Strengthening Canada’s Financial Sector: Phase 3 of the Federal Consultation Emphasizes Competition and Consumer Interests

On August 12, 2024, the Department of Finance released its Consultation on Proposals to Strengthen Canada’s Financial Sector, the third phase of the federal government’s ongoing review of Canada’s financial institutions laws. The accompanying media release notes that this phase builds on feedback from the earlier phases. Comments relating to this phase of the consultation may be submitted until September 11, 2024.

On the basis of the feedback received from phases one and two, a number of “potential proposals” have been identified. These fall under five headings:

• Competition and consumer choice;
• Consumer protection;
• Financial sector framework modernization;
• Geopolitical risk adaptation; and
• World-class regulation.

The specific proposals under each of the above are discussed below. Highlights include a legislated ban on large bank consolidations, a renewed commitment to encourage the growth of federal credit unions, better access by small and medium-sized banks to brokered deposits, implementing standards for protecting consumers from financial fraud, enhanced requirements for bank branch closures and enhancements to the ability of the Minister of Finance and Superintendent of Financial Institutions to issue directives to banks in relation to their internal policies and procedures. There is also a commitment to greater transparency with respect to the government’s regulatory initiatives and a commitment to provide leadership on AI issues in the financial sector.

Competition and Consumer Choice

One of the primary goals of the process is to support competition that benefits consumer choice. Proposed policies under this heading include:

• Enacting legislation to prohibit “large bank” consolidations, subject to prudential or financial stability exemptions (with respect to which the Department of Finance is seeking input). Large banks are those with over $12B in equity. This is a somewhat curious proposal, as such transactions are already subject to the approval of the Minister, in her discretion.
• Modernizing the ministerial application process applicable to FRFI incorporations, amalgamations and ownership changes to (i) require applicants to hold public consultations where their applications raise public interest concerns (e.g. competition issues or regional issues) and (ii) clarify that the Minister has the authority to consider the applicant’s overall regulatory compliance record, both foreign and domestic, particularly such as tax and anti-money laundering compliance, and to impose terms, conditions or undertakings with respect to employment. This is also a somewhat curious proposal, as the Minister can already require such consultations and consider such compliance matters as part of her overall assessment of the application.
• Amending the Bank Act to ensure that large banks cannot exercise control over deposit broker subsidiaries in a way that “unduly limits” access to brokered deposits by small and medium-sized banks (SMSBs).
• Working with federal and provincial regulators and policymakers to encourage the growth of federally-regulated credit unions beyond the 3 that currently exist.
• Allowing banks and other FRFIs into the automobile/light vehicle leasing market (in a manner that does not negatively disrupt the existing market).

Consumer Protection

Ensuring that the growth of digital financial products and services, and the increasing complexity of the market in general, do not interfere with consumer access or consumer protection is another theme of the Department of Finance’s initiative. Proposed policies that have this focus include:

• Preventing financial fraud that is increasingly enabled by artificial intelligence (AI) and other new technologies, by requiring banks to be more proactive in querying or delaying suspicious transactions in order to prevent financial fraud. One potential measure is to allow bank customers to disable automated wire transfer features on mobile apps, which are convenient for some, but which can facilitate financial fraud if an account is compromised.
• Establishing standards that banks would be required to meet with respect to protecting consumers against financial fraud, potentially including the introduction of a maximum liability threshold for “unauthorized transactions”, a term that is to be defined as part of this process, and also a requirement that banks collect and report “anonymized, aggregated data related to the nature of fraud and scams targeting their clients”.
• Enhancing requirements relating to branch closures, including the provision of a detailed rationale for the decision to close a branch (including data on volume and value of transactions at the branch, etc.) and mandatory waiver of customer account transfer fees in certain circumstances.
• Expanding data-reporting requirements respecting bank branch networks, including statistics on volume and value of transactions and disclosure of branch openings and closings.
• Clarifying whether, and to what extent, the rules requiring acceptance of new retail deposit customers apply to deposit account services offered via digital channels rather than at physical locations.
• In light of cost-of-living increases and technological improvements, shortening cheque clearing hold periods and/or increasing the minimum funds immediately available when a cheque is cashed in person from the current amount of $100. Whether there should be a similar requirement for immediate availability of funds in the cases of ATM and mobile app deposits will also be considered.

Financial Sector Framework Modernization

Corporate governance best practices are the focus of the third section of the consultation, which includes proposals designed to respond to new developments and changing economic conditions. Proposed policies include:

• Restricting or prohibiting “interlocking directorates” in financial firms, which arise when a director of one firm is also an employee, executive, board member, owner, partner, etc., of another financial industry firm.
• Updating the public holding requirement threshold, which requires FRFIs with equity value of $2 billion or more to list at least 35 percent of their voting shares on a recognized stock exchange. The $2 billion figure, established in 2007, is to be reconsidered as part of the consultation process.
• Updating various other numerical thresholds in Canada’s financial institutions statutes, potentially by shifting them to OSFI guidelines that can be more easily updated in future. Thresholds under consideration include the limits on investment powers and specialized financing activities as well as ownership restrictions on farmland, timberland, etc., in the Insurance Companies Act.
• Improving the financial transactions application process to ensure that the Minister of Finance and Superintendent of Financial Institutions are responsive and clear about application status and approval timing. A requirement to provide a written update after 120 days, on request, is under consideration. Such approvals have recently been taking much longer to obtain that was historically the case.

Geopolitical Risk Adaptation

The fourth element of the consultation centres on proposed responses to geopolitical risks posed by hostile forces that threaten Canada’s national security as well as the safety and privacy of individual Canadians. Proposals under consideration include:

• Establishing a statutory formal structure to coordinate Canada’s response to these geopolitical risks by facilitating consultations among financial regulators and security and intelligence agencies. This committee, which would be distinct from the existing Financial Institutions Supervisory Committee, would also make policy recommendations to the Minister of Finance.
• Extending the authority of the Superintendent of Financial Institutions and Minister of Finance to issue compliance directives relating to a FRFI’s “affairs” (internal policies and governance) and not solely, as has until now been the case, to its “business”. While FRFIs are already required to take measures to defend themselves against integrity and security threats (including foreign interference), the Superintendent and the Minister of Finance have lacked statutory enforcement powers in this area.

World-class Regulation

The consultation paper concludes with proposals relating to the Canadian regulatory system in general, including the following:

• Encouraging greater collaboration among federal, provincial and territorial governments in policy and rule development and administrative processes, as appropriate.
• Improving regulatory predictability, including by improved public communication of likely forthcoming regulatory actions, publication of impact statements and sharing information about integrity and security risks with industry and provincial governments, as well as developing a venue for the collaborating on international issues.
• Ensuring that the federal government provides leadership on financial sector AI, helping to ensure that its positive potential is realized while mitigating associated risks. The consultation is seeking guidance on where the Department of Finance should focus its initial efforts in this area.

Next Steps

The consultation will be open to submissions until September 11, 2024. Directions for prospective commenters are provided in the media release. A submission, or any part thereof, may be made on a confidential basis if desired.

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