The Canadian Federal Budget and Financial Institutions

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The recently published federal budget (titled “Canada’s Economic Action Plan 2013”) included high level guidance regarding the Government’s priorities for the regulation of financial institutions, services and markets. The details of how these areas will be regulated will become clear only when the applicable legislation and regulations are introduced.  Below is a brief overview of the main points of emphasis in the budget as they apply to financial institutions.

Developing a Financial Consumer Code

The Government intends to develop a “comprehensive financial consumer code” that would consolidate financial consumer protection rules that now appear in various legislation and related regulations. The code would be administered by the Financial Consumer Agency of Canada (FCAC). We can expect consultation with stakeholders to begin in 2013.

Domestic Systemically Important Banks

In March, 2013, the Office of Superintendent of Financial Institutions (OSFI) issued an advisory designating Canada’s six major banks as domestic systemically important banks (DSIBs). Due to the potential impact that the failure of a DSIB could have on the domestic economy, each DSIB will be subject to a risk-weighted capital ratio requirement equal to a 1% common equity surcharge as well as enhanced supervisory and disclosure requirements.

The budget also described the Government’s intention to implement a “bail-in” regime for DSIBs, including provision for the “very rapid conversion of certain bank liabilities into regulatory capital” in the event a DSIB’s viability is threatened. Following questions regarding the meaning of “certain bank liabilities”, the Department of Finance has clarified that it is referring to regulatory capital of the bank (which includes preferred shares and subordinated debt) which will be converted into common equity of the bank in case of a “bail-in”.  Such a conversion will be consistent with the Basel III capital rules now in effect in Canada which require that any regulatory capital (other than common equity) issued by banks should be convertible into common equity upon the occurrence of certain events.

Canadian Payments System

The Government intends to continue its review of elements of Canada’s payments system following the report of the Task Force for the Payments Systems Review. Recently, the FCAC issued Commissioner’s Guidance to clarify three issues related to the Code of Conduct for the Credit and Debit Card Industry in Canada (the “Code”). The budget includes the Government’s intent to finalize an addendum to the Code regarding mobile payments and to review the governance framework for the payments sector generally together with the Bank of Canada.

Canadian Financial Institutions in a Global Marketplace

The Government has indicated its intention to promote the strategic expansion of Canadian financial institutions internationally. In recognition of the global nature of financial markets, it will also propose allowing Canadian financial institutions greater flexibility to appoint non-residents as members of board committees, though the requirement that a majority of members be Canadian residents will remain.

The Role of Mortgage Portfolio Insurance

The Government will continue to address the role of mortgage portfolio insurance in Canada’s housing market. It intends to do so by:

  • Limiting the insurance of low-ratio mortgages to those that are used in conjunction with securitization programs sponsored by the Canada Mortgage and Housing Corporation (CMHC); and
  • Prohibiting any use of any CMHC insured mortgage as collateral in any securitization program other than those sponsored by CMHC.