On September 16, 2016, Canada's Department of Finance (Finance Canada) published for comment the Deposit Insurance Review (Consultation Paper). The Consultation Paper ensues from the Budget 2014 announcement of the launch of a comprehensive review of Canada's deposit insurance framework to ensure that the framework provides adequate protection for the savings of Canadians. The consultation period runs until November 30, 2016, and written comments can be submitted here.
The deposit insurance review is guided by three broad policy objectives:
- Protect depositors: The deposit insurance framework should protect depositors by ensuring that it provides an adequate scope and level of coverage
- Support financial stability: The deposit insurance framework should contribute to the stability of the financial system in Canada and act as a disincentive for bank runs to develop
- Promote efficient and competitive financial services: The deposit insurance framework should encourage market discipline and should not act as an impediment to competition
The Consultation Paper notes that, overall, the current framework administered by the Canada Deposit Insurance Corporation (CDIC) meets the above objectives and therefore no major changes are required. In particular, it concludes that the existing coverage limit of C$100,000 per eligible deposit category remains appropriate.
On August 26, 2016, Finance Canada published a consultation paper entitled Supporting a Strong and Growing Economy: Positioning Canada's Financial Sector for the Future, which is vague on specific proposals for amendments to the legislative or regulatory framework of the federal financial sector (see our August 2016 Blakes Bulletin: Canada's Financial Sector: Legislation for the Future). Unlike that consultation paper, this one contains a number of detailed proposals that could improve the current deposit insurance framework. The federal government is soliciting feedback on a number of specific questions relating to those proposals.
The three areas that the Consultation Paper has identified as meriting consideration are: streamlining deposit categories; updating the scope of eligible deposits; and addressing the complexity of trusts. The specific proposals in respect of each area are outlined below.
STREAMLINING DEPOSIT CATEGORIES
Mortgage Tax Accounts: Under the current framework, deposits held in mortgage tax accounts are classified as a distinct insured deposit category. However, given the decline in the use of mortgage tax accounts, the government is considering eliminating this category. Funds held in these accounts could still receive coverage under another eligible deposit category, but would no longer have a separate $100,000 coverage limit.
On this point, the Consultation Paper poses the following question: What are your views on removing the mortgage tax account as a deposit category?
Registered Products: Currently, only Registered Retirement Savings Plans, Registered Retirement Income Funds and Tax-Free Savings Accounts are treated as separate categories of eligible deposits, while other registered products such as Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs) are included in the more general trust or individual coverage categories.
The government is considering adding two new eligible deposit categories for RESPs and RDSPs to ensure that each registered product is equally covered up to the C$100,000 limit. As an alternative, the government is considering creating a separate category with a higher limit that includes all registered products, however, the Consultation Paper notes that this introduction of multiple limits would add a layer of complexity to the existing framework.
On this point, the Consultation Paper poses the following question: What are your views on adding RESPs and RDSPs as new deposit categories or the amalgamation of all registered products into one deposit category?
UPDATING THE SCOPE OF ELIGIBLE DEPOSITS
Traveller's Cheques: Although traveller's cheques are currently classified as an eligible deposit, CDIC member institutions no longer issue these instruments and instead offer third-party traveller's cheques that are not covered by deposit insurance. The government is therefore considering simply removing traveller's cheques from the types of eligible deposits.
On this point, the Consultation Paper poses the following question: What are your views on removing traveller's cheques as eligible deposits?
Products with Terms Greater than Five Years: Under the current framework, only term deposits with original terms to maturity of five years or less are classified as eligible deposits. However, in recent years, the popularity of term deposits, including Guaranteed Investment Certificates, with periods longer than five years has risen. The government is considering removing the five-year limit for this type of deposit to better reflect current trends.
On this point, the Consultation Paper poses the following questions:
- What are your views on extending deposit insurance coverage to term deposits with terms of maturity greater than five years?
- Should there be a maximum term?
Foreign Currency Deposits: Under the current framework, only deposits held in Canadian currency are eligible deposits. However, given that foreign currency deposits are widely held by Canadians, the government is considering extending the scope of eligible deposits to include foreign currencies. The Consultation Paper notes that this would significantly increase CDIC's exposure.
On this point, the Consultation Paper poses the following questions:
- What are your views on the inclusion of foreign currency as an eligible deposit?
- Should only certain foreign currencies be insured? If so, which currencies should be covered and why?
Temporary High Balances: The government is considering extending coverage to temporary high balances that may result when a natural person transitions through a major life event (such as the sale of a home). The Consultation Paper notes several challenges in implementing this coverage that would increase the CDIC's exposure and add complexity to the current structure. These include differentiating between personal and corporate depositors and the necessity of adjusting coverage to meet shifting external factors.
On this point, the Consultation Paper poses the following questions:
- What are your views on extending deposit insurance coverage to include temporary high balances?
- If you would like to see coverage extended to temporary high balances, which transactions would you propose be covered (e.g. real estate, insurance settlement, inheritance)? How would these transactions be identified? What would be the appropriate definition of "temporary" (e.g. 45 days, 90 days, 180 days)?
ADDRESSING THE COMPLEXITY OF TRUSTS
Disclosure Requirements: Currently, trusts are a deposit insurance category that allows each beneficiary to receive separate coverage of up to C$100,000, subject to the trustee providing and updating specified information about the trust for inclusion on the CDIC member institution's records. However, trustees are not required to provide beneficiary information on a regular basis and the CDIC member institutions are not required to report this information to the CDIC. In addition, certain professional trusts are exempted from disclosing beneficiary information.
Given the importance of beneficiary information to the accuracy and speed of deposit insurance payouts, the government is seeking views on how to improve the quality of the information available to CDIC.
Brokered Deposits: The Consultation Paper considers two types of brokered deposits. The first is where the broker acts as agent and the amount deposited is considered part of the client's C$100,000 limit in the individual category of deposit insurance. The second is where the broker acts as trustee and the client is the beneficiary of the amount deposited. In the latter case, the broker may be reluctant to provide beneficiary information to the CDIC member institutions who are potential competitors of the broker. The government is considering ways to improve disclosure so that beneficiaries of brokered trustee deposits retain their coverage.
On the above two points, the Consultation Paper poses the following questions:
- In your view, how can the quality of beneficiary information be improved?
- In your view, how should brokered deposits be treated under the deposit insurance framework?
- Are beneficiaries aware of the consequences of their broker not providing beneficiary information?
- Are the reporting and record keeping requirements for professional trusts clear?
FURTHER CONSIDERATIONS
One important issue that the Consultation Paper fails to address is that, in order to qualify as an eligible deposit, the deposit must be received or held by the CDIC member institution "in the usual course of the deposit-taking business of the institution". This is one of the most difficult elements to interpret under the current framework and the Consultation Paper does not propose to clarify it. In particular, while the review aims to evaluate the types of financial products that are covered to ensure that Canada's deposit insurance framework remains relevant in today's marketplace, as we continue to move further away from deposits taken over the counter in a physical location, failure to address this issue may leave a gap in coverage that will not be clear to customers.
COMMENT PERIOD
As noted above, the consultation period runs until November 30, 2016 and written comments can be submitted here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
