement powers, including the following:
- the power to direct an entity to produce information and documents;
- the power to direct a person to cease or refrain from acting in a certain manner and perform acts that in the opinion of OSFI are necessary to remedy the situation;
- the power to apply for a court order requiring an entity to comply with OSFI’s direction; and
- a requirement that OSFI make public the nature of a violation, the name of the person who committed the violation and the amount of the penalty imposed.
Although these new rules will liberalize the use of the word “bank” by regulated financial institutions that are not “banks”, we would expect to see more rigorous enforcement by OSFI of the prohibition on use of bank terminology by entities such as Fintechs that are not prudentially regulated institutions.
The Budget Bill also amends the Insurance Companies Act to permit federal life insurance companies to (under prescribed terms and conditions) acquire control of, or acquire or increase a substantial investment in, a “permitted infrastructure entity” (or a holding company for such permitted infrastructure entity. A “permitted infrastructure entity” is defined as an entity that, in accordance with prescribed conditions, only makes investments in infrastructure assets or engages in any other activity prescribed by regulation. “Infrastructure assets” are further defined as “physical assets, including a long-lived physical asset that supports the delivery of public services, prescribed by regulation”. The regulations have not yet been issued.
The Bank Act, Trust and Loan Companies Act and Insurance Companies Act are also being amended to provide for a sunset provision of 5 years after the Budget Bill receives royal assent, to support further review of the provisions of those Acts on a regular basis.
The Budget Bill also includes amendments to the Canada Deposit Insurance Corporation Act aiming to modernize and enhance the Canadian deposit insurance framework, including in respect of trust deposits, nominee broker deposits and professional trustee accounts.
Payment Clearing and Settlement Act
The Budget Bill also includes amendments to the Payment Clearing and Settlement Act (and consequential amendments to the Canadian Payments Act) adding to such Act a framework for resolution of clearing and settlement systems and clearing houses while minimizing the exposure of public funds, with the Bank of Canada acting as resolution authority. The Bank of Canada will be required to develop and maintain a resolution plan for each clearing and settlement system, and the Governor of the Bank of Canada will bear responsibility for making a declaration of non-viability.
The Bank of Canada will be permitted to recover the costs of the resolution of a clearing and settlement system or a clearing house. The Bank of Canada will also be permitted to borrow funds not exceeding $3,200,000,000 out of the Consolidated Revenue Fund, for the purpose of carrying out its objects as the resolution authority.