On April 21, 2015, the Government of Canada tabled the federal budget, Economic Action Plan 2015 (Budget 2015) in the House of Commons. In Budget 2015, the Government promised a number of regulatory changes that will be relevant to financial institutions. The changes include:
- A new consumer protection framework for banks and specific targeted consumer protection measures
- A bail-in regime for Domestic Systemically Important Banks (D-SIBs)
- Restrictions on the use of Canada Mortgage and Housing Corporation (CMHC) portfolio insurance and insured mortgages in relation to securitizations
- A review of the rules relating to the confidentiality of supervisory information communicated to banks, insurance companies and other federally regulated institutions and the oversight provided by the various federal agencies that play have a supervisory role
- Although no specific measures were mentioned, the Government also stated that it will continue to work with the credit union sector to address issues relating to its development and growth. Budget 2015 also mentioned the consultation currently underway into the possible regulation of “national retail payments systems”. This consultation was launched on April 13th and remains open until June 5th.
Some further highlights are as follows:
Consumer Protection Framework for Banks
Budget 2015 provides that the new financial consumer protection framework will include:
- Broadened general requirements for clear and simple disclosure of information, and expanded use of summary information boxes for banking products and services;
- Improved access to basic banking services by allowing a broader range of personal identification to open an account;
- Expanded prohibitions on certain business practices, including high pressure sales situations, and cooling-off periods for a greater range of products;
- Expanded corporate governance requirements so that boards of directors’ duties relate to all consumer protection measures;
- Improved transparency and accountability, for example through enhanced public reporting on complaints and on measures taken to address the challenges faced by vulnerable Canadians; and
- A requirement that advertising be clear and accurate.
In addition, the Bank Act will be amended to include a set of principles to guide the conduct of banks. Banks will be required to report annually on how their business activities meet the spirit of the principles.
The Government stated that it intends for the Bank Act to provide the exclusive set of rules governing consumer protection for banks. This statement is apparently a response to the September 2014 decision of the Supreme Court of Canada in Bank of Montréal v. Marcotte in which the Court held that Québec’s Consumer Protection Act is generally applicable to banks.
Taxpayer Protection and Bank Recapitalization Regime
The Budget 2015 reiterates the Government’s intention to implement a bail-in regime for systemically important banks (D-SIB) (referred to as the Taxpayer Protection and Bank Recapitalization regime). The following were noted as the key features of the regime:
- There will be a statutory conversion power which would allow for the permanent conversion of eligible liabilities of a non-viable bank into common shares.
- Deposits will not be subject to the regime. Only unsecured debt that is tradable and transferable, has an original term to maturity of 400 days or more, and is issued or renegotiated after an implementation date will be subject to conversion.
- There will be a minimum loss absorbency requirement to ensure systemically important banks can withstand significant losses and emerge from a conversion well capitalized.
- It will include comprehensive disclosure and reporting requirements.
Reinforcing the Housing Finance Framework
The Budget plan states that new regulatory measures will be implemented to restrain the use of mortgages insured by the Canada Mortgage and Housing Corporation (CMHC) in securitization vehicles. The measures will include
- Limiting the extension of portfolio insurance through the substitution of mortgages in insured pools
- Tying the use of portfolio insurance to CMHC securitization vehicles
- Prohibiting the use of government-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC.
Financial Sector Oversight
Currently, banks, insurance companies and other federally regulated financial institutions are subject to regulations that require that they keep confidential certain types of communications that they might have with the Office of the Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation. The Budget 2015 states that legislative amendments will be introduced to modernize, clarify and enhance the protection of this information. There is also a reference to two inter-agency committees that play a role in the supervision of federal financial institutions and an intention to review the statutes that provide for that oversight and governing certain Crown corporations to ensure effective governance and operations.
For more information about Budget 2015 and the financial services sector, please refer to our client alert available here.