Proposed Amendments to Ontario’s Credit Union Legislation
The Credit Unions and Caisses Populaires Act, 1994 (the "Act") and associated Regulations sets out the legislative framework in which credit unions and caisses populaires operate in Ontario. Ontario has recently proclaimed amendments to the Act to come into effect on October 1, 2009. The amendments are intended to enable credit unions and caisses populaires to remain competitive in the financial services marketplace while preserving the soundness of the regulatory system. Two new Regulations will replace the four Regulations currently in place1. The two new Regulations are O. Reg. 238/09 “Cost of Borrowing and Disclosure to Borrowers” which will provide harmonized rules that will govern the disclosure of the cost of consumer loans and will come into force on October 1, 2009 and a new “General” Regulation O. Reg. 237/09, certain sections of which will come into force on October 1, 2009 while other sections will come into force on January 1, 2010.
Some highlights of the key amendments to the Act are as follows:2
Streamlined regulatory functions
Ontario credit unions are currently regulated through a comprehensive regulatory framework which involves the Ministry of Finance, the Financial Services Commission of Ontario ("FSCO") and the Deposit Insurance Corporation of Ontario ("DICO"). The Ministry of Finance is responsible for developing and establishing the legislative and regulatory framework under which credit unions must operate. FSCO is responsible for ensuring that credit unions operate in accordance with the requirements of the Act and the Regulations, particularly with respect to market conduct issues relating to members and the general public. DICO is responsible for overseeing compliance with solvency rules and for providing deposit insurance protection for deposits held in Ontario credit unions up to prescribed limits. As part of this responsibility, DICO has the authority to issue by-laws to ensure that insured institutions operate in accordance with sound business and financial practices. The new amendments will transfer many functions of the Superintendent of FSCO to the DICO. These include the responsibility for monitoring and enforcing compliance with capital and liquidity requirements, restrictions on borrowing, pledging of assets and lending and investments.
New administrative penalties
The Superintendent of FSCO and DICO will be able, by order, to impose administrative penalties for contraventions of specified requirements in the Act. An appeal of the order can be made to the Financial Services Tribunal.
Improved credit union governance
The new amendments will allow training requirements and qualifications for directors and members of the audit committee to be established by the credit union, not by regulation. Credit unions are governed by a board of directors that is democratically elected from within the membership through a one-member, one-vote process. The new amendments will prohibit directors from directly managing or being involved in the day to day activities of the credit union.
Enhancements to capital requirements
Under the Act, a credit union is required to maintain, in relation to its operations, adequate and appropriate forms of capital and liquidity3. The new amendments will allow, subject to the General Regulations and with the approval of DICO, two or more credit unions to enter into an agreement with a league4 to form a group for the purposes of assisting the credit unions in satisfying this requirement. Pursuant to the new General Regulations, such agreements will be required to contain certain provisions such as requiring the league to, upon an order of DICO to increase its capital or provide additional liquidity, invest sufficient monies in the credit union by purchasing preferred shares or subordinated debt of the credit union and require that the credit unions in the group agree to jointly and severally indemnify the league for the amount invested.
Only a member of a credit union may deposit money with the credit union, or borrow money from it.5 In Ontario, subject to the by-laws of the credit union, membership is limited to persons, related persons or entities who come within a bond of association, which is described to exist among persons or entities having a common bond of occupation or association, or who reside or work within a municipality, neighbourhood or other reasonably well-defined community.6 The new amendments will allow credit unions to raise capital by issuing additional membership shares and provide the ability to issue a class of shares known as patronage shares, payable to members as a dividend and which do not confer the holder the right to vote, the right to notice of meetings, the right to receive dividends or the right to receive property on dissolution of the credit union.
Updated investment and lending powers
Credit unions, being user-owned financial cooperatives, provide financial services primarily for its members.7 Credit unions will no longer be required to apply for lending licenses and will have greater flexibility to meet the borrowing needs of their members. Larger credit unions with commercial loan portfolios will be able to establish their own prudent limits for lending activity. The amended Act will allow a credit union to establish capital and liquidity policies, reviewable at least once a year by the board of directors of the credit union, which policies shall consist of policies, standards and procedures that a reasonable and prudent person would apply in order to ensure the financial soundness of the credit union, avoid undue risk of loss and obtain reasonable return.
Some highlights of the key provisions to the new General Regulation are as follows:8
Tailoring rules for small credit unions
Small credit unions, also known as Class 1, are defined to be institutions with less than $50 million in assets that do not engage in commercial lending and are distinguished from Class 2 credit unions whose total assets are greater or equal to $50 million and who make one or more commercial loans. Under the new General Regulations, the Class 1 and Class 2 credit unions have different requirements for adequate liquidity and eligible types of securities and property that each class may invest in or hold.
Remuneration reported in financial statements
The salaries of officers and employees of a credit union whose total remuneration for the year was over $150,000 (five highest earners only) will be required to be disclosed in annual audited financial statements.
Bond for persons handling money
The new General Regulation will increase the minimum amount of the required bond for persons handling money to the lesser of $5 million (currently $1 million) and the amount of the credit union's assets.
Consumer complaints by members and depositors
Credit unions will be required to designate an officer or employee who would be responsible for reporting to the credit union's board at least once annually on complaints received from members and depositors and how they were resolved.
Capital structure – number of shares
The new General Regulation will set a limit of $1,000 per member for additional membership shares issued by a credit union to raise capital.
Security interests in credit union property
The new General Regulation will set out the circumstances in which a credit union may create a security interest in its property for the purpose of accessing adequate liquidity.
Continuing as or ceasing to be an Ontario credit union
Part XV of the new General Regulation elaborates on the requirements necessary for an Ontario credit union to continue to another jurisdiction or continue under another Ontario Act. Part XV also describes how an entity from another jurisdiction in Canada, or under another Ontario Act, may be continued as a credit union in Ontario.