Budget Bill 2023: Changes for Financial Institutions

By Alan Fraser, Ora Morison, Vladimir Shatiryan and Paul Belanger

May 8, 2023

On May 2, 2023, Bill C-47, Budget Implementation Act, 2023, No. 1 received second reading in the House of Commons (Budget Bill). The Budget Bill implements the policy initiatives outlined in the federal government’s 2023 Budget released on March 28 (Budget Plan) and proposes several important amendments to legislation that governs federally regulated financial institutions (Financial Institutions).

This bulletin discusses key amendments applicable to Financial Institutions.

Lowering Criminal Rate of Interest

As outlined in the Budget Plan, the Budget Bill will amend the Criminal Code to lower the criminal rate to a 35% annual percentage rate. Currently, the criminal rate of interest is set at 60% and expressed as an effective annual rate that is equivalent to a 47% annual percentage rate, according to the Budget Plan. The proposed amendment follows consultations on predatory lending conducted by the Department of Finance in August 2022 and will align the federal criminal rate of interest with the cap currently in effect on interest rates for consumer contracts. The government also indicated that additional consultations will be launched to consider a further reduction in the criminal rate of interest.

The criminal rate of interest in the Criminal Code applies to both consumer and commercial contracts. The Budget Bill introduces a regulation-making authority for the government to exempt certain agreements from the criminal rate of interest prohibition in the Criminal Code, although no regulations are currently proposed.

With respect to payday lending, the Budget Plan announced that the government intends to adjust the payday lending exemption to require payday lenders to charge no more than C$14 per C$100 borrowed, which would be in line with the lowest cap in the provinces.

The changes to the criminal rate of interest and the payday lending limit would not be retroactive for existing agreements or arrangements.

New Power to Increase CDIC Coverage

The Budget Bill introduces a new but temporary power for the Minister of Finance to increase the amount of Canada Deposit Insurance Corporation (CDIC) deposit insurance coverage from the current C$100,000 to any greater amount, including full coverage. This amendment to the Canada Deposit Insurance Corporation Act is structured such that the Minister’s discretionary power will operate only until April 30, 2024. To increase coverage, the Minister must conclude that the increase would be necessary to promote the stability or maintain the efficiency of Canada’s financial system, as well as receive authorization from the federal cabinet. The amendment will largely align the CDIC deposit insurance framework with the systemic risk exception under U.S. banking legislation so that Canadian authorities can increase deposit insurance coverage in distress scenarios without a statutory amendment.

New Integrity and Security Requirements for Financial Institutions

The Budget Bill introduces new measures to the Bank Act, Trust and Loan Companies Act and Insurance Companies Act to protect Financial Institutions against threats to their integrity and security and related risks to Canada’s financial system and national security. Specifically:

Financial Institutions will be required to establish policies and procedures to protect against threats to their integrity and security, including foreign interference.
The examination powers of the Office of the Superintendent of Financial Institutions (OSFI) will be expanded to specifically include assessment of the adequacy of these policies and procedures. OSFI’s power to issue directives and enter into a prudential agreement will also be broadened to apply in respect of deficiencies in integrity and security issues.
The Minister of Finance (Minister) will have new powers to order the disposition of shares of a Financial Institution if the Minister determines that a direct or indirect shareholding person poses a threat to the integrity or security of the Financial Institution or the financial system in Canada, or to Canada’s national security. The order may also suspend voting or other rights attached to these shares.
The federal financial institution statutes will also permit supervisory intervention where the continued operation of the Financial Institution would be prejudicial to its integrity or security, pose a risk to national security, or where the Financial Institution’s depositors, policyholders or creditors may be detrimentally affected by an order of the Minister noted above.

Many of these proposed amendments will come into force on January 1, 2024. However, the Budget Bill will permit OSFI to carry out examinations with respect to integrity and security policies and procedures immediately after the Budget Bill receives royal assent.

Additional government initiatives are underway that also seek to bolster integrity and security and deal with foreign influence threats. A consultation is currently underway for the Government of Canada to implement a foreign influence transparency registry. On April 21, 2023, OSFI also released the Intelligence-led Cyber Resilience Testing (I-CRT) framework, which provides a methodology to identify areas where Financial Institutions may be vulnerable to cyber-attacks.

Single External Complaints Body

The Budget Bill will also amend the Bank Act to introduce a single external complaints body (ECB) to replace the existing provisions that allow multiple ECBs to be authorized by the Financial Consumer Agency of Canada (FCAC). The new single ECB will have the power to establish policies, procedures and terms of reference with the approval of FCAC. The ECB will submit quarterly reports to FCAC and advise them annually about the number of complaints for which a bank did not comply with a final recommendation.

Updates to Sanctions Legislation

Several amendments are introduced to two key federal sanctions legislation: the Special Economic Measures Act (SEMA) and the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) (SML). The most significant amendment is to introduce, for the first time, a formal control test for list-based prohibitions under SEMA and SML. Specifically, when a regulation made under SEMA or SML designates a person as sanctioned under these statutes, entities controlled by these designated entities will effectively be deemed to be designated persons as well. Control will be defined in SEMA and SML to capture both legal control and control in fact, but the test for control is stipulated differently than in the federal financial institutions statutes. Specifically, an entity will be deemed to control a designated person if:

The designated person directly or indirectly holds 50% or more of the shares or ownership interests in the entity or 50% or more of the voting rights in the entity
The designated person is able to change the composition or powers of the entity’s board of directors directly or indirectly, or
It is reasonable to conclude, having regard to all the circumstances, that the designated person is able to direct the entity’s activities directly or indirectly and through any means

The control test is not incorporated into other federal sanctions statutes, such as the United Nations Act, Freezing Assets of Corrupt Foreign Officials Act or Criminal Code.

In addition, the Budget Bill will amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to require entities regulated under the PCMLTFA to report property of a designated person under SEMA or SML to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The PCMLTFA currently requires that only property of terrorists listed under the Criminal Code and the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism be reported to FINTRAC.