• The 2014 Canadian Federal Budget and Financial Services
  • February 17, 2014
  • Law Firm: Borden Ladner Gervais LLP - Toronto Office
  • The 2014 Budget of the Government of Canada includes a number of significant financial sector policy initiatives of interest to financial institutions and related stakeholders. The Government has identified three key areas of priority: (i) Implementing measures to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector, (ii) taking action to encourage competitive financial services while preserving the safety and soundness of the financial sector and (iii) modernizing regulation to better protect investors and consumers, enhance Canada’s financial services sector, support efficient capital markets and manage systemic risk. Set out below is a summary of the key initiatives.

    Residential Lending

    The planned measures of the Government include:

    • Canada Mortgage and Housing Corporation (CMHC) will pay guarantee fees to the Receiver General to compensate the Government for mortgage insurance risks.
    • CMHC is reducing its annual issuance of portfolio insurance from $11 billion to $9 billion.
    • The Minister of Finance has reduced the amount of new guarantees that CMHC is authorized to provide under its 2014 securitization programs to $80 billion for market. National Housing Act mortgage backed securities and to $40 billion for Canada mortgage bonds.
    • Implementation of the new legislative framework for covered bonds.
    • Measures to implement Economic Action Plan 2013 initiatives to tie portfolio insurance to the use of CMHC securitization vehicles and prohibit the use of government-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC.

    Encouraging Competitive Financial Services

    The Government proposes to improve the ability of new entrants and smaller banks to compete while preserving the safety and soundness of the sector as follows:

    • The Office of the Superintendent of Financial Institutions (OSFI) has appointed an advisor to reach out to small banks and trusts and will address challenges faced by these institutions where feasible. OSFI will also review the approval process for establishing a new bank with a view towards  streamlining  it.
    • The Government will improve the ability of smaller banks to access funding from CMHC.
    • The Government will support provincial credit unions that wish to move to the federal credit union framework by streamlining the process for amalgamations.

    The Government will study and consult on other measures to encourage competitive financial services. Potential measures include requiring large banks to provide access to deposit products from small federally regulated banks and trusts through dealers.

    Property and Casualty (P&C) Demutualization Framework

    The Government proposes to introduce legislative and regulatory changes to establish a P&C demutualization framework. The Government will be consulting stakeholders on the framework, which will provide for an orderly and transparent process and ensure that policyholders are treated fairly and equitably.

    Modernizing Regulation

    Economic Sanctions Regime

    The Government will improve the effectiveness of its targeted financial sanctions regime and reduce the compliance burden on the private sector.

    Led by Foreign Affairs, Trade and Development Canada, the Government will adopt new administrative measures and propose legislative and/or regulatory amendments as necessary to improve the effectiveness of its targeted financial sanctions regime.

    Cooperative Capital Markets Regulator

    The Government is committed to improving the regulation of Canada’s capital markets, noting that  on September 19, 2013, Canada, British Columbia and Ontario agreed to establish a Cooperative Capital Markets Regulator. It is noted that, along with British Columbia and Ontario, the Government continues to invite all other provinces and territories to participate in the implementation of the Cooperative System.

    OTC Derivatives and Financial Benchmark Regulation

    The Government proposes to amend the Bank Act to create an explicit regulation-making authority for banks regarding over-the-counter derivatives.
    The Government also proposes to introduce amendments to the Bank Act to provide a regulation- making authority that would apply to Canadian banks in their submissions to financial benchmarks.

    Strengthening the Governance of Canada’s Payments Sector

    The Government indicates that it is developing a comprehensive framework for the oversight of the Canadian payments system and will consult on the oversight of retail payments systems in the coming months. In addition, the Government indicates that it is developing a comprehensive risk-based approach to the oversight of the Canadian payments system. Further, the Government notes that it intends to consult publicly on the oversight of retail payments systems in the spring of 2014.

    The Government proposes to amend the Canadian Payments Act to introduce changes to the governance and accountability structures of the Canadian Payments Association. In addition, the Government proposes to expand and enhance the oversight powers of the Bank of Canada by amending the Payment Clearing and Settlement Act so it can better identify and respond to risks to financial market infrastructure in a proactive and timely manner.

    Improving Corporate Transparency

    The Government notes that it will consider options to further strengthen corporate transparency in Canada, including an explicit ban on bearer instruments. The Government will also consider options to further improve corporate transparency, taking into account the results of Industry Canada’s current consultations on corporate transparency issues in the context of the Canada Business Corporations Act.

    Federal Regime for Credit Unions

    The Government recently announced plans to offer temporary transitional support to eligible credit unions through extended deposit insurance and a short-term funding facility. As noted above, the Government proposes to establish a streamlined process for amalgamating two or more provincial credit unions into one federal credit union. In  addition, the Government will enhance clarity of the federal mandate. It indicates that joint supervision of provincial credit union centrals by the Office of the Superintendent of Financial Institutions will cease. Over the coming months, the Government will consult with provinces and industry on a two-year transition plan. In addition, the Government indicates that it will review the powers of federal entities with respect to provincial credit unions’, caisses populaires’ and centrals’ access to direct federal support and will make amendments, as appropriate.

    Canada Deposit Insurance Corporation (CDIC)

    The Government of Canada proposes to make legislative amendments to permit the Bank of Canada to provide banking and custodial services to CDIC.

    Anti-Money Laundering and Anti-Terrorist Financing Regime

    The Government indicates that it will introduce legislative amendments to strengthen Canada’s anti- money laundering and anti-terrorist financing regime to strengthen Canada’s anti-money laundering and anti-terrorist financing regime and improve Canada’s compliance with international standards, while minimizing the compliance burden.

    The Government proposes to:

    • Introduce anti-money laundering and anti-terrorist financing regulations for virtual currencies, such as Bitcoin.
    • Make online casinos subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
    • Enhance the ability of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to disclose to federal partners threats to the security of Canada, consistent with the Government’s response to the Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182.

    To implement the above amendments, the Government proposes to provide FINTRAC up to $10.5 million over five years and up to $2.2 million per year ongoing. The Government also proposes to provide up to $12 million on a cash basis over five years to improve FINTRAC’s analytics system.

    P&C  Insurance

    The Government indicates that it will consult with the insurance industry, provinces and territories, and other stakeholders to explore options for a national approach to residential flood insurance in Canada and insurance issues arising from natural disasters more generally.

    The Government also proposes to provide $11.4 million over five years on a cash basis to Natural Resources Canada to upgrade the earthquake monitoring system to incorporate more advanced technologies that provide timely public alerts in high-risk and urban areas. This is also a topic on which the P&C industry has made a helpful contribution to the development of federal policy.

    Consumer Protection

    There were a number of important announcements that are part of the Government’s agenda to improve financial consumer protection as follows:

    • Launch of a comprehensive review of Canada’s deposit insurance framework.
    • Work with stakeholders to promote fair and transparent practices and to help lower credit  card acceptance costs for merchants, while encouraging merchants to lower prices to consumers. In addition, the Government notes that it intends to strengthen the Code of Conduct for the Credit and Debit Card Industry in Canada, in consultation with stakeholders.
    • Work with the provinces to maintain the integrity of the payday lending framework and to support provincial efforts to regulate appropriately all payday lending-type high interest rate products. The Financial Literacy Leader will also work with stakeholders to raise public awareness about the costs of and alternatives to these products.
    • Require enhanced disclosure with respect to collateral charge mortgage, better equipping borrowers to understand these impacts.
    • Require enhanced disclosure by banks on the costs and benefits of using powers of attorney or joint accounts and more robust bank processes and staff training.

    Further, the Government indicates that it will continue to engage with Canadians on the development of a comprehensive financial consumer code to better protect consumers of financial products and services and ensure they have the necessary tools to make responsible financial decisions. The Minister of State (Finance) will conduct national consultations and the government indicates that Canadians’ views will be invaluable in developing the code.

    The Government will act to enhance access to  basic banking services. Specifically the Government indicates it will work with financial institutions to expand no-cost basic banking services for youths, students and vulnerable groups (e.g. beneficiaries of a Registered Disability Savings Plan and at-risk seniors). The Government will also proactively ensure pay-to-pay policies for monthly printed credit card statements provided by banks are prohibited. Further the Government indicates that it will build Canadians’ awareness of their right to cash Government of Canada cheques free of charge at any bank in Canada, following up on the commitment in Economic Action Plan 2013.

    Next Steps

    A significant number of the initiatives noted above contemplate further consultations with the financial sector and other stakeholders, including consumers. We will report on these consultation processes as they mature. In addition, the Government also announced a number of initiatives that will be reflected in new legislation and/or regulations. We will also provide our analysis in the coming months as these measures are made public.