On September 16th, the Department of Finance announced the launch of a public consultation on the deposit insurance regime for banks, federally regulated trust and loan companies and certain provincially regulated institutions. There is no indication when the Government proposes to complete its review but comments are requested by November 30th.
The Consultation Paper states that the Government is generally comfortable with the current limit on deposit insurance ($100,000), and how deposit insurance works. However, comment is requested with respect to certain categories of deposits, and whether they should or should not be insured, and what is referred to as “trust deposits’ which are deposits made for the benefit of someone else.
The paper notes some areas where deposit insurance could potentially be expanded. These include:
- Excluded registered deposits. Currently, some types of deposits, such as RRSPs, are treated as separate insured deposits each subject to a separate $100,000 limit. The paper notes that some important categories of registered deposits, such as RESPs, do not receive this treatment and asks for comment on how to reconcile these differences.
- Extended maturities. Currently, deposits must have a term of five years or less to be insured. The paper notes that it is no longer unusual for deposits to have maturities greater than five years and asks for comment on whether the five-year term restriction should be updated.
- Foreign currency deposits. The paper notes a growing trend for Canadians to have deposits in other currencies and asks whether the current exclusion of foreign currency deposits should be removed.
- “Temporary high balances”. There can be occasions when the $100,000 limit is exceeded due to an unusual event that is likely to be of short duration. An example might be when a depositor receives the proceeds of a life insurance policy following the death of a family member. The paper asks whether it would be appropriate to increase the limit in these types of circumstances and, if so, what types of circumstances should be included.
In the following areas, the paper questions whether insurance should be altered or removed:
- Mortgage tax accounts. The paper suggests that these types of deposits are in limited use and that they should no longer be treated as separate insured deposits. If they are eliminated as a separate category, the amount of these deposits would be subject to the aggregate $100,000 limit with other deposits of the depositor.
- Travellers cheques would no longer be eligible for insurance.
Trust and Broker deposits
The second area where the paper requests comments is with respect to trust deposits. Under current rules, when a person makes a deposit for the benefit of another person, for the purposes of calculating the $100,000 limit, the amount of the deposit is not aggregated with other deposits of the depositor. Rather, the amount is treated as a deposit of the beneficiary that is subject to a separate $100,000 limit that is not aggregated with other deposits that the beneficiary may have with that same institution. However, in order for this treatment to apply, certain rules must have been observed, including that the depositor disclosed to the institution the identity of the beneficiary. In practice, there has been very uneven practice with respect to the collection of this information by banks and other insured institutions resulting in the potential for considerable unfairness if an insolvency necessitating an insurance payout was experienced. The paper requests comment on how to better address the disclosure requirement and the maintenance of beneficiary information by institutions.
Brokered deposits present an additional complexity. In some cases, brokers act as agents placing the deposit in the name of the underlying depositor. In these cases, for the purposes of calculating the insurance limit, the deposit is aggregated with other deposits of the underlying depositor. In other cases, the broker holds a group deposit on behalf of a number of underlying depositors. In such cases the deposit is eligible for trust deposit treatment if the broker complies with the disclosure related requirements. This can be highly beneficial to the underlying depositor who benefits from the separate $100,000 insurance for the brokered deposit. The paper asks for comment on how to better address brokered deposits in the regime.
Note that as brokered deposits are an important source of funding for small and medium-sized banks, this issue may be of particular interest for them.