The regulation of federally regulated financial institutions (FRFIs) continued intensifying in 2016 with a new wave of legislative and regulatory initiatives impacting mortgage lending, the bank resolution regime, the life insurance capital framework, anti-money laundering legislation, deposit insurance, and corporate and operational-risk governance, among many other areas. The key initiatives introduced or implemented in 2016 are outlined in this, our annual regulatory overview.

Upcoming Review of Federal Financial-Sector Legislation

Bail-in

New Life Insurance Capital Framework

Prudential Guidance From OSFI

Anti-Money Laundering and Sanctions

UPCOMING REVIEW OF FEDERAL FINANCIAL-SECTOR LEGISLATION

On August 26, 2016, the Department of Finance launched a consultation process to review the legislative and regulatory framework of the federal financial sector, following the extension of the sunset provisions under the Bank Act, the Insurance Companies Act, and the Trust and Loan Companies Act from 2017 to 2019. As the first of a two-stage consultation process, the Department of Finance published a new consultation paper titled Supporting a Strong and Growing Economy: Positioning Canada’s Financial Sector for the Future. It provides an overview of Canada’s financial sector and identifies key trends that may influence future directions in this sector. The stated objective of the consultation paper is to solicit feedback on a list of published questions to determine whether the current regulatory framework meets the federal government’s three core policy objectives:

  1. Stability: The sector is safe, sound and resilient in the face of stress
  2. Efficiency: The sector provides competitively priced products and services, and passes efficiency gains to customers, accommodates innovation, and effectively contributes to economic growth
  3. Utility: The sector meets the financial needs of an array of consumers, including businesses, individuals and families, and the interests of consumers are protected

It is expected that the legislative review will address the antiquated provisions of the federal financial-institutions legislation governing technology services and investments by FRFIs. A market study into technology‑led innovation in the Canadian financial-services sector was launched earlier in May 2016 by Canada’s Competition Bureau. The Competition Bureau noted that the fintech sector is evolving rapidly and has the potential to disrupt the financial-services sector and spur innovation. The Competition Bureau’s market study will focus on how innovation is affecting the way consumers and businesses use financial products and services. It will also explore barriers to entry faced by fintech companies and whether there is a need for regulatory reform to promote greater competition in the financial sector.

For more information, please see our August 2016 Blakes Bulletin: Canada’s Financial Sector: Legislation for the Future.

MORTGAGE LENDING

Following the announcement by the Department of Finance, the Office of the Superintendent of Financial Institutions (OSFI), and the Canada Mortgage Housing Corporation in December 2015 of forthcoming changes to regulations regarding residential mortgage lending (discussed in our January 2016 Blakes Bulletin: New Federal Rules for the Residential Mortgage Market), a number of new measures were introduced in 2016 that impact the residential mortgage-lending business in Canada.

On July 7, 2016, OSFI issued a letter to all FRFIs to reinforce its expectations set out in OSFI Guideline B-20 on residential mortgage underwriting practices and procedures and Guideline B-21 on residential mortgage insurance underwriting practices and procedures, in light of high levels of household debt, low interest rates, and rapid house-price increases in some major cities in Canada. In the letter, OSFI notes that it will increase supervisory oversight in the areas of income verification, non-conforming loans, debt-service ratios, appraisals and loan-to-value ratio calculations, and institutional risk appetite. OSFI’s intention to subject residential mortgage underwriting practices to enhanced supervision is also discussed by Superintendent Jeremy Rudin in his remarks delivered on November 28, 2016.

On October 3, 2016, the Department of Finance announced three new measures intended to ensure the stability of Canada’s housing market:

  1. Effective October 17, 2016, all high-ratio insured residential mortgages are required to qualify for mortgage insurance at least at the Bank of Canada’s conventional five-year fixed posted interest rate. This requirement was extended to low-ratio insured mortgages effective November 30, 2016. This requirement was already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.
  2. Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low loan-to-value ratio mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages
  3. The federal government tightened the capital gains exemption for disposing of a principal residence

On October 21, 2016, the Department of Finance also issued a consultation document on lender risk sharing for government-backed insured mortgages. Lender risk sharing, if implemented, will require mortgage lenders to retain and manage a portion of loan losses on insured mortgages that default (currently, mortgage insurance covers 100 per cent of eligible lender claims for insured mortgages that default). The Department of Finance set forth two potential approaches for calculating a lender’s portion of loan losses:

  1. A “first-loss” approach involves making lenders responsible for losses up to a fixed portion of the outstanding loan balance at loan default. Under this approach, the lender would be responsible for losses up to the determined amount, with mortgage insurers only responsible for losses in excess of this level. Under this approach, the lender’s dollar-value loss as a proportion of the dollar value of the total loan loss would decline, as the total loan loss increases.
  2. An alternative “proportionate-loss” approach would base the lender portion of loan losses on a percentage of total loan losses. By setting the lender’s portion of loan losses to a fixed percentage of total loan losses, the lender’s dollar-value loss would vary proportionately with the dollar value of the total loan loss.

The comment period is open until February 28, 2017.

On December 9, 2016, OSFI released the final version of the updated Capital Adequacy Requirements 2017 guideline (CAR Guideline), which, among other things, includes revisions to the capital treatment of insured residential mortgages. Specifically, the updated CAR Guideline includes the final rules for the implementation of a downturn-loss-given-default floor, which applies to banks using an internal rating-based approach for residential mortgages. The floor requires banks to calculate the potential severity of loss on a loan by using data for the 11 cities in the Teranet – National Bank House Price Index, effectively requiring more capital when house prices are high relative to borrower incomes. The revised CAR Guideline also provides that “mortgage insurance in Canada is considered a guarantee” and banks must comply with certain due-diligence requirements in order to be able to recognize the risk-mitigating effect of the guarantee. Specifically, a bank that purchases mortgage insurance “must establish internal policies and procedures to implement and ensure compliance with the protection provider(s) credit underwriting and other contractual requirements.” The revised CAR Guideline also reiterates that banks must have appropriate policies and procedures in place to originate, underwrite, and administer insured mortgages. If, as part of its supervisory work, OSFI determines that there is evidence that a bank has not implemented these required policies and procedures, “a supervisory assessment will be made to determine whether recognition of the mortgage insurance as a guarantee for credit risk mitigation purposes should be reduced by OSFI”, according to the revised CAR Guideline.

On December 15, 2016, OSFI issued a new Advisory on capital requirements for federally regulated mortgage insurers, with an effective date of January 1, 2017. The Advisory defines a new approach for the regulatory-capital requirements for mortgage insurance risk that is intended to be more risk sensitive and incorporates such characteristics as borrower creditworthiness, outstanding loan balance, loan-to-value ratio, and remaining amortization. The new mortgage-insurance risk capital requirements consist of (i) a base capital requirement that applies to all mortgages at all times and (ii) a supplementary capital requirement that applies only to mortgages originated during periods when the housing market for the relevant region has a house price-to-income ratio exceeding a specified threshold. The new Advisory complements OSFI’s Minimum Capital Test Guideline and replaces the earlier advisory on interim capital requirements for mortgage insurance companies.

BAIL-IN

On June 22, 2016, the Budget Implementation Act, 2016 No. 1 received royal assent introducing key amendments to the Canada Deposit Insurance Corporation Act (CDIC Act). Under the amended CDIC Act, the federal government now has the power to direct CDIC to convert a domestic systemically important bank’s (DSIB) certain liabilities and shares into common shares of the DSIB or its affiliates. The categories of liabilities and shares of a DSIB eligible for such “bail-in” conversion, as well as the mechanics of the conversion, will be specified in regulations that have not been release yet. It is expected that the regulations will be based on a consultation paper published by the Department of Finance in 2014. In conjunction with the implementation of the bail-in framework, new regulations and guidelines will also be issued under the Bank Act to specify a loss-absorbing capacity requirement for DSIBs, based on a combination of regulatory capital and bail-in eligible liabilities. International guidance for this new capital measure was finalized by the Financial Stability Board in November 2015.

The CDIC Act amendments also included revisions to the legislative framework governing the exercise of eligible-financial-contract close-out rights in a bank-resolution scenario. The revised framework is summarized in a new guidance note published by CDIC on November 14, 2016. For more information, please see our May 2016 Blakes Bulletin: Amendments to Canada’s Bank Restructuring Legislation: Bail-In and Financial Contract Safe Harbours.

NEW LIFE INSURANCE CAPITAL FRAMEWORK

On September 12, 2016, after seven quantitative impact studies, OSFI finalized the new life-insurance regulatory-capital framework. The new Life Insurance Capital Adequacy Test (LICAT) guideline will take effect on January 1, 2018 and will replace the current Minimum Continuing Capital and Surplus Requirements (MCCSR) capital measure. Former Deputy Superintendent Mark Zelmer identified five core principles that guided the development of LICAT in his remarks delivered on April 21, 2016:

  1. Inclusion of a standardized capital approach with risk-measurement methods that can be objectively and consistently applied by all life insurers
  2. Consideration of all relevant cash flows from on-balance sheet assets and liabilities, as well as off-balance sheet activities (such as derivatives transactions)
  3. Inclusion of individual measures of required capital for insurance, credit, market, and operational risks, measured at similar confidence levels over a defined time horizon
  4. Appropriate accounting for reinsurance, hedging, and other risk mitigation strategies used by life insurers
  5. Inclusion of a methodology for aggregating the required capital associated with each type of risk while considering the dependencies and interactions within and across risks

LICAT represents an evolution in OSFI’s regulatory-capital expectations and is designed to take into account significant changes in the nature and management of risk within the life-insurance industry. The LICAT ratio includes in the numerator, in addition to available capital, a surplus allowance and an amount for eligible deposits. The denominator of the LICAT ratio is a base solvency buffer, representing the amount that an insurer must hold to cover for losses in excess of its best estimate liabilities. The base solvency buffer is defined as the aggregate requirements for all risks net of credits, and multiplied by a scalar (a tool that OSFI can use to adjust the general level of capital in the system). The LICAT guideline also reflects more advanced and risk-based techniques to measure credit, market, insurance, and operational risks. A webinar offered by OSFI on the LICAT guideline is available here.

On the international scene, the International Association of Insurance Supervisors (IAIS) continued its efforts to develop a risk-based global insurance capital standard (ICS) for internationally active insurance groups (IAIGs), as part of IAIS’s proposed Common Framework for the Supervision of IAIGs. On July 19, 2016, IAIS published a new consultation document titled Risk-based Global Insurance Capital Standard (ICS) Version 1.0 (ICS 1.0) to solicit further stakeholder feedback on certain key components for ICS 1.0. Assistant Superintendent Neville Henderson indicated in December 2015 that OSFI’s LICAT framework would include many of the changes stemming from this international standard and that OSFI therefore did not foresee a need to implement any significant changes in Canada in relation to ICS, before IAIS finalizes ICS 2.0 (expected in 2020). In its recent annual report, OSFI also noted that it is engaged with IAIS in the development of ICS 2.0.

PRUDENTIAL GUIDANCE FROM OSFI

Corporate Governance Framework

On December 16, 2016, OSFI announced that it will be undertaking a review of its expectations of FRFI boards of directors. The purpose of the consultation, as outlined in remarks delivered by Superintendent Jeremy Rudin earlier in June 2016, is to “prune away some of the growth in the requirements” that OSFI has placed on boards of directors of FRFIs in the past few years and to streamline the “long and in many ways less-than-consistent list of tasks for boards to navigate”. OSFI’s intention is to present a more focused approach to governance by gathering all of its expectations for boards within the Corporate Governance Guideline and removing references to regulatory requirements for boards that appear in other OSFI guidance. In addition to implementing this “one-stop shop approach”, OSFI intends to ensure that its expectations are tailored to the size, nature, and complexity of FRFIs. Specifically, small and medium-sized FRFIs will be subject to the corporate-governance principles set out in the Corporate Governance Guideline, while large, more complex FRFIs will also be subject to detailed expectations to be set out in a separate annex to the Corporate Governance Guideline, according to Mr. Rudin. Consultations will begin in early 2017 with select FRFI boards and stakeholder groups and will be followed by a wider consultation.

Operational Risk Management

On June 29, 2016, OSFI issued the final version of Guideline E-21 on operational-risk management. Guideline E-21 aims to provide consolidated guidance on operational risk management across all FRFIs and fills what OSFI perceives to be a gap in existing guidance. FRFIs are expected to establish and maintain an enterprise-wide framework of operational-risk management controls, consistent with four guiding principles that are set out in Guideline E-21. OSFI expects that full implementation of Guideline E-21 principles will be achieved no later than June 2017.

Model Risk Management

On December 21, 2016, OSFI released for comment a new draft Guideline E-23 on enterprise-wide model risk management for banks, trust and loan companies, and foreign-bank branches. The draft Guideline E-23 aims to address the increasing reliance by financial institutions on internal models in management decision-making and sets out OSFI’s minimum standards for managing and controlling model risk. Guideline E-23, in its final form, is scheduled to take effect on November 1, 2017. The comment period is open until February 28, 2017. For more information, please see our January 2017 Blakes Bulletin: OSFI Releases Draft Guidance on Model Risk Management.

Margin Requirements for Derivatives

On February 29, 2016, OSFI released the final version of Guideline E-22 on margin requirements for non-centrally cleared derivatives. Guideline E-22 requires the mandatory exchange of margin for non-centrally cleared derivative transactions between FRFIs and certain covered financial counterparties. It is based on the policy framework developed by the Basel Committee on Banking Supervision (Basel Committee) and the International Organization of Securities Commissions. For more information about Guideline E-22, please see our March 2016 Blakes Bulletin: Margin Requirements for Non-Centrally Cleared Derivatives Issued in Canada.

OSFI Ruling on Comprehensive Credit Insurance

On September 29, 2016, OSFI published a ruling holding that a bank may not, under the Insurance Business (Banks and Bank Holding Companies) Regulations, promote within its Canadian branches a policy of comprehensive credit insurance — a policy that provides insurance to a seller of goods or services against a loss incurred due to the non-payment by a purchaser located within or outside Canada. It was determined that this type of insurance went beyond the permitted export credit insurance.

Revised Pillar 3 Disclosure Requirements

On January 21, 2016, OSFI released a draft guideline on Pillar 3 disclosure requirements. The draft guideline provides clarification on the domestic implementation for banks and federal trust and loan companies of the Revised Pillar 3 disclosure requirements standards issued by the Basel Committee in January 2015.

Federal Credit Unions

On August 9, 2016, OSFI issued an Instruction Guide on the process for continuing a provincial credit union or caisse populaire as a federal credit union. The publication of the Instruction Guide follows the announcement by the Minister of Finance in July 2016 that Canada’s first federal credit union received approval to operate under a federal charter. The Instruction Guide will provide more clarity to provincial credit unions on the OSFI-administered federal continuance process.

On December 9, 2016, OSFI released the final version of the updated CAR Guideline, which, among other things, clarifies how the CAR Guideline will apply to federal credit unions in respect of qualifying capital instruments, deductions from capital, and transitioning of non-qualifying instruments. A key amendment to the CAR Guideline enables federal credit unions to issue non-membership share capital instruments that will qualify as common-equity tier 1 capital.

Effective January 15, 2017, Part XVI of the Cooperative Credit Associations Act (CCAA), which enabled provincial credit-union centrals to voluntarily subject themselves to OSFI supervision, was repealed under the provisions of the Economic Action Plan 2014, No. 2.

IFRS 9

On June 21, 2016, OSFI issued the final version of IFRS 9 Financial Instruments and Disclosures Guideline. The Guideline sets out OSFI’s expectations for FRFIs on the application of International Financial Reporting Standard 9 Financial Instruments (IFRS 9), issued by the International Accounting Standards Board (IASB) in July 2014. The Guideline will be effective once FRFIs adopt IFRS 9, starting with DSIBs on November 1, 2017. Other FRFIs are expected to comply with IFRS 9 for annual periods beginning on or after January 1, 2018. The new Guideline will replace the following OSFI guidance that was in effect under the International Accounting Standard 39 Financial Instruments: Recognition and Measurement:

  1. Guideline C-1 (Impairment)
  2. Guideline C-5 (Collective Allowance)
  3. Guidelines D-1, D-1A, D-1B (Annual Disclosures)
  4. Guideline D-6 (Derivatives Disclosures)
  5. Guideline D-10 (Accounting for Financial Instruments Designated as Fair Value Option)

IFRS 4

On December 19, 2016, OSFI issued for consultation a draft Advisory in response to IASB’s September 2016 approval of an amendment to IFRS 4 Insurance Contracts allowing companies whose activities are predominately connected with insurance to defer the application of IFRS 9 before January 1, 2021. OSFI concluded that the IASB amendment can lead to inconsistencies among life insurers and seeks to provide, through the Advisory, a level of consistency and comparability across the federally regulated life-insurance industry. The comment period is open until January 31, 2017.

Revised Assessment of Financial Institutions Regulations, 2017

On November 30, 2016, new Assessment of Financial Institutions Regulations, 2017 were released, replacing the current Assessment of Financial Institutions Regulations, 2001. The new regulations will take effect on April 1, 2017 and introduce a number of changes to OSFI’s methodology for recovering its costs from FRFIs. Significantly, the size of a FRFI will no longer serve as a proxy for determining the FRFI’s pro rata share of OSFI’s expenses. Instead, OSFI will recover its costs from FRFIs based on the FRFI’s risk-based capital-adequacy or capital-equivalency measures.

ANTI-MONEY LAUNDERING (AML) AND SANCTIONS

Amendments to AML Legislation

On June 17, 2016, the federal government released amendments to regulations made under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PC Act). The amendments usher in two key amendments to the federal anti-money laundering framework: a new set of identity-verification rules and new requirements for politically exposed domestic persons and heads of international organizations. The new identity-verification rules came into effect on June 30, 2016, with the existing rules to be phased out by June 30, 2017. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has issued a new Guideline: Methods to ascertain the identity of individual clients that provides additional regulatory guidance on the new identity rules. The rules relating to politically exposed domestic persons and heads of international organizations will take effect on June 17, 2017. FINTRAC has published separate guidelines on these new requirements, as they apply to financial entities, securities dealers, money services businesses, and life insurance companies, brokers and agents. The amendments are discussed in greater detail in our June 2016 Blakes Bulletin: Amendments to Canada’s Anti-Money Laundering Legislation: The First Step.

It is expected that OSFI will update its 2008 Guideline B-8 on deterring and detecting money laundering and terrorist financing to incorporate the amendments to the PC Act that were introduced in the past few years, after the anticipated next round of amendments to the PC Act regulations (in respect of foreign money services businesses, dealers in virtual currencies, and potentially prepaid products) are finalized.

FATF Mutual Evaluation of Canada

On September 15, 2016, the Financial Action Task Force (FATF) released its Mutual Evaluation Report – Canada, a 216-page assessment of Canada’s anti-money laundering and anti-terrorist financing regime against the international FATF standards. The report concludes that Canada has a strong and effective regime, but identifies several areas for improvement.

Kabul Farms Decision

On May 6, 2016, the Federal Court of Appeal released its decision in Canada v. Kabul Farms Inc. (Kabul Farms), a case that compelled FINTRAC to revamp its approach to assessing administrative monetary penalties (AMPs) under the PC Act. In that case, a self-represented small money services business contested a C$6,000 AMP imposed for alleged violations of the PC Act. The Federal Court held that the application of “rigid” unpublished formula developed by FINTRAC for assessing AMPs was inadequate as it did not take into account the specific circumstances in which a violation occurred, contrary to the PC Act. On appeal, the Federal Court of Appeal upheld the decision stating that it wished “to remind the Director [of FINTRAC] that in conducting his reassessment he must keep front of mind his obligations of procedural fairness. Among other things, he must ensure that the respondent is made aware of the case to meet, including any formulas, guidelines and analyses he intends to rely upon, and he must give the respondent an opportunity to address that case.” Because the Federal Court of Appeal’s criticism related to FINTRAC’s overall approach to administering AMPs, FINTRAC was effectively required to revisit its AMP framework applicable to all reporting entities.

Risk-Based Approach Workbooks

On April 22, 2016, FINTRAC released two workbooks that supplement its Guidance on the risk-based approach to combating money laundering and terrorist financing:

  1. A risk-based approach workbook for securities dealers
  2. A risk-based approach workbook for life insurance companies, brokers and agents

Operational Briefs

On November 14, 2016, FINTRAC published an operational brief of indicators of money laundering in financial transactions related to real estate. Later, on December 15, 2016, it issued an operational alert setting out indicators of money laundering involving human trafficking. Both documents are intended to assist reporting entities to enhance their suspicious-transaction reporting capabilities.

Sanctions

On February 5, 2016, the federal government repealed substantial parts of the Canadian sanctions measures against Iran. These amendments followed the confirmation by the International Atomic Energy Agency that Iran satisfied the commitments it made under the Joint Comprehensive Plan of Action, a program intended to ensure that the Iranian nuclear program is not used for the development of nuclear weapons. A number of sanctions prohibitions in respect of Iran remain in force under the Special Economic Measures (Iran) Regulations and the Regulation Implementing the United Nations Resolutions on Iran. For more information, please see our February 2016 Blakes Bulletin: First Step to Re-engagement: Canada Rolls Back Iranian Sanctions.

On March 11, 2016, amendments to the Freezing Assets of Corrupt Foreign Officials (Tunisia and Egypt) Regulations came into force. The amendments fully repealed the list of designated names in respect of Egypt and renamed the regulation to refer only to Tunisia.

On October 21, 2016, the Regulations Implementing the United Nations Regulations on the Democratic People’s Republic of Korea were amended to implement Resolution 2270 adopted by the United Nations Security Council.

For more information about Canadian sanctions legislation, please see our April 2016 Blakes Bulletin: A Primer on Canadian Sanctions Legislation.

CONSUMER PROTECTION

Proposed New FCAC Framework

On September 29, 2016, the Financial Consumer Agency of Canada (FCAC) published for consultation a proposed new Supervision Framework and proposed new Publishing Principles for FCAC Decisions. The consultation on the Supervision Framework aims to address the expansion of FCAC’s mandate since 2011, when the FCAC’s Compliance Framework was last updated, and its increasing focus on “proactive and risk-based supervision”. The proposed new Publishing Principles clarify the FCAC’s policies on publicizing notices of violation, notices of decision, and notices of non-compliance. For more information on the proposals, please see our October 2016 Blakes Bulletin: Proposed Supervision Framework and Publishing Principles for FCAC Decisions Released for Consultation.

New FCAC Decision

On December 20, 2016, the FCAC released Commissioner’s Decision #125 concerning the failure of a bank to accurately disclose to credit card customers the nature and amounts of non-interest charges in initial disclosure statements, contrary to subsection 12(1) of the Cost of Borrowing (Banks) Regulations. An FCAC investigation revealed that processing issues caused a delay in posting payments made by cardholders to their accounts and that, as a result, some customers incurred overlimit fees even though appropriate payment had been made. The FCAC noted that the Commissioner agreed not to publish the bank’s name and not to impose an AMP on the basis that the bank acted promptly and proactively in providing full reimbursement to impacted customers and committed to improving its risk-management practices by undergoing an independent review of its systems.

New FCAC Guidance on Code of Conduct Guidance

On November 13, 2016, new and amended guidance from the FCAC related to the Code of Conduct for the Credit and Debit Card Industry in Canada (Code) took effect. The Code applies to credit and debit payment-card network operators and their participants, such as card issuers and acquirers. Specifically, three guidance documents were published:

  1. Amended Commissioner’s Guidance 10Increased Disclosure in Sales and Business Practices and Cancellation of Contracts without Penalty
  2. Commissioner’s Guidance 15Information Summary Box examples for the Code of Conduct for the Credit and Debit Card Industry in Canada
  3. Commissioner’s Guidance 16Fee Disclosure Box for the Code of Conduct for the Credit and Debit Card Industry in Canada

For more information about the new and amended Code, please see our August 2016 Blakes Bulletin: FCAC Issues New and Amended Code of Conduct Guidance.

Consumer Code Proposal Withdrawn

On December 14, 2016, in response to opposition from the government of Quebec, Finance Minister Bill Morneau withdrew from the Budget Implementation Act, 2016 No. 2, a set of proposed amendments to the Bank Act that would have created a new financial consumer framework (a summary is available in our October 2016 Blakes Bulletin: A New Financial Consumer Framework – Does this Change Everything?). The proposed framework reflected successive governments’ promises to enact a comprehensive federal “consumer code” for banks, federal credit unions, and foreign-bank branches and was to provide a comprehensive and exclusive regime intended to be paramount to any provincial consumer-protection legislation. When withdrawing the proposed framework from the budget bill, the Finance Minister stated that the federal government will “ask the Financial Consumer Agency of Canada, the FCAC, to ensure that the federal protection system is as solid as any provincial protection system”, following which an updated version of the proposed framework could be introduced as new legislation.

DEPOSIT INSURANCE

Consultation on a Deposit Insurance Framework

On September 16, 2016, the Department of Finance launched a consultation seeking views on possible improvements to the federal deposit-insurance framework. The possible changes fall into three broad categories: streamlining deposit categories, updating the scope of eligible deposits, and addressing the complexity of trust deposits. While the consultation paper sets out a number of proposals for consideration, overall, the federal government concluded that the current framework administered by the CDIC meets the government’s stated objectives and that therefore, no major changes to the framework are required. In particular, there is no proposal to change the existing coverage limit of C$100,000 per eligible deposit category. For more information, please see our September 2016 Blakes Bulletin: Deposit Insurance Review: Improving the Current Framework.

Canada Deposit Insurance Corporation Consults on Information Bylaw Modernization

On September 12, 2016, CDIC issued a consultation paper on proposed amendments to the CDIC information bylaw governing how CDIC-member financial institutions must inform Canadians about deposit protection. The information bylaw currently requires member financial institutions to prominently display CDIC signage at their place of business, provide CDIC brochures in branches, and post a CDIC membership notice on their websites. The amendments proposed in the consultation paper aim to modernize the CDIC bylaw and improve the clarity, usefulness, and timeliness of information provided by member financial institutions to depositors through all banking platforms, including electronic banking. For more information, please see our September 2016 Blakes Bulletin: Canada Deposit Insurance Corporation Looks to Modernize Deposit Insurance Information By-law.

PAYMENTS

Automated Clearing Settlement System Designation

Effective May 2, 2016, the Governor of the Bank of Canada designated the Automated Clearing Settlement System (ACSS) — Canada’s retail payments system operated by Payments Canada — as a clearing and settlement system that has the potential to pose payments-system risk. The designation brings ACSS under the formal oversight of the Bank of Canada under the Payment Clearing and Settlement Act and will subject it to the Bank of Canada’s Risk-Management Standards for Prominent Payment Systems.

Experimenting with Blockchain

On June 17, 2016, Senior Deputy Governor of the Bank of Canada Carolyn Wilkins announced that the Bank of Canada is partnering with Payments Canada, Canadian banks, and R3 (a firm that leads a consortium of 50 financial institutions around the world) to experiment with distributed ledgers. Ms. Wilkins noted that the Bank of Canada’s “only goal at this stage is to understand the mechanics, limits and possibilities of this technology” and that the Bank of Canada will “build a rudimentary wholesale payment system to run experiments in a lab environment”. This will include a simulated settlement asset used as a medium of exchange within the system.

Payments Canada Adopts ISO 20022

On April 25, 2016, Payments Canada announced the adoption of ISO 20022, a global standard for electronic payment messages that is intended to help businesses and financial institutions facilitate the move away from paper by creating the ability to exchange more information with electronic payments.

Proposed Point-of-Service (POS) Rules

On June 7, 2016, Payments Canada published a consultation document titled Enhancing the CPA’s Framework for Point of Service Payments, which seeks feedback on proposed amendments to the POS Rule Framework to ensure they support innovation in payments technologies. The proposed new rules would support alternative authentication methods such as biometrics, the use of tokenization, and introduce alternate settlement processes.

Modernizing Canada’s Payments Infrastructure

On December 8, 2016, Payments Canada released for consultation an Industry Roadmap & High-Level Plan (Roadmap) and companion reader that outlines a multi-phase project to modernize Canada’s payments infrastructure and builds on the April 2016 Vision for the Canadian Payments Ecosystem consultation. The Roadmap sets as a priority the building of a new core clearing and settlement system based on the ISO 20022 data standard and includes plans to establish a payment system with the capability to deliver funds in real time (less than 60 seconds). The consultation period for the Roadmap is open until January 20, 2017.