2019 marked another year of prodigious change in regulatory guidance and legislation impacting federal financial institutions in Canada. With the industry awaiting the implementation of the new federal consumer protection framework and the broadened financial institution business and investment powers, all adopted as part of the 2018 federal financial sector legislation review, the federal government introduced the most significant set of changes to Canada’s anti-money laundering legislation in years.
The federal financial regulators also published a considerable collection of new and revised guidance impacting a broad range of activities and practices of financial institutions. Payment modernization, open banking and retail payment oversight initiatives also made progress in 2019, although more significant developments in these areas are expected in 2020.
These and other key legislative and regulatory developments are discussed in our annual update.
PRUDENTIAL REGULATION AND GUIDANCE
The Office of the Superintendent of Financial Institutions (OSFI) continued updating its regulatory guidance in 2019 and published a considerable number of new or revised guidelines. These are discussed below.
Updates to Liquidity Requirements
OSFI introduced several changes to its liquidity requirements guidance in 2019.
On April 11, 2019, OSFI released revisions to the Liquidity Adequacy Requirements guideline (LAR Guideline) for implementation on January 1, 2020. Key updates include changes to the Liquidity Coverage Ratio (Chapter 2) and Net Cumulative Cash Flow (Chapter 4) metrics, which intend to address increases in risks posed by retail deposits that may be subject to higher withdrawal rates in stress periods. The revised LAR Guideline also incorporates the Net Stable Funding Ratio (NSFR) requirement (Chapter 3) in Canada. A long-term structural liquidity metric, the NSFR requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. It is intended to limit overreliance on short-term wholesale funding and encourage better assessment of funding risk across all on- and off-balance sheet items. The NSFR will initially apply to Canada’s systemically important banks only.
Concurrently with the release of these revisions, OSFI a released the final version of the NFSR Disclosure Requirements guideline. The guideline comes after the Basel Committee on Banking Supervision (Basel Committee) released Pillar 3 disclosure requirements – consolidated and enhanced framework, which contains the standard on information that must be publicly disclosed on the NSFR. The guideline will take effect with the quarterly reporting period ending January 31, 2021.
On December 5, 2019, OSFI released an updated version of Guideline B-6: Liquidity Principles. The revised guideline outlines a set of updated liquidity risk management principles that supplement the quantitative liquidity metrics set out in the LAR Guideline. The changes took effect on January 1, 2020, replacing the earlier version, which was last updated in 2012, before the implementation of the LAR Guideline. For more information, please see our December 2019 Blakes Bulletin: OSFI Releases Updated Liquidity Principles.
Basel III Reforms
On July 18, 2019, OSFI published a letter outlining transitional reporting requirements for deposit-taking institutions currently approved to use the Advanced Measurement Approach (AMA) for capital reporting. Institutions currently using the AMA will be required to use a revised Basel III Standardized Approach when OSFI’s revised capital requirements for operational risk applicable to deposit-taking institutions are implemented in Q1 of 2021. On January 20, 2020, OSFI released an additional letter on implementation timeline for Basel III operational risk capital requirements.
Updates to Large Exposure Limit and Interest Rate Risk Management
On April 10, 2019, OSFI released the final version of Guideline B-2: Large Exposure Limits for Domestic Systemically Important Banks (Guideline B-2). The original Guideline B-2 was published in 1994 and establishes limits for a bank’s exposure to a single counterparty measured as a percentage of capital. The changes to Guideline B-2 incorporate the Basel Committee’s standard on large exposure risk management, as stated in Supervisory framework for measuring and controlling large exposures and Frequently asked questions on the supervisory framework for measuring and controlling large exposures. The changes include moving the eligible capital base from Total capital to Tier 1 capital, introducing tighter limits for exposures to systemically important banks, and providing for the recognition of eligible credit risk mitigation techniques. The new Guideline B-2 applies only in respect of the six systemically important banks in Canada. OSFI has not published a revised version of Guideline B-2 for other federally regulated financial institutions (FRFIs).
On May 30, 2019, OSFI released a revised version of Guideline B-12: Interest Rate Risk Management (Guideline B-12). The guideline was first introduced in 2005. The updates reflect the Basel Committee’s revised Interest Rate Risk in the Banking Book Standard, which incorporates new international market practices in the identification, assessment and management of interest rate risk. The revised Guideline B-12 took effect January 1, 2020, for Canada’s systemically important banks and will take effect for other banks and federal trust or loan companies on January 1, 2021. Until then, these institutions remain subject to the current Guideline B-12.
Cybersecurity Incident Reporting
On January 24, 2019, OSFI released an advisory on Technology and Cyber Security Incident Reporting. The advisory requires all FRFIs to report technology and cybersecurity incidents to OSFI within 72 hours if the incident can materially impact the normal operations of a FRFI. The advisory took effect on March 31, 2019. For more information, please see our January 2019 Blakes Bulletin: OSFI Releases Advisory on Technology and Cybersecurity Incident Reporting Obligations.
On January 7, 2020, Assistant Superintendent Jeremy Hubbs noted in his remarks that OSFI aims to enhance its capabilities and expectations for technology and cyber risk, and that OSFI will be working toward a more agile guidance model to keep pace with the changing landscape of technology and cyber.
Residential Mortgage Insurance Underwriting
On March 1, 2019, OSFI updated Guideline B-21: Residential Mortgage Insurance Underwriting Practices and Procedures to align it with the updated Guideline B-20: Residential Mortgage Underwriting Practices and Procedures (Guideline B-20). In his January 24, 2020, remarks, Assistant Superintendent Ben Gully also provided an update on OSFI’s considerations of the effectiveness of Guideline B-20.
Foreign Bank Branching
OSFI introduced two key updates to guidance for foreign bank branching.
On March 27, 2019, OSFI issued a revised Guide to Foreign Bank Branching, updating the previous version that was released in 2002 and was out of date in many respects with OSFI’s current practices and expectations on new foreign bank entry applications.
On December 4, 2019, OSFI released the final revisions to Guideline A-10: Foreign Bank Branch Deposit Requirement (Guideline A-10). Guideline A-10 outlines OSFI’s expectations with respect to the minimum deposit that authorized foreign banks must maintain in trust in respect of their business in Canada, previously known as capital equivalency deposit. Among other changes, the deposit ratio calculation under the revised Guideline A-10 now excludes off-balance sheet liabilities and includes accrued expenses. The updated Guideline A-10 took effect on January 1, 2020. It was last updated in 2002.
Sound Reinsurance Practices and Procedures
On June 12, 2019, OSFI released proposed revisions to Guideline B-3: Sound Reinsurance Practices and Procedures (Guideline B-3). The proposed revisions come after OSFI’s Discussion Paper on OSFI's Reinsurance Framework that was released for public consultation in June 2018.
The changes to Guideline B-3 are intended to encourage insurers to better identify and manage risks arising from the use of reinsurance. The revisions also clarify OSFI’s expectation that reinsurance payments should flow directly to a cedant insurer in Canada and that an insurer should not cede substantially all of its risks. These changes are primarily clarifications but may highlight the need for some insurers to adjust aspects of their reinsurance programs. OSFI intends to offer information sessions once the final revised Guideline B-3 is released later in 2020.
On August 13, 2019, OSFI released a letter providing a summary of OSFI’s activities towards the implementation of International Financial Reporting Standard 17 - Insurance Contracts (IFRS 17). In that regard, on November 21, 2019, OSFI released a letter advising federally regulated insurers of the proposed changes to the Canadian Council of Insurance Regulators’ manual of regulatory forms and instructions. OSFI is holding a 120-day public consultation on the changes, which will close on March 21, 2020.
Internal Model Oversight Framework
On June 21, 2019, OSFI issued for comment draft Guideline E-25: Internal Model Oversight Framework (Guideline E-25) for federally regulated property and casualty insurance companies. The proposed Guideline E-25 requires insurers to develop and implement sound policies and procedures for the oversight and control of risk associated with internal models that it uses to determine regulatory capital requirements for insurance risk. Banks and federal trust and loan companies are already subject to the requirements of Guideline E-23: Enterprise-Wide Model Risk Management for Deposit-Taking Institutions.
MICAT Total Requirements for FTHBI Mortgages
On September 3, 2019, OSFI issued an advisory to complement the Mortgage Insurer Capital Adequacy Test guideline (MICAT). Effective November 1, 2019, the advisory outlines the total requirements for First-Time Home Buyer Incentive (FTHBI) insured mortgages.
ANTI-MONEY LAUNDERING AND SANCTIONS
2019 ushered in the most significant update to Canada’s anti-money laundering legislation and guidance in years. We discuss these updates, as well as changes to Canada’s sanctions legislation, below.
In June 2019, the Department of Finance released the final registered version of the amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The amendments were initially released in draft form in June 2018 and have been revised after rounds of consultations with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Given the scope of the changes, financial institutions will be required to significantly revamp their compliance policies and procedures. Thankfully, most of the amendments under the regulations will take effect in June 2020 and June 2021. The amendments introduce changes to the electronic funds transfer reporting requirements, suspicious transaction reporting timeline and content requirements, subject prepaid cards issued by financial institutions to the know-your-customer and other requirements of the legislation, update identity verification requirements, regulate virtual currency transactions and dealers in virtual currencies, and provide for a mandatory publication of all administrative monetary penalties. Life insurance companies will also become subject to the requirements of the legislation in relation to their loan and prepaid products. A comprehensive review of these amendments is available in our July 2019 Blakes Bulletin: Revamping Canada's Anti-Money Laundering Rules: What's New, What's Changed and What It Means for Business.
Updated Identity Verification Guidance
Following the amendments, in October 2019, FINTRAC updated its guidance, Methods to Verify the Identity of an Individual and Confirm the Existence of a Corporation or an Entity Other than a Corporation. Among other things, the guidance interprets the new authenticity requirement for the photo identification method and clarifies that financial institutions may rely on scans and photocopies of documents, including identification documents, under the dual process method. For more information, please see our November 2019 Blakes Bulletin: FINTRAC's Updated Guidance on Methods to Verify Identity: A New Spin on "Authentic".
Updated Guidance on Suspicious Transactions
Earlier in 2019, on January 21, FINTRAC updated its industry guidance in respect of suspicious transaction reporting by releasing three new guidance documents on Transaction reporting requirements, Reporting suspicious transactions to FINTRAC and What is a suspicious transaction report?. These updated guidance document clarify FINTRAC’s expected standard for filing suspicious transaction reports and provide field-by-field guidance on completing these reports. For more information, please see our January 2019 Blakes Bulletin: New Guidance from FINTRAC: Expanding Suspicious Transaction Requirements.
On February 8, 2019, FINTRAC also released new set of materials that are intended to provide more transparency to FINTRAC’s examination and enforcement practices. Specifically:
- FINTRAC published an overview of its compliance framework as well as an assessment manual describing FINTRAC’s examination practices.
- FINTRAC also published an Administrative Monetary Penalties Policy (Policy), which follows the Federal Court of Appeal’s 2016 decision in Canada v Kabul Farms Inc., where the court was critical of the fact that FINTRAC did not disclose its reasoning for choosing the amount of the administrative monetary penalty that it imposed on the respondent. The Policy reflects FINTRAC’s new, more detailed approach to determining administrative monetary penalties.
- In August 2019, FINTRAC also issued companion harm-done assessment guides. These guides are specific to calculating penalties for violations involving a reporting entity’s compliance program, suspicious transaction reports, other reports, know-your-client requirements, recordkeeping requirements and other compliance measures.
- FINTRAC released a Voluntary Self-Declaration of Non-Compliance Notice, which formalizes FINTRAC’s existing self-declaration framework. FINTRAC sets out the information that it requires from financial institutions when they make a voluntary self-declaration.
For more information on these measures, please see our February 2019 Blakes Bulletin: FINTRAC: All Amped Up and our September 2019 Blakes Bulletin: FINTRAC Reveals its Secret Formula for Determining "Harm Done", Calculating AMP Amounts.
Response to Standing Committee on Finance Report
In February 2019, the federal government released its response to the report of the Standing Committee on Finance, Confronting Money Laundering and Terrorist Financing: Moving Canada Forward. The Standing Committee Report initially made 32 recommendations on proposed modifications and additions to the Canadian anti-money laundering regime. The response substantially agrees with the initial recommendations and outlines some of the steps the federal government has taken towards their implementation. For example, the response notes that the federal government has already taken steps to strengthen beneficial ownership transparency under federal corporate law by requiring corporations to hold information on beneficial ownership in corporate records under the Canada Business Corporations Act. The government also intends to work with provinces and territories to assess options to improve beneficial ownership information for law enforcement agencies, including the possible use of a registry. For more information on the Standing Committee Report, please see our November 2018 Blakes Bulletin: Confronting Money Laundering and Terrorist Financing: Canada Considers Vast Changes to AML Regime.
On March 4, 2019, the federal government amended the regulations made under the United Nations Act and the Special Economic Measures Act (SEMA), Canada’s key sanctions legislation. For the most part, the amendments ensure consistency across the various regulations. The amendments also modify the monthly reporting obligation to which Canadian regulated financial institutions and securities dealers are subject. Prior to the amendments, Canadian banks, authorized foreign bank branches, insurers, trust and loan companies, credit unions, securities dealers—both Canadian registered and those operating under an international exemption—and money services businesses offering account-based products were required to disclose, every month, to their principal federal or provincial regulator whether or not they were in possession or control of property of a person designated under seven sanctions regulations relating to anti-terrorism, Iran, North Korea, Venezuela and the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law). Under the March 2019 amendments, the monthly reports are now required only for persons and groups designated under the Criminal Code—for association with terrorism—and the Sergei Magnitsky Law—for corruption and gross violations of human rights. For more information, please see our May 2019 Blakes Bulletin: Changes to Monthly Sanctions Reporting Requirement.
On June 21, 2019, the federal government published regulations under SEMA in respect of Nicaragua. The regulations impose asset-freezing and dealing prohibitions in respect of designated individuals.
The federal government also introduced several changes to the list of designated persons under various Canadian sanctions regulations. For more information on Canadian sanctions, please see our Blakes Bulletin: A Primer on Canadian Sanctions Legislation.
While the banking industry is awaiting the implementing regulations for the proposed new consumer framework in the Bank Act, the Financial Consumer Agency of Canada (FCAC) released several reports, bulletins and decisions in 2019, which are discussed below.
Report on Home Equity Lines of Credit: Consumer Knowledge and Behaviour
On January 15, 2019, the FCAC published a report on home equity lines of credit that presented findings from an online survey conducted by the FCAC to assess Canadians’ knowledge, awareness and opinions on the key terms and risks associated with these products. Among other things, the FCAC concluded that Canadians’ knowledge in this area is sub-optimal and that 25 per cent of respondents routinely make interest-only payments. In response to these findings, the FCAC indicated that it intends to work with financial institutions to improve disclosures, ensure customers understand these products and select appropriate products based on their financial needs and circumstances.
Code of Conduct for the Delivery of Banking Services to Seniors
On July 25, 2019, the banking industry adopted a voluntary Code of Conduct for the Delivery of Banking Services to Seniors (Code). The Code outlines seven principles with which banks that are members of the Canadian Bankers Association will comply to respond effectively to potential health, mobility or cognitive changes that may impact the ability of seniors to bank. The majority of these principles will take effect on January 1, 2021. However, effective immediately, banks must mitigate potential financial harm to seniors and take into account market demographics and the needs of seniors when proceeding with branch closures. For more information, please see our July 2019 Blakes Bulletin: Is CBA's New Voluntary Code of Conduct the Golden Rule for Banks Serving Canadians in Their Golden Years?
New Compliance Bulletin B-8
On December 19, 2019, the FCAC published new Compliance Bulletin B-8: Simultaneous Provisioning and Removal in Mobile Wallets of Co-badged Debit Cards (Compliance Bulletin B-8). Compliance Bulletin B-8 clarifies requirements under the Code of Conduct for the Credit and Debit Card Industry in Canada as to how co-badged debit cards are provisioned and removed from mobile wallets or mobile devices.
Effective April 1, 2020, Compliance Bulletin B-8 outlines the following principles:
- When both debit payment credentials can be provisioned simultaneously, consumers must be able to exercise their choice of provisioning a single debit payment credential or both.
- Consumers should be allowed to separately delete individual debit payment credentials from mobile wallets.
- Consumers should be able to set the default payment options at the time of provisioning.
New FCAC Decisions
The FCAC issued two decisions in 2019. Decision #133 was released on May 30, 2019, in relation to the failure of a bank to meet prescribed disclosure and formatting requirements for information boxes.
Decision #134 was released on June 4, 2019, in relation to a bank that improperly charged interest to certain cardholders who had paid the outstanding balance before the due date.
The industry is also adjusting to the FCAC’s final version of the Supervision Framework, which came into effect on October 1, 2018. The new Supervision Framework presents some key changes to the FCAC’s methods of enforcement, which can be highly prescriptive. For more information, please see our October 2018 Blakes Bulletin: Final Financial Consumer Agency of Canada Supervision Framework in Effect.
OPEN BANKING, PAYMENTS MODERNIZATION AND OTHER DEVELOPMENTS
On January 11, 2019, the Department of Finance released a consultation paper on the merits of open banking. The consultation paper discusses the concept of open banking and outlines the associated risks and benefits. The consultation is part of the first phase of a two-phase review of open banking led by the Advisory Committee on Open Banking, established in September 2018. The federal government first announced its intention to study open banking in its Budget 2018. For more information, please see our January 2019 Blakes Bulletin: Canada Seeks Input on Open Banking Framework.
On February 21, 2019, the Department of Finance released its Report on the Review of the Canadian Payments Act (Report). The Report provides a summary of the feedback received in the Department of Finance’s review of the Canadian Payments Act, launched in May 2018. The review considered the merits of allowing non-prudentially regulated financial institutions (PSPs) to participate in the proposed new real-time rail, possibly through a new class of associate membership. The PSPs would be regulated under the proposed Retail Payments Oversight Framework. In that regard, the Report notes that any potential legislative amendments to the Canadian Payments Act will follow the implementation of the Retail Payments Oversight Framework. In this respect, the Bank of Canada conducted targeted consultations regarding the future framework throughout 2019.
On December 18, 2019, Payments Canada published the Modernization Delivery Roadmap 2019 Update (2019 Roadmap) as a follow-up to the first Modernization Delivery Roadmap 2018 Update and the Modernization Target State. The 2019 Roadmap notes that Payments Canada is progressing towards the launch of Lynx—the new high-value payments system that will eventually replace the Large Value Transfer System—as well as the new real-time rail and certain interim improvements to Canada’s retail payments system.