Finance Canada Consults On Changes To Financial Institution Statutes

The Department of Finance has launched the third phase of its review of Canada's federal financial institutions statutes, concerning proposed changes to the Bank Act, Insurance Companies Act, Trust and Loan Companies Act and related legislation. The public Consultation Paper was published on August 12, 2024 and builds on two previous financial sector consultations by the Department that were advanced in 2023, relating to national security and strengthening competition in the financial sector.

Overall, the proposals respond to recent financial institution mergers, suggest banks should take on more responsibilities during the transition to digital banking, and continue the dialogue around national security risks. Some of the more significant proposals impacting financial services are summarized below.

Fostering Competitiveness

Additional competition in the financial sector encourages innovation, reduces costs for consumers, and improves financial services overall. With these stated policy objectives, the Department is requesting feedback on:

1. Preventing consolidation among large banks (with equity of $12 billion or more), by prohibiting the acquisition of control of a large bank by another large bank and their amalgamation, subject to prudential or financial stability exemptions. This proposal is akin to the current requirement that large banks must be widely held.
2. Minor changes to the Ministerial approval application process, such as requiring applicants to hold public consultations, if the application raises material public interest considerations, and clarifying that the Minister of Finance can consider compliance with other laws (such as taxation or anti-money laundering), and impose terms on employment aspects.
3. Restricting banks from exercising control over their deposit broker subsidiaries, so that they would not unduly limit small/mid-sized bank access to brokered deposits.
4. Options to encourage the growth and expansion of Federal Credit Unions, recognizing that the federal continuance and acquisitions processes involve a number of steps at both the provincial and federal levels.
5. Permitting federal institutions to engage in the leasing of light motor vehicles to consumers, subject to requiring the agreement of the auto manufacturer.

Enhancing Consumer Protection in Banking

There are several proposals aimed at protecting Canadians as they shift to more electronic banking and digital products, with views requested on:

1. Whether banks should be required to prevent or delay transactions they believe to be fraudulent and/or associated with a scam and, if so, under what circumstances.
2. Requiring banks to give consumers the ability to turn off or adjust account capabilities to prevent fraud, such as the ability to complete wire transfers.
3. Mandating policies and procedures for banks to detect fraud and scams, in order to support a clear line of sight into options to protect consumers and data regarding the extent and magnitude of financial fraud, including whether this information should be reported to the Financial Consumer Agency of Canada.
4. Building on the Bank Act's $50 maximum liability for unauthorized credit card transactions and the Canadian Code of Practice for Consumer Debit Card Services, banks could have liability for unauthorized transactions, regardless of the means by which account funds were accessed (for example, card-based transaction, wire transfer, or electronic funds transfer). Feedback is requested on what could be considered an unauthorized transaction and related maximum liability thresholds.
5. Expanded public notice requirements and a community impact assessment concerning proposed bank branch closures, including options to reduce/waive service fee costs for customers moving to another nearby bank, together with annual data reporting by all banks concerning their branch network.
6. Whether the identification rules for opening deposit accounts at a bank's physical point of service (i.e., a branch) should also apply when a bank offers to open an account electronically.
7. Increasing the amount of funds immediately available when cashing a cheque in person or when cashing a cheque by other means (for example, ATM or through a mobile application) and lowering maximum hold periods, likely reflecting the upcoming introduction of 'real time rails' by Payments Canada.

Proposals Affecting Banking and Insurance

Feedback is requested on several proposals relating to all federally regulated financial institutions (FRFIs), including:

1. Restricting or prohibiting directors from holding a business interest in, or being an employee, executive, partner, owner, or member of the board of directors of, a second entity within the financial sector.
2. Adjusting the thresholds for the public holding requirement, which currently requires FRFIs with $2 billion in equity to have 35% of their voting shares publicly listed on a recognized stock exchange.
3. Introducing a service standard for the Department of Finance to provide, upon request, a written update to an applicant if no decision has been made within 120 days of receiving a complete application, to match Canada's international trade commitments.
4. Establishing a federal committee to enhance the oversight of financial sector risks related to integrity and security, including national security, and provide authority for the exchange of information among member agencies, with necessary safeguards.
5. Expanding the authorities of the Minister of Finance and Superintendent of Financial Institutions to require a FRFI to adhere to its policies and procedures concerning threats to its integrity or security, and expanding OSFI's direction of compliance authority to include an act that may threaten the integrity or security of a FRFI or its affairs.
6. Options to improve regulatory predictability and understanding of regulatory actions and impacts, such as coordinated announcements, impact statements, a forum for collaborating on international issues and sharing information about integrity and security risks.

The Department of Finance also noted its preliminary work on the safe and responsible use of Artificial Intelligence in the financial sector, and requested views on which aspects should be prioritized in this area.

Next Steps

All submissions on the Consultation Paper are requested by the Department of Finance by September 11, 2024.

The federal Budget Implementation Bill C-69 extended the "sunset date" for legislative review of the financial institution statutes to June 30, 2026, from the previous date of June 30, 2025. Considering the short timeline of this consultation, some of these legislative initiatives may be introduced in earlier legislation.

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