Finance Canada
Reforming Canada's Financial Services Sector -- A Framework for the Future:
Annex A
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Annex A
Summary of Proposed Measures

Promoting Efficiency and Growth

Widely Held Rule

  1. The government will introduce a new definition of widely held. An investor will be permitted to own up to 20 per cent of any class of voting shares, and 30 per cent of any class of non-voting shares, of a widely held bank or demutualized insurer, subject to a "fit and proper" test. (pp. 16-17)
  1. The Bank Act will be reviewed to ensure that its provisions are adequate to preclude control by any single shareholder, or group of shareholders, under the new ownership regime. (p. 17)

Holding Companies

  1. Widely held banks and widely held insurance companies will be able to organize within a regulated, widely held, non-operating holding company. (p. 17)
  2. Where a widely held financial institution organizes under a holding company, the widely held ownership rule will apply at the level of the holding company. (p. 19)
  3. A broader range of investments will be permitted for both holding company and parent-subsidiary structures to give banks and insurance companies greater choice and flexibility in the structure of their operations. Trust companies will also be permitted to have a broader range of investments. (p. 19)
  4. The 20-per-cent limit on voting share ownership and the 30-per-cent limit on a non-voting share ownership will apply to the total direct and indirect cumulative ownership of the bank subsidiary of the holding company. (p. 20)
  5. The holding company group will be subject to consolidated capital adequacy requirements. (p. 21)
  6. Closely held banks will also be permitted to organize under a regulated holding company. (p. 22)

Merger Review Process

  1. A Merger Review Process will be applied to banks that wish to merge, where both banks have equity in excess of $5 billion. (p. 22)
  2. The Merger Review Process will require applicants to prepare a detailed Public Interest Impact Assessment (PIIA) for release to the general public. (p. 23)
  3. The House Finance Committee will be asked to consider the PIIA and to conduct public hearings into the broad public interest issues that are raised by the merger as proposed. (p. 23)
  4. Concurrent with Finance Committee hearings, the Office of the Superintendent of Financial Institutions and the Competition Bureau will review the proposal, from the perspective of safety and soundness and market competition, respectively. These reports will be made public. The Minister of Finance will then decide whether the proposal will be allowed to proceed in light of any prudential, competition and other public interest concerns. If the proposal raises concerns which can be met by imposing conditions, the merger will proceed only if these conditions are met. (p. 24)
  5. Legislation will be introduced to provide the Minister with the authority to require enforceable undertakings of applicants for mergers or acquisitions. (p. 26)

Taxation

  1. The federal government will raise with the provinces the effects of capital taxation on the financial services sector. As part of these discussions, the federal government is committing to a review of its own capital taxes. (p. 27)
  2. The government will review the issue of withholding tax rates in the context of tax treaty negotiations with other countries. (p. 27)

Fostering Domestic Competition

The New Size-Based Ownership Regime

Ownership Rules for Banks

  1. The government will implement a new ownership regime for banks based on equity. The new rules will have three classifications: small (less than $1 billion), medium ($1 billion to $5 billion) and large (greater than $5 billion). (p. 31)
  2. The large banks, those with equity in excess of $5 billion, will be widely held. (p. 32)
  3. Medium-sized banks, those with equity between $1 billion and $5 billion, will be allowed to be closely held. Closely held medium-sized banks will be required to have a public float of 35 per cent of voting shares. (p. 32)
  4. Small banks, those with equity of less than $1 billion, will have no ownership restrictions other than "fit and proper" tests. (p. 32)
  5. For existing Schedule I banks with equity under $5 billion, their widely held status will be maintained. However, there may be circumstances where it could be advantageous for one or more of these banks to consider a closely held structure. Therefore, if requested by the individual institution, the Minister of Finance will have the discretion to change the status of these banks to the new regime for banks under $5 billion. (p. 32)

Ownership Rules for Non-Bank Financial Institutions

  1. Demutualized life insurance companies will have a two-year transition period from the time of demutualization during which time they will remain widely held. No mergers among, or acquisition of, demutualized firms will be permitted during this period. (p. 34)
  2. Following the transition period, large demutualized insurers, those with equity in excess of $5 billion, will be required to be widely held. (p. 34)
  3. At the time of demutualization, insurers with equity under $5 billion will remain widely held. If requested by the institution, the Minister of Finance will have the discretion to permit them to change their status to closely held under the new regime. (p. 34)
  4. If permitted to become closely held, medium-sized demutualized insurers, those between $1 billion and $5 billion in equity, will be subject to the 35-per-cent public float requirement. (p. 34)
  5. If permitted to become closely held, demutualized insurers with equity of less than $1 billion will have no ownership restrictions other than "fit and proper" tests. (p. 34)
  6. The threshold above which trust companies, stock life insurance companies and property and casualty insurance companies must have a 35-per-cent public float will be raised from $750 million to $1 billion. (pp. 35-36)

Reduced Minimum Capital Requirements for Financial Institutions

  1. The minimum capital required to start a financial institution will be reduced from $10 million to $5 million. (p. 36)

Accommodating the Initiatives of the Credit Union Movement

  1. The government will introduce legislation to provide for a restructured, two-tier credit union system with an enhanced national presence. (p. 38)
  2. The government will work with interested credit unions to determine what legislative steps may be taken to accommodate a co-op bank structure. (p. 38)

Expanding Access to the Payments System

  1. Access to the payments system will be broadened to accommodate the entry of life insurance companies, securities dealers and money market mutual funds. (p. 40)

Empowering and Protecting Consumers of Financial Services

Ensuring Access

  1. The government will legislate key elements of the 1997 agreement with the banks on access to basic services. Banks will be required to open accounts and cash federal government cheques for any individual who meets certain basic identification requirements, provided there is no reason to suspect fraudulent activity. Neither employment nor a minimum deposit will be required to open an account. (p. 48)
  2. The government will introduce regulations requiring banks to clearly disclose their hold policies to customers. (p. 48)
  3. The government will introduce legislation requiring banks to offer a standard low-cost account that includes a certain number of non-electronic transactions, and prominently post information on their availability in branches. (p. 49)
  4. The government will require federal deposit-taking institutions to provide four months' notice of branch closures and post notice of the closing date in the affected branch. In rural areas without another financial institution within a 10-kilometre radius of the closing branch, six months' notice will be required. (p. 51)
  5. For branch closures in rural or low-income inner-city areas with only one branch of a deposit-taking institution, the new Financial Consumer Agency will be able to convene a consultation of stakeholders if there are concerns that insufficient consultation is taking place. (p. 51)
  6. The government will monitor federal deposit-taking institutions' progress toward full wheelchair accessibility. (p. 53)

Financial Consumer Agency

  1. The government will establish a new Financial Consumer Agency (FCA) to enforce the consumer-oriented provisions of the federal financial institution statutes, monitor the industry's self-regulatory initiatives, promote consumer awareness, respond to consumer enquiries, and direct the calls of consumers with complaints to the appropriate body. The FCA will consolidate and strengthen existing oversight activities currently dispersed among various federal entities. (pp. 54-55)

Canadian Financial Services Ombudsman

  1. The government will work with the industry to establish the Canadian Financial Services Ombudsman (CFSO), a not-for-profit corporation that can accept any financial institution as a member, to provide impartial, non-legalistic dispute resolution services. The CFSO will operate independently of government and financial institutions. (pp. 55-56)
  2. Banks will be required to join the CFSO. Other federal financial institutions will be required to be members of a third-party dispute resolution system. These institutions, and provincially incorporated financial services providers, will be welcome to join the CFSO. (p. 56)
  3. The CFSO will report annually to the Minister of Finance and the public on the number of complaints received, the results of its involvement and the time it takes to resolve complaints. (p. 57)

Promoting Good Business Practices and Accountability

  1. The federal government will hold discussions with the provinces and the industry to work towards enhancing transparency and disclosure of financial service sales documents and contracts. (p. 58)
  2. In order that the government be able to respond to disclosure problems as new products and services emerge, it will amend the financial institution statutes to provide for regulation-making authority governing disclosure. (p. 58)
  3. The government will regulate the disclosure of risks associated with index-linked deposit products offered by federal deposit-taking institutions. (p. 58)
  4. The existing Bank Act provision on tied selling, which prohibits a bank from coercing a customer to purchase a product as a condition of obtaining a loan, will be extended to prohibit a bank from coercing a customer to purchase a product as a condition of obtaining any other product. (p. 60)
  5. The government will require banks to disclose to consumers the fact that coercive tied selling is illegal, prior to entering into a combination of financial transactions. (p. 60)
  6. Federal financial institutions with equity in excess of $1 billion will be required to publish annual Public Accountability Statements that describe an institution's contributions to the Canadian economy and society. (p. 61)
  7. The government will undertake a comprehensive program of data collection and analysis to ensure that there is adequate information on the financing needs of small and medium-sized enterprises (SMEs) for effective public policy development:
  • Statistics Canada will be given the mandate to collect and publish data on the supply of debt and equity financing to SMEs. (p. 62)
  • Industry Canada will be given the mandate to establish a dedicated SME Finance Group to analyze the Statistics Canada data, conduct other surveys and undertake continuing research on SME financing issues. (p. 62)
  • Industry Canada will report annually to the House of Commons Standing Committee on Industry regarding the state of SME financing in Canada. (p. 62)

Improving the Regulatory Environment

  1. The government will change the mandate of the Canadian Payments Association (CPA) to better define the Association's role in the payments system and to establish its responsibility to advance the public interest. The CPA will be required to facilitate, rather than plan, the development of the system. (p. 69)
  2. The CPA Board will be expanded from 11 to 15 members. The Board will consist of 11 CPA members (5 bank, 6 non-bank), 3 independent directors and 1 director from the Bank of Canada. (p. 69)
  3. The CPA's Stakeholder Advisory Council will be enshrined in the CPA Act. (p. 69)
  4. The Minister of Finance will have a maximum of 30 days following receipt of a new or amended CPA rule to disapprove it, if it is found contrary to the public interest. (p. 70)
  5. The Office of the Superintendent of Financial Institutions (OSFI) will no longer be required to perform an examination of and report annually on CPA activities. (p. 70)
  6. The Minister of Finance will have the authority to designate other payments systems for oversight. (p. 70)
  7. The Minister of Finance will have the power to issue a directive to the CPA and other designated systems to require a change in a by-law, rule or operating practice which the Minister determines to be contrary to the public interest. (p. 70)
  8. The Canada Deposit Insurance Corporation's standards by-laws will be updated and a number of changes will be put in place to streamline the associated administrative processes. (p. 73)
  9. OSFI will have additional supervisory powers that would increase the consequences for any institution that fails to meet certain regulatory or supervisory requirements, in particular:
  • A new authority that would allow the Superintendent to remove directors and senior officers from office in certain circumstances, such as instances of misconduct.
  • A system of administrative money penalties for financial institutions and individuals that fail to comply with undertakings and cease and desist orders, or violate financial institution legislation and regulations.
  • Measures to enhance the Superintendent's power to deal with related party transactions of financial institutions. (p. 74)
  1. OSFI will introduce a new notice-based approval process for many of the applications requiring the Superintendent's approval. Applications will be automatically approved 30 days following their receipt provided that the Superintendent does not raise concerns, seek further information or require a delay. (p. 75)

 

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