On November 23, 2011, the federal Government gave first reading in the Senate to the Financial System Review Act (FSRA) proposing changes to legislation governing financial institutions in Canada.
The Bank Act, Cooperative Credit Associations Act, Insurance Companies Act and Trust and Loan Companies Act each contain a "sunset clause" whereby each statute must be re-enacted by April 20, 2012. In the 2011 federal budget, the Government committed to having these statutes reviewed and updated by the sunset date. To this end, on September 20, 2010, the Government initiated its review of these statutes and obtained stakeholder input. The FSRA takes into account the outcome of this review.
While most changes are of a technical nature, a few are more significant. We highlight the more significant changes below.
Widely Held Bank Equity Threshold
To keep pace with the asset growth and increased capitalization of banks, the FSRA proposes to increase the equity threshold above which banks must be widely held from $8 billion to $12 billion. Banks whose equity exceeds this threshold would be required to be widely held, meaning no shareholder may hold more than 20% of the bank's voting shares or 30% of the bank's non-voting shares. The equity of a medium-sized bank must now be below $12 billion.
Minister's Approval of Substantial Foreign Acquisitions
The FSRA proposes that a financial institution must obtain the approval of the Minister of Finance to acquire control of a foreign financial services entity in certain circumstances. Previously, approvals for foreign acquisitions were solely in the domain of the Superintendent of Financial Institutions. The Minister's approval would be required for a financial institution with equity of $2 billion or more to acquire control of a foreign financial services entity where the value of that foreign entity's consolidated assets, together with the aggregate value of the consolidated assets of all other foreign financial services entities acquired by the financial institution within the preceding 12 months period, exceeds 10% of the value of the financial institution's consolidated assets. The Minister may, in considering whether to grant approval, take into account all matters that he or she considers relevant in the circumstances, including the stability and the best interests of the financial system in Canada. The "stability of the financial system in Canada" is a new criterion, clearly seeking to address potential concerns about contagion given the interconnectedness of global financial services.
Enhanced Flexibility to Issue Shares to Foreign Institutions Owned by Foreign Governments
Under the FSRA, federal financial institutions would have greater flexibility to issue shares to foreign institutions owned by foreign governments. Currently, shares of a federal financial institution may only be issued or transferred to foreign institutions controlled by foreign governments where the financial institution is a subsidiary of the foreign institution to which the share is issued or transferred. Under the FSRA, the "subsidiary" requirement would be eliminated. A financial institution would be permitted to record a share transfer or issuance to a foreign institution that is controlled by a foreign government if the share is beneficially owned by the foreign institution or by an entity it controls. This enhanced flexibility will, therefore, permit non-controlling interests by foreign government-owned institutions in Canadian financial institutions.
Foreign Bank Subsidiaries of Canadian Banks
Foreign bank subsidiaries of Schedule I Canadian banks are excluded from the definition of "foreign bank" under the Bank Act. This means that, among other things, such subsidiaries are not subject to the general prohibition in Part XII of the Bank Act on foreign banks carrying on business in Canada. The FSRA proposes to remove this exclusion for the purposes of Part XII with the result that that foreign bank subsidiaries of Schedule I Canadian banks would now be subject to the same restrictions of carrying on business in Canada as other foreign banks.
Financial Consumer Agency of Canada – Increased Powers and Penalties
The Financial Consumer Agency of Canada, which is responsible for enforcing compliance with the consumer provisions of financial institutions legislation, would be granted enhanced supervisory and enforcement powers under the FSRA. The FCAC would be granted oversight over the new provisions in financial institutions legislation dealing with sending documents in electronic form pursuant to consumer provisions. Also, the maximum penalty for a violation of a consumer provision committed by a financial institution or a payment card network would be increased to $500,000 from $200,000.
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