On August 11, 2017, Canada’s Department of Finance (Finance Canada) launched the second stage of its consultation process to review the legislative and regulatory framework of the federal financial sector, by releasing its second consultation paper, titled “Potential Policy Measures to Support a Strong and Growing Economy: Positioning Canada’s Financial Sector for the Future” (Consultation Paper). Finance Canada is consulting on policy measures that could be addressed in the 2019 update to the federal financial institution statutes or that could inform longer-term initiatives.
This publication follows the first consultation paper published by Finance Canada in 2016, titled “Supporting a Strong and Growing Economy: Positioning Canada’s Financial Sector for the Future” (see our August 2016 Blakes Bulletin: Canada’s Financial Sector: Legislation for the Future). The first consultation paper did not contain specific proposals, but rather identified key trends that may influence the financial sector and sought feedback on a series of general questions.
The 2017 Consultation Paper seeks stakeholders’ views on a broad array of policy measures organized into the following four themes:
- Supporting a competitive and innovative sector
- Improving the protection of bank consumers
- Modernizing the framework
- Safeguarding a stable and resilient financial sector
We highlight below some notable items from the Consultation Paper.
BANKS AND FINTECHS
The takeaway for banks and fintechs is that, although the Consultation Paper acknowledges that it is a priority to remove barriers to collaboration and to foster competition and innovation, it is also clear that it is a priority of Finance Canada to maintain the long-standing prohibition on financial institutions engaging in commercial activities. Finance Canada seeks to strike a balance between modernizing the type of technology activities that financial institutions are permitted to undertake and maintaining the separation of core financial services from other commercial activities. However, in our view, the provision of financial services can no longer be separated from the provision of technology services. A framework that maintains a separation between the two may fall short of meeting the needs of financial institutions and fintechs alike.
Specifically, under the theme of supporting a competitive and innovative sector, Finance Canada is seeking views on:
- Whether to clarify and modernize the type of information and technology activities that federally regulated financial institutions are permitted to undertake in-house, while maintaining the long-standing prohibition on commercial activities
- Whether to provide federally regulated financial institutions with additional flexibility to make non-controlling investments in fintechs and the corresponding authority to make referrals, subject to appropriate consumer protection, prudential and commercial activities limitations.
The Consultation Paper specifies that views related to the outsourcing framework should be directed to the Office of the Superintendent of Financial Institutions (OSFI) for consideration.
Finance Canada is also seeking views on whether to undertake specific targeted refinements to streamline the bank entry and exit process. The Consultation Paper acknowledges that ease of entry allows entrepreneurs, including fintechs, to enter the sector efficiently. The two examples given of the proposed refinements are:
- Increasing the number of officers a newly-incorporated financial institution may remunerate (resulting in amendments to section 50 of the Bank Act)
- Providing the Superintendent with the authority to extend the period to issue an Order to Commence and Carry on Business in exceptional circumstances.
These refinements would address certain barriers that some potential entrants face, but ironically, the effect of the two examples of proposed measures could make the entry process longer and more expensive. Easing the entry regime has been a repeated theme, but applicants have not yet seen any progress on that front.
Also notable is that Finance Canada intends to examine the merits of open banking as a forward-looking initiative. This would include consideration of how other jurisdictions are implementing open banking and the potential benefits and risks for Canadians. Finance Canada is not specifically asking for comments on open banking, but is seeking views on other adjustments to the current framework that would support competition and innovation.
Under the theme of improving the protection of bank consumers, reference is made to measures proposed by Finance Canada in the 2016 Budget to strengthen the bank consumer protection framework and the related initiatives that are currently underway by Finance Canada, OSFI and the Financial Consumer Agency of Canada (FCAC). There is no indication that policy measures or legislative amendments to strengthen the framework are being considered in the short term.
Under the theme of modernizing the framework, Finance Canada is considering whether to permit federally regulated life and health insurers to have additional investment powers in infrastructure, which would be a welcome change. Finance Canada is seeking views on whether to provide such additional powers and whether any conditions should apply to such investments. It will be interesting to see the scope of conditions that are ultimately proposed on infrastructure investments and whether the powers will provide sufficient flexibility to be beneficial to life insurers.
Under the theme of safeguarding a stable and resilient sector, the Consultation Paper refers to the announcement in the 2017 Budget to establish an insurance resolution framework and notes that the Financial Stability Board and the International Association of Insurance Supervisors continue to advance standards for the effective resolution of insurers. Finance Canada is seeking views on possible enhancements to the existing life insurance resolution framework in Canada, which is set out in the relevant provisions of the Insurance Companies Act and Winding-up and Restructuring Act.
PROPERTY AND CASUALTY INSURANCE COMPANIES
Under the theme of safeguarding a stable and resilient sector, the Consultation Paper addresses the system-wide risks an extreme earthquake could pose to federal property and casualty insurers. No specific question is posed for comment, but Finance Canada indicates that it will be consulting with provinces, territories and stakeholders on how to limit these risks and notes that the FCAC intends to improve consumer education on products related to catastrophic risk and insurance.
The Annex to the Consultation Paper sets out for comment a list of additional, targeted policy measures, the bulk of which will amount to technical amendments to the financial institution statutes. One notable topic covered in the Annex is that Finance Canada is seeking views on whether to allow property and casualty insurers to assume the periodic payment obligations associated with three-party structured settlement arrangements.
CREDIT UNIONS AND OTHER NON-BANK FINANCIAL INSTITUTIONS
Under the theme of modernizing the framework, Finance Canada is seeking views on whether non-bank deposit-taking institutions — such as credit unions — should be given flexibility to use the terms “bank” or “banking” to describe their activities and services in appropriate circumstances. Specifically, feedback is sought on how to refine the limitations on the use of these terms and on how to avoid marketplace confusion and ensure appropriate protection of consumers.
OSFI released an advisory on this same topic in June of this year, clarifying its interpretation of the Bank Act restriction on the use of these terms by non-bank financial service providers and imposing implementation deadlines. Notably, in light of the Consultation Paper, OSFI has suspended the application of its advisory. OSFI has indicated that it will communicate its revised expectations for compliance once Finance Canada has announced the outcome of its consultation.
OTHER POTENTIAL POLICY MEASURES
Other topics addressed in the Consultation Paper include the following:
- Corporate Governance: Finance Canada is considering whether to align the federal financial institution statutes — which are tailored to reflect the unique nature of financial institutions — with proposed changes to the Canada Business Corporations Act across a number of areas, such as promoting diversity on boards, the election of directors and electronic distribution of meeting materials.
- Cyber Risk: Finance Canada intends to work with Public Safety Canada to assess what legislative and regulatory changes might be needed to:
- Create a new cybersecurity strategy that is forward-looking, enduring and responsive to a continually changing cybersecurity environment
- Make Canada a global leader in the provision of cutting-edge cybersecurity technology and the use of these technologies to promote safe and secure services to the global marketplace.
Cybersecurity initiatives in the financial sector would benefit from collaboration among banks and fintechs. The degree to which a separation of financial services and technology services is maintained may limit the ability of banks to participate in such initiatives.
- Climate Risk Disclosure: Finance Canada is keeping track of the Financial Stability Board’s and the Canadian Securities Administrators’ reviews and recommendations on climate change and continues to contribute to ongoing work on green finance in international forums, including the G7 and G20.
The consultation period runs until September 29, 2017 and written comments should be submitted to:
Financial Institutions Division
Financial Sector Policy Branch
Department of Finance Canada
James Michael Flaherty Building
90 Elgin Street
Ottawa ON K1A 0G5
Submissions received in response to this Consultation Paper will inform whether and how to implement potential policy measures and will influence policy directions for future work. Given the sunset date of March 29, 2019 for the federal financial institution statutes, decision will have to be made quickly regarding changes to be implemented by that date.