Department of Finance Proposes Updates to Canada’s Financial Sector Framework

On August 12, 2024, the Department of Finance launched a public consultation seeking views on proposed measures to update Canada’s regulatory framework for financial institutions. This consultation marks the third phase of the Department of Finance’s legislative review of the Bank Act, Insurance Companies Act, and Trust and Loan Companies Act, likely informing the statutory “sunset” review of the legislation due by June 2026. We have summarized some of the key proposed measures of the consultation paper below.

Proposed Updates to Regulatory Framework and Application Reviews

Formal Limit on Large Bank Consolidations: The Department of Finance is considering new measures to restrict consolidation among Canada’s largest banks (that is, banks with equity of C$12-billion or more). The Bank Act currently requires banks with equity of C$12-billion or more to be widely held, and the new proposed measures will expressly prohibit amalgamation among these banks or the acquisition of control of one such bank by another. If implemented, this measure will codify the federal government’s longstanding position that such consolidations are not in the best interest of the Canadian financial system since the rejection of the proposed consolidations in 1998. The consultation paper is seeking views on exemptions that should be considered in addition to those relating to financial stability. 

Increasing Public Float Threshold: The Department of Finance is also seeking input on whether to update the equity threshold beyond which banks and other federally regulated financial institutions (FRFIs) must list a percentage of their voting shares on a public stock exchange. The current threshold for this public float requirement for medium-sized FRFIs is set at C$2-billion. 

Public Consultation for Applications: In addition, the consultation paper suggests a new requirement to hold public consultations for certain applications requiring the approval of the Minister of Finance, such as FRFI amalgamations or acquisitions. The new public consultation requirement would apply for applications that “raise material public interest considerations (for example, to consider potential competition or regional issues)”, but the Department of Finance provides no additional details on the triggers for this new proposed requirement. It would be important for the triggers to be clearly articulated in the legislation, so that the requirement would not be used in an ad hoc manner. The Department of Finance has occasionally held such public consultations on sizeable transactions. The Superintendent also has discretion under current legislation to hold a public inquiry for certain applications (such as new entry applications) where objections are received in response to the notice published by the applicant in the Canada Gazette. The new proposed measure, if implemented, would supplement the public inquiry regime, which is rarely invoked.

Broad Ministerial Authority: Other proposed measures include adding express authority in the FRFI legislation for the Minister of Finance to consider applicants’ compliance with domestic or foreign regulatory requirements (including anti-money laundering and tax compliance measures) when making a decision. Although the current legislation provides broad authority to the Minister to consider all relevant factors in an application, this proposal stresses the federal government’s focus on anti-money laundering, tax and other compliance measures. The consultation paper also proposes to codify in the legislation the Minister’s authority to impose terms and conditions or require undertakings in respect of employment matters, a key aspect of Ministerial approvals for major transactions. 

Expanding National Security Powers: In response to emerging geopolitical risks, the Department of Finance is considering explicitly extending the Office of the Superintendent of Financial Institutions’ (OSFI) power to issue directions on compliance to matters involving a financial institution’s governance, such as relationships between the institution and its shareholders, directors and officers. If implemented, these measures would expand recent amendments to the FRFI legislation that extended OSFI’s and the Minister’s authority to oversee integrity and security measures by FRFIs, including in respect of foreign interference. The Department of Finance is also considering establishing by statute a formal committee to oversee financial sector risks related to integrity and security, including national security, and inform related policy advice to the Minister of Finance.

Limiting Interlocking Directorates: The consultation paper describes several measures to update corporate governance rules, including a proposal to prohibit or restrict interlocking directorates among FRFIs, whereby a director of one institution is also a director or executive of another institution. These measures, if implemented, will supplement the existing limits under the FRFI statutes in respect of affiliated directors. The Department of Finance notes that “limiting interlocking directorates could encourage a broader range of individuals to serve as directors, bringing in diverse perspectives and expertise.”

Federal Credit Unions: The consultation paper signals the federal government’s willingness to work with federal and provincial regulators, policymakers and the industry to encourage growth and expansion of federal credit unions, including through amalgamation of provincial credit unions into federal credit unions under the continuance-and-amalgamation framework set out in the Bank Act.

Access to Brokered Deposits: The Department of Finance is also considering amendments to the Bank Act that would prevent larger banks from exercising control over the deposit brokers they own in such a way that would unduly limit access to the distribution channel for brokered deposits by small and medium-sized banks (SMSBs). The consultation paper notes that large banks control some of Canada’s largest deposit brokers, and ensuring SMSBs have access to the distribution channel for brokered deposits would support consumer choice and foster competition between large banks and SMSBs.

Lifting the Car Lease Restriction: The consultation paper signals that the federal government is considering lifting the longstanding prohibition under federal legislation for FRFIs to engage in light motor vehicle leasing. The consultation paper is silent on whether the current ban would be replaced with the complex regime currently applicable to permitted financial leasing of other personal property under the Financial Leasing Entity Regulations. The Department of Finance instead notes that the removal of the bank will need to be “subject to measures that minimize the negative impact on the current market structure, such as requiring the agreement of the auto manufacturer.”

Promises for More Transparency and Collaboration: The consultation paper also contains a proposal to provide updates to applicants that have submitted applications for transaction approvals to OSFI or the Department of Finance. The application process timeline for transaction approvals has ballooned in recent years, creating frustration and uncertainty among applicants and financial sector participants. The consultation paper proposes that where no decision is made on an application after 120 days, an applicant may request a written update on the status of their application. The consultation paper notes that this measure would match Canada’s international trade commitments. The consultation paper also describes desire for increased collaboration between the federal government and provincial and territorial governments and public information sharing to support predictability in the regulatory environment for financial institutions. It lists possible measures to achieve this, such as coordinated announcements on upcoming regulatory changes, publication of impact statements on regulatory actions, and a forum for coordination and information sharing on integrity and security risks.

Other Measures: The Department of Finance is also considering increasing various limits under FRFI statutes that trigger regulatory approval, such as in the context of FRFI investment rules, including under the specialized financing regulations. The Department of Finance is also considering whether these statutory thresholds should instead be contained in guidelines issued by OSFI so that they can be updated more quickly to reflect current market conditions going forward.

New Consumer Protection Measures

Fraud Prevention: The consultation paper proposes several consumer protection measures to address risks associated with increasingly complex financial products and sophisticated scams. The Department of Finance is considering requirements for banks to prevent or delay transactions believed to be fraudulent and to implement policies and procedures for fraud detection. The consultation paper also proposes to introduce a maximum liability threshold for account holders who lose funds as a result of unauthorized transactions and seeks views on what constitutes an unauthorized transaction and the circumstances under which consumers should be held liable for a loss. The Department of Finance is also considering a requirement for banks to collect and report to the Financial Consumer Agency of Canada (FCAC) with data on the nature of fraud and scams targeting their clients.

Branch Closures: The consultation paper also includes measures to support consumers following closure of a bank branch, including a requirement for banks to facilitate customer account transfers related to the closure at no cost. It is also proposed that banks include in their notices to the public and to FCAC a detailed rationale for the closure, its impact on the community, and data on the closed branch’s transactions and annual in-person visits in comparison to the bank’s average branch. The Department of Finance is also considering a requirement for banks to include data in their annual public accountability statements with additional information on their branch networks, such as urban and rural locations, branch openings and closures, and volume and value of transactions processed at branch locations to support regulators’ and policymakers’ understanding about how banks determine whether to maintain a branch location and how communities are affected by branch closures.

Access to Basic Banking: The Department of Finance is considering whether the current requirement to open a retail deposit account at physical locations for any Canadian presenting two identification documents should be expanded to apply where banks offer services through digital channels.

Access to Funds: The consultation paper also proposes increasing the amount of funds immediately available when a cheque is cashed and lowering the maximum cheque hold period. These measures are intended to reflect more sophisticated bank systems that allow cheque funds to clear faster and the higher cost of living.

Artificial Intelligence

Under this category, the Department of Finance notes that Canadian financial institutions are accelerating adoption of artificial intelligence (AI) to improve their core business activities such as lending, insurance underwriting, customer service and risk management. The consultation paper describes the federal government’s efforts to ensure responsible use of AI in the financial sector, including development of a federal strategy on AI capabilities and risks. 

Submissions for this consultation are open until September 11, 2024.