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Ottawa, February 14, 1997
1997-012

Government Introduces New Legislation for Financial Institutions and Announces Decision to Allow Foreign Bank Branching

Related document:

• Key Policy Proposals for Federal Financial Institutions.

Secretary of State Doug Peters today introduced legislation to strengthen consumer protection, ease the regulatory burden on financial institutions, and fine-tune certain provisions in the financial institutions statutes.

Mr. Peters also announced a new foreign bank entry regime to be implemented through separate legislation to be made public before the end of the year. This new regime will allow foreign banks to branch directly into Canada.

The legislation tabled in the House of Commons today reflects measures proposed in the June 1996 consultation paper: 1997 Review of Financial Sector Legislation: Proposals For Changes, as amended following extensive consultations involving a wide range of stakeholders, the Standing Senate Committee on Banking, Trade and Commerce, and the House of Commons Standing Committee on Finance.

Mr. Peters said: "We have listened closely during these consultations and have changed the proposals outlined in the June 1996 consultation paper where warranted."

To better protect consumers of financial services the government will: proceed with regulations governing privacy; enhance cost-of-credit disclosure; and introduce tied-selling safeguards. In addition, after discussion with the government, banks will take steps to improve access to basic financial services for low-income individuals and improve dissemination of information about fees.

The new legislation also includes a number of changes to update and fine-tune financial institutions regulation. Banks that do not take retail deposits will be allowed to opt out of Canada Deposit Insurance Corporation coverage, more flexibility will be provided to financial institutions seeking to enter into joint venture arrangements, and access to capital for mutual insurance companies will be enhanced.

"The legislation to implement these measures will be given high priority", said Mr. Peters. "We are committed to moving the legislation forward as rapidly as possible."

"Regarding foreign entry, the new direction for foreign banks will bring important benefits to Canada. Foreign banks have expressed concerns over the requirement to establish Canadian subsidiaries to carry on business in Canada. Therefore, branching will encourage new banks to enter the Canadian marketplace and allow existing foreign banks greater opportunity to compete. At the same time, prudential measures will be developed to ensure that the Canadian system remains strong," said Mr. Peters.

Mr. Peters added, "I want to thank the Senate Banking and House Finance Committees, and all those who participated in the 1997 review. What I am proposing to do will ensure that the best interests of consumers and the financial sector are served."

The attached backgrounder provides additional detail on the initiatives outlined above.

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For further information:

Key Policy Proposals for Federal Financial Institutions

I. Key Provisions of Bill Amending Certain Laws Relating to Financial Institutions

Strengthening Consumer Protection

Privacy Protection

Consumers have expressed a desire for better privacy protection in their dealings with financial institutions. Accordingly, the bill provides the authority to require financial institutions to establish procedures governing the collection, retention, use and disclosure of customer information; to implement complaints-handling procedures; and to report annually on complaints.

Cost-of-Credit Disclosure

Following up on the recent federal-provincial agreement on harmonization of cost-of-credit disclosure regulation, the disclosure provisions in the financial institutions legislation will be enhanced. These changes will result in improved and uniform disclosure practices throughout the country.

Tied Selling

Concerns have been expressed about the potential for financial institutions to exert undue pressure on consumers when selling financial products. In response, financial institutions will be asked to adopt a policy on tied selling and establish procedures for dealing with complaints in this area. The major banks have internal ombudsmen to look at complaints. In addition, the banking industry ombudsman, Michael Lauber will deal with and report publicly on consumer complaints about tied selling. This will facilitate monitoring of banks' compliance with their policy. In addition, the bill includes an amendment to the Bank Act to prohibit coercive tied selling, which would be proclaimed if it proved necessary.

Easing the Regulatory Burden

Foreign Bank Entry

Several changes to reduce regulatory burden will be made to the provisions governing the operations of foreign banks in Canada. The key changes are:

1. Regulated foreign banks which own a Schedule II bank will no longer be required to own other financial institution subsidiaries through the Schedule II bank.
2. "Near banks" (entities which do not generally take deposits, are not regulated as banks in their home jurisdiction, but provide one or more banking-type services) which have received approval under the Bank Act to enter the Canadian market will no longer need to seek further approvals, provided that their unregulated activities do not include taking deposits.
3. "Near banks" will be permitted to own any non-bank financial institution.

Deposit Insurance Opt-Out

Banks that do not take retail deposits will be permitted to opt out of Canada Deposit Insurance Corporation (CDIC) coverage, provided they are not affiliated with another CDIC member. As a result, these institutions will no longer have to fulfil the reporting requirements associated with CDIC membership.

Subsidiary Requirements

To reduce operating costs, the legislation will permit financial institutions to carry on both information processing and specialized financing activities in-house. Ministerial approval will be required to undertake these activities.

Self-Dealing Regime

A number of changes are proposed to streamline the self-dealing regime. These involve streamlining the operations of the Conduct Review Committee, narrowing the range of related parties, and allowing subsidiaries of a federal financial institution to transact with each other.

Fine-tuning the Legislation

Joint Ventures

New regulations will provide more flexibility to financial institutions seeking to enter into joint venture arrangements. The requirement that the eligible joint venture be controlled by a financial institution will be removed.

Access to Capital for Mutual Insurance Companies

The government is proposing a number of changes to enhance access to capital for mutual insurance companies. They will be permitted to issue participating shares. In addition, the demutualization regime will be extended to apply to all mutual life companies, and added flexibility will be provided. Large mutual insurance companies will be required to remain widely-held after conversion to a stock company.

The Superintendent of Financial Institutions will have the authority to exempt companies on specific aspects of the demutualization regime, on a case-by-case basis. The Minister of Finance will have the authority to exempt companies in financial distress from any aspect of the demutualization process. Details will be set out in regulations to be developed in consultation with industry participants over the coming months.

II. Steps to Improve Access and Information on Fees

Access to Basic Financial Services

The government committed in the consultation paper to working with financial institutions and consumer representatives to improve access to basic financial services for low-income Canadians. After discussion, the major banks have agreed to ensure that:

1. Only two (decreased from three) pieces of signed identification (I.D.) will be required to open accounts or cash cheques, with photo identification desirable but not mandatory (the Canadian Bankers' Association's (CBA) July 1996 I.D. requirements provide a list of typically acceptable I.D.). Sponsorships from responsible customers known to the branch will be accepted.
2. Bank policies on "holding" or "freezing" deposited funds will be clearly explained to customers.
3. Employment will not be a condition of opening a bank account.
4. Minimum deposits will not be required to open a bank account.
5. Staff will be trained to follow their bank's I.D. and hold policies and to be sensitive to the needs of low-income individuals.
6. Staff will be reminded of the need for all customers to be treated with fairness and respect.
7. More information and training, developed in conjunction with national and local community groups, will be provided to low-income groups to help them become more knowledgeable about and comfortable with using banking services.

Where these provisions are not already in place, the banks will be implementing them throughout their branches as quickly as possible.

Simplifying and Improving Dissemination of Information about Fees

The major banks will ensure that clear and understandable information about all products and services, including low-cost banking options and ways of minimizing service fees, is readily available in publicly-accessible areas. They will ensure that all branch managers and staff are reminded to make such literature readily available in the branch.

The major banks are working with Industry Canada to provide, via Industry Canada's Internet site, information which will assist Canadians to determine which financial services account or plan would be most suitable for their needs and minimize their costs. In addition, the banking industry is producing a generic pamphlet to assist individuals in identifying and listing their banking needs and habits, and evaluating the most appropriate account for those needs. This will be made available at no cost through the CBA.

III. Foreign Bank Entry Policy Review

While the government is proposing several modifications to foreign bank entry requirements at this time, it will also develop a new framework for the entry of foreign banks into Canada. A key part of this framework will be a branching regime.

The main characteristics of the branching regime would be as follows:

1. The branches of foreign banks would not be allowed to take retail deposits.
2. The ability to operate branches in Canada would generally apply to foreign banks with at least $25 billion in assets on a world-wide basis. This limit would permit most foreign banks operating in Canada as subsidiaries to operate as branches.
3. The Superintendent would have the power to require the maintenance of assets in Canada with an unrelated approved financial institution to cover liabilities of the branches.
4. A capital equivalency deposit of at least 5% of branch liabilities would have to be maintained at all time with a recognized financial institution.
5. The foreign bank would have to be regulated on a consolidated basis in its home jurisdiction in line with internationally-recognized regulatory standards in a manner acceptable to the Superintendent, and appropriate co-operative regulatory arrangements would have to be in place.
6. The branches would be subject to appropriate Canadian reporting, auditing and taxation requirements.
7. In cases of branch liquidation, the Superintendent could seize all the assets of the foreign bank in Canada to satisfy the obligations of the Canadian branches.

In addition to developing the branching regime, the government will review all other aspects of foreign bank entry policy. Until this review is completed, foreign companies offering a limited range of financial services and which now operate unregulated in Canada, as well as new entrants that meet certain criteria, will be allowed to carry on activities without being regulated as a financial institution.

The criteria will be as follows:

1. The company will not be allowed to accept deposits.
2. The assets of the Canadian operations will have to remain below $200 million.
3. The company will be required to disclose to creditors and customers that it is not regulated as a financial institution in Canada.

A final decision on the status of foreign companies currently operating in Canada without being regulated as financial institutions, and of any companies established during this interim period, will be taken once the branching regime and the broader review of the foreign bank entry policy have been completed. It is expected that, once the branching regime is in place, a number of these foreign companies will take advantage of the regime by converting their Canadian activities to branch operations.