On September 16, 2016, Canada’s federal Department of Finance launched a consultation process on the deposit insurance framework. The consultation paper can be found here. The consultation process is to help determine whether the scope of targeted Canadian financial products requires adjustments to ensure the deposit insurance framework continues to serve Canadians effectively.
The review comes as a response to changes to the global banking landscape since 2008 financial crisis and, more specifically, changes to deposit products offered by financial institutions. The policy objectives relating to the review include protecting depositors, supporting financial stability and promoting efficient and competitive financial services.
Current Canadian Deposit Insurance Framework
Canada’s deposit insurance framework is administered by the Canada Deposit Insurance Corporation (CDIC). CDIC has 80 members and is comprised of banks, federally incorporated trust and loan companies, federal credit unions, provincially incorporated trust and loan companies, and cooperative retail associations.
Canada’s deposit insurance coverage framework consists of:
- seven coverage categories
- scope of eligible deposits
- coverage limit
The seven categories of deposits to which coverage extends are:
- deposits held in one name (individual)
- deposits held in more than one name (joint deposits)
- deposits held in trust for another person
- deposits in Registered Retirement Savings Plans
- deposits in Registered Retirement Income Funds
- deposits in Tax Free Savings Accounts
- deposits held in mortgage tax accounts
Coverage extends to:
- savings and chequing accounts
- Guaranteed Investment Certificates (GICs) and other term deposits of five years or less
- money orders, travellers’ cheques and bank drafts issued by CDIC members and cheques certified by CDIC members
- debentures issued by loan companies that are CDIC members
The coverage limit has been $100,000 since 1983 (when it was raised from $60,000) and applies to deposits of up to $100,000 in each of the above seven categories. Therefore, by holding deposits in multiple categories, and with multiple CDIC member institutions, depositors can access coverage above $100,000.
Policy Framework Considerations
The Department of Finance Canada is seeking views on possible enhancements to the deposit insurance framework in three broad categories: streamlining deposit categories; updating the scope of eligible deposits; and addressing the complexity of trust deposits. The specific issues for consideration regarding each area are noted below. For each issue, the Government has proposed questions to solicit comments in the consultation paper.
Streamlining Deposit Categories
Mortgage Tax Accounts: Given the declining use of mortgage tax accounts, mortgage tax deposits may no longer warrant their own separate category of deposit insurance. To keep the deposit insurance framework current, the Government is considering removing mortgage tax accounts as a separate insured category of deposit.
Registered Products: Registered Retirement Savings Plans (RRSPs) and Registered Disability Savings Plans (RDSPs) do not receive the same coverage as other registered products. The Government is considering the addition of two new deposit categories for RESPs and RDSPs. This approach would ensure that every registered product would be equally covered up to the same $100,000 limit. Alternatively, all registered products could be amalgamated into one deposit category with a higher insurance limit.
Updating the Scope of Eligible Deposits
Travellers’ Cheques: Given that CDIC member institutions no longer issue travellers’ cheques, the Government is considering modernizing the deposit insurance framework by removing travellers’ cheques as an eligible deposit.
Foreign Currency Deposits: Given that foreign currency deposits are widely held in Canada, the Government is considering the addition of foreign currency as an eligible deposit. To reduce complexity, any funds paid out to depositors holding eligible foreign currency accounts could be paid in Canadian dollars.
Temporary High Balances: Temporary high balances include large lump-sum payments such as payment received from an inheritance, an insurance payout, a divorce settlement or the sale of property. The creation of temporary high balance coverage in Canada would add complexity to the deposit insurance framework and increase CDIC exposure. Funds necessary to cover temporary high balances under deposit insurance could likely only be collected subsequent to a bank failure.
Addressing the Complexity of Trusts
Disclosure of Beneficiary Information: For CDIC to be able to quickly and accurately pay out deposit insurance, they need to have ready access to beneficiary information. Insufficient or incorrect beneficiary information may result in a reduction in coverage available to beneficiaries.
Brokered Deposits: Brokers can deposit funds either as an agent or in their own name in a trust for their client. Brokered deposits receive coverage differently depending on the approach the broker chooses. If the deposit broker acts as agent, the amount is considered part of the client’s $100,000 limit in the individual category of deposit insurance. In the trust form, the client is a beneficiary, and coverage is dependent on the provision of accurate beneficiary information by the trustee to the member institution before the institution fails. In the latter case, brokers may be reluctant to provide client information to CDIC member institutions who are potential competitors. Therefore the Government is seeking views on how to ensure beneficiaries of brokered trustee deposits retain their coverage.