2014 was another busy year for regulatory change for the financial services sector, and it appears that this pace is set to continue in 2015. Below is a description of some of the more important changes that are already on the books and coming into effect in 2015. Of course, other changes are likely to arise as well.
The new Liquidity Requirements Guideline for banks comes into effect on January 1, 2015. The new Guideline implements the Basel III liquidity framework. The Guideline supplements and does not replace Guideline B-6 – Liquidity Principles. Under the Guideline, banks are required to calculate two liquidity ratios, the net cumulative cash flow that measures cash flows beyond the 30 day horizon, and must monitor metrics in up to six categories. OSFI has not specified targets for the metrics, although it has indicated that it may elect to do so in the future.
Beginning in the first quarter of 2015, banks must also adhere to the new Leverage Requirements Guideline. The leverage ratio introduced by the Guideline replaces the current Asset to Capital Margin test. Again, through the Guideline, OSFI is introducing the leverage requirements adopted by the Basel Committee. This time, OSFI is introducing the requirements ahead of Basel, which only requires reporting of the leverage ratio, and not compliance therewith until 2018. While it appears that all banks will be able to meet the new leverage requirement, the Guideline contains more detailed instructions on the calculation of the ratio than applied with respect to the margin test that it replaces. This will likely lead to some growing pains as experience with the details of the calculation develops.
Leverage Ratio Disclosure Requirements
OSFI has also introduced a Guideline establishing disclosure requirements relating to the new Leverage Requirements. The disclosure requirements go into effect for the designated domestic systemically important banks (D-SIB) in the first quarter of 2015 and for all remaining deposit-taking institutions by the end of 2015. Even the less onerous requirements applicable to non-D-SIBs requires the disclosure of 22 items relating to the calculation of the ratio.
Regulatory Compliance Management
In November, OSFI released a revised version of Guideline E-13, now named Regulatory Compliance Management. Although OSFI stated that the revised Guideline does not create any new regulatory requirements, institutions have been given until May 1, 2015 to implement it. While the Guideline seems to contain the same structural requirements for a compliance program as under Guideline E-13, it elaborates considerably on the expectations for program elements. Giving institutions time to ensure that their programs are consistent with these elaborations may be the reason for the delay in full implementation of the Guideline.
Two voluntary commitments made by the banks to offer low cost/no cost deposit accounts and to provide enhanced disclosure of information relating to mortgage security will also come into effect in January. Although the commitments are referred to as voluntary, the Financial Consumer Agency of Canada has statutory responsibility to monitor and report on the implementation of the commitments by individual banks.
The amendments made to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act introduce rules relating to domestic politically exposed persons, which will be implemented through regulations that are expected to be released in 2015. Further regulations are needed to implement the amendments that will create a regulatory regime for virtual currency dealers. In addition, the Department of Finance has commenced consultations about other changes to the regulations that will likely go into effect before the Financial Action Task Force conducts its review of Canada’s anti-money laundering and terrorist financing regime in the fall of 2015.
Bank of Canada
While the Bank of Canada does not directly regulate institutions, all eyes are watching for an expected increase in the Bank’s target overnight interest rate. The target rate is the rate that the Bank expects banks to use for overnight loans to other banks. The target rate has been set at 1% since 2010. A change in the rate could have a significant impact on the market for consumer credit, a key driver of bank profits.
Also of note, in its December Financial System Review, the Bank noted that the recent changes in the auto financing landscape warrant continued monitoring in the context of already high household indebtedness. Again, while the Bank is not a regulator, it is no doubt an influential voice with regulators. The Department of Finance already has a record of trying to lower consumer mortgage debt by imposing indirect regulation through the Department’s oversight of the Canada Mortgage and Housing Corporation’s mortgage insurance products.