On August 12, the Department of Finance launched the third phase of its review (the Review) of the Bank Act, the Insurance Companies Act, and the Trust and Loan Companies Act (the FI Acts). In our April 2023 bulletin entitled 2025 review of the financial sector statutes: proposed changes for consideration, we noted that the FI Acts were substantially overhauled in 1992 and again in 2001, but since that time most changes have been very targeted in nature. Accordingly, we identified a number of provisions that we argued should be revisited. Many of those suggestions have been addressed in the Review.
The first phase of the Review, conducted in late 2023, considered how emerging trends in the financial sector could impact consumers, national security, fair competition, and the safety and integrity of the financial system, while the second phase, in early 2024, focused on measures to strengthen competition in the financial sector and uphold stability and security.
The third phase is divided into five themes: (1) supporting a competitive market structure and expanding consumer choice, (2) enhancing consumer protections, (3) modernizing the financial sector framework, (4) adapting to geopolitical risks, and (5) upholding world-class regulation. While many of the proposals in the third phase are light on specifics, the broad themes may provide insight into the Department of Finance's regulatory priorities.
Supporting a competitive market structure and expanding consumer choice
The measures in this category relate largely to issues affecting consolidation and ownership of federally regulated financial institutions (FRFIs), along with measures affecting federal credit unions (FCUs) and auto leasing.
The Department of Finance is considering measures to prohibit the acquisition of control of a large bank (defined as a bank with equity of $12 billion or more) by another large bank, subject to prudential or financial stability exemptions, and is seeking views on whether other exemptions should be considered. We are uncertain why additional measures are necessary given that the Bank Act only permits such an acquisition to be implemented using an amalgamation agreement which requires prior approval of the Superintendent of Financial Institutions before being approved to shareholders and subsequent approval by the Minister of Finance (and a previous Minister has already rejected two such mergers as not being in the public interest).
The Department is also considering measures to modernize the application process for the entry, amalgamation, and change in ownership of FRFIs, such as requiring public consultations. In addition, as part of the Review, the Department of Finance is seeking views on how it could work with stakeholders to encourage the growth and expansion of FCUs. Finally, the Department of Finance is seeking views on allowing FRFIs to engage in the leasing of light motor vehicles to consumers, subject to measures that minimize the negative impact on the current market structure (like requiring the agreement of the auto manufacturer).
Enhancing consumer protections
The measures in this category relate largely to the prevention of financial fraud and the protection of consumers in the event of bank branch closures. On financial fraud, the Department of Finance is considering whether banks should be required to prevent or delay transactions that are believed to be fraudulent. The Department of Finance is also considering the introduction of a maximum liability threshold for account holders, as well as requiring banks to have policies and procedures to detect fraud.
With respect to bank branch closures, when banks decide to close branches, or to cease teller-based activities at a branch, they are currently required to provide written notice to impacted consumers and to the Financial Consumer Agency of Canada (FCAC) within timelines set out in legislation. The Department of Finance is seeking views on requiring banks that intend to close a branch or to cease teller-based activities at a branch to include detailed notices to the public and to the FCAC, as well as to expand data-reporting requirements for banks with respect to their branch network.
The Department of Finance is also seeking views on increasing the amount of funds immediately available when cashing a cheque in person, and setting out how much should be immediately available when cashing a cheque by other means (for example, using an ATM or through a mobile application), as well as potentially lowering maximum cheque hold periods. It is also considering whether the maximum length of time for cheque holds should depend on the amount of funds deposited or the manner by which cheque funds are deposited.
Modernizing the financial sector framework
The measures in this category relate largely to updating corporate governance rules and statutory thresholds.
In our April 2023 bulletin, we advocated for increasing the equity threshold at which FRFIs are required to have shares, with at least 35% of the voting rights listed and traded on a recognized stock exchange. As part of the Review, the Department of Finance is now considering whether to update this threshold and is seeking views on what the threshold should be.
The Department of Finance is also considering measures to increase limits on specialized financing activities, as well as measures to update limits on investment powers (e.g., commercial lending) consistent with the recommendations made in our April 2023 bulletin.
Other measures under consideration address restrictions on interlocking directorates within the financial sector and enhanced reporting in the financial transactions application process. We are uncertain why additional restrictions on interlocking directors are necessary since the requirement to establish conflict of interest polices established in 1992 has been very effective and at that time replaced certain restrictions on interlocking directors.
Adapting to geopolitical risks
The measures in this category relate largely to enhanced oversight of financial sector risks related to national security. In particular, the Department of Finance is considering the creation by statute of a committee to facilitate consultations among members on how to address risk related to integrity and security and to provide for the exchange of information with necessary safeguards.
The Department of Finance is also considering whether to expand the compliance authority of the Office of the Superintendent of Financial Institutions to include an act that may threaten the integrity or security of an FRFI, as well as expanding the authorities of the Minister of Finance and the Superintendent of Financial Institutions that refer to an FRFI's policies and procedures to protect itself against threats to its integrity or security to include a reference to the adherence by an FRFI to these policies and procedures.
Upholding world-class regulation
The measures in this category relate largely to harmonizing regulations and enhancing coordination between federal, provincial, and territorial regulators. While specific details are light, the Department of Finance has indicated that it is considering measures like periodic announcements on forthcoming regulatory actions, the development of a forum for coordinating on international issues and improved sharing of integrity and security risks.
Notably, the Review also highlights the Department of Finance's intention to develop a regulatory approach to artificial intelligence (AI) in the financial sector. As we noted in a previous bulletin, a piecemeal combination of existing human rights law, privacy law, tort law and intellectual property law partially regulates the AI industry. In collaboration with an AI expert, the Department of Finance plans to consult a broad range of domestic and international stakeholders in its effort to identify and assess the potential risks of AI and to develop a federal strategy for AI in the financial sector.
Next steps
Submissions for the third phase of consultation are open until September 11, 2024, and may be submitted to the Department of Finance.
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