2025 review of the financial sector statutes: proposed changes for consideration

On March 28, 2023, the Federal Government announced its Budget 2023, which included a number of proposed legislative actions applicable to financial institutions (see our Budget 2023 bulletin). Unfortunately, one omission that we were hoping and expecting to see was a formal kick-off to the process for the 2025 review of the Bank Act (Canada) (BA), Insurance Companies Act (Canada) (ICA), and Trust and Loan Companies Act (Canada) (TLCA) (collectively referred to as the FI Acts). This is disappointing given that the review was originally supposed to be completed in 2023 (five years after the last review was completed)¹ but was extended to 2025, and we are concerned that if the review is not commenced in the near term, it is unlikely to be able to be completed by 2025. Moreover, we believe that when this review is commenced, it should be fairly comprehensive—the FI Acts were substantially overhauled in 1992 and again in 2001, but since that time, most changes have been very targeted in nature and, in fact, many of the provisions enacted in 1992 have not been changed.

In this bulletin, our financial services team identifies a number of provisions which we believe should be revisited and potentially updated.

Public holding requirement

The FI Acts require a federally regulated financial institution (FRFI) with more than $2 billion but less than $12 billion in equity to have shares with at least 35% of the voting rights listed and traded on a recognized stock exchange and not held by any major shareholders. This threshold was initially $750 million in 1992, then was increased to $1 billion in 2001 and to $2 billion in 2007. We believe that the threshold should be increased to at least $4 or $5 billion in equity. We also note that there should be an ability for an FRFI that exceeds the threshold to subsequently fall below in the future and no longer be subject to the restriction. We also question whether there should be an explicit exemption for an FRFI which is the subsidiary of another FRFI that satisfies the public float requirement under its governing legislation.

Death of a control person

The FI Acts require prior approval of the Minister of Finance (the Minister) on the acquisition of control of an FRFI, and there are certain consequences where a person contravenes this requirement. For example, that person, and any entity controlled by that person, is restricted from voting its shares of the FRFI. Additionally, that person (or any person who is an officer, director or employee of an entity prohibited from exercising its voting shares of the FRFI) is disqualified from being a director of the FRFI until such time as the Minister’s approval has been obtained. This has serious, practical consequences where an FRFI is controlled by a natural person and that person passes away. Accordingly, we believe the FI Acts should be amended to enable the transition of control of an FRFI to the estate of a controlling individual, or to a trust or other entity, on the death of that person without a breach of the FI Acts (and the associated consequences). As an example, perhaps the estate/trust/entity must apply to the Minister to acquire control of the FRFI within 90 days following the person’s death, which is consistent with temporary investments that are subject to the Minister’s approval.

Eliminating the requirement for the CEO to be a member of the board of directors

Largely for historical reasons, the FI Acts have required the CEO of an FRFI to also act as a director. While, in practice, most CEOs do serve as directors, we would submit that it does not need to be a legislative requirement and could result in unintended consequences. For example, the CEO of a provincial credit union is not typically a member of the board of directors, and the BA requirement has generated considerable unnecessary debate in the board meetings of provincial credit unions considering continuing federally.

Plans of arrangements

In 1992, the FI Acts were drafted to incorporate substantially all of the corporate provisions from the Canada Business Corporations Act (CBCA). However, a decision was made not to permit plan of arrangement-type powers in the FI Acts, as there was a concern that it could fetter or override the Superintendent of Financial Institution’s (the Superintendent) focus on the protection of depositors, creditors and policyholders. Since that time, the use of plan of arrangement-type powers in the CBCA, Business Corporations Act (Ontario) and in other modern corporate statutes have become the predominant way mergers and acquisitions and restructuring transactions are implemented in order to facilitate transaction structuring and ensure fairness to shareholders and other stakeholders.

We believe that the FI Acts should be amended to include the flexibility to use plan of arrangement-type structures, but in a manner which clearly provides that regulatory approval is also required to ensure the Office of the Superintendent of Financial Institutions (OSFI) is satisfied with the arrangement from a prudential standpoint and the Minister is onside from the policy/best interest of the financial system in Canada perspective. In particular, these structures could assist a credit union or insurance company incorporated under Provincial law to combine with a federal credit union (FCU) or federal insurance company, respectively, where a continuation followed by an amalgamation is not feasible but combining with an FRFI is in the best interests of its members/policyholders (see below for additional discussion on continuances for the sole purpose of amalgamating).

Notice and access/access equals delivery and electronic delivery consent for investor material

The FI Acts permit FRFIs to seek exemptive relief from the Superintendent to allow them to use notice and access for delivery of proxy materials in respect of shareholder meetings. A number of FRFIs have been granted exemptive relief orders in respect of shareholder meetings, but we are not aware of the Superintendent granting such an order in respect of policyholder meetings. In addition, the FI Acts do not currently contemplate similar exemptive relief in respect of the delivery of annual financial statements.

In 2013, the Canadian Securities Administrators (CSA) adopted a notice and access system to enable issuers to post proxy related materials, annual financial statements and annual management discussion and analysis documents on SEDAR and an alternate website (subject to the issuer sending a notice informing beneficial shareholders that the materials have been posted online and explaining how to access them). Similar amendments to the CBCA to allow the use of notice and access by CBCA distributing corporations have also been proposed. More recently, the CSA has proposed an access equals delivery model that would allow issuers, subject to some exceptions, to satisfy the requirement to deliver certain continuous disclosure documents (including annual and interim financial statements and related MD&A) by publicly filing the document on SEDAR, then issuing and filing a news release announcing that the document is publicly available on SEDAR and that a paper or electronic copy can be obtained upon request.

We believe that, for distributing FRFIs, the FI Acts should be modernized to align with applicable securities law requirements governing the delivery of continuous disclosure documents. This would eliminate the need for distributing FRFIs to incur the costs and burden of obtaining Superintendent exemption orders (and also clearly extend the availability of notice and access/access equal delivery to proxy materials related to policyholder meetings). We also believe the FI Acts should be modernized to enable non-distributing FRFIs (such as FCUs) to deliver proxy materials and financial statements electronically without express consent.

Real property, equities and commercial lending limits

The 1992 revisions to the FI Acts adopted a “prudent person” approach to investments and lending by FRFIs; however, as this was quite a fundamental change in approach, a decision was made to maintain certain overriding restrictions on these powers (particularly with respect to real property and equity investments and, in the case of insurance companies and trust and loan companies, commercial loans). In the 2001 revisions to the FI Acts, the restrictions on real property and equity investments were eliminated for widely held banks and insurance companies, and we believe they should be revisited for other institutions as part of the 2025 review.

For example, the limit on equity investments can create artificial limits for life insurance companies that offer universal life products. These products allow a policyholder to choose equity investments as an investment feature under the policy in which the policyholder takes the economic risk of the investment. However, since the investment is shown on the balance sheet of the life insurance company, the company needs to count these investments towards the statutory equity limit, even if the company does not have the economic exposure to the investment.

As another example, the definition of “commercial loan” has not been amended since it was first enacted, and there has been a significant evolution in sophistication in the market for commercial loans such that some are significantly less risky than other types of investments (and therefore should be encouraged for insurance companies and trust and loan companies). Moreover, the definition of “commercial loan” is so broad that sometimes an investment that is considered a commercial loan could also be subject to the real property or equity investment limits. This was obviously not intended and should be corrected. In addition, there is an ability for life insurance companies and trust companies with regulatory capital in excess of $25 million to apply to the Superintendent to exceed the 5% statutory limit for commercial loans, but there is no similar flexibility for property and casualty or marine insurance companies.

Restriction on leasing

Deposit-taking institutions were given the power to enter into leases in 1980, subject to the restriction from leasing vehicles weighing less than 21 tonnes. This restriction was extended to trust companies and life companies in 1992. In the 1998 report Change, challenge, opportunity: report of the Task Force / Task Force on the Future of the Canadian Financial Services Sector², it was noted that auto dealers and manufacturers argued that allowing banks to lease would reduce auto dealer profitability and lead to job losses in many communities; however, notwithstanding these arguments, the Task Force recommended on page 98 that the restrictions on light vehicle leasing be removed, noting that the additional competition would be beneficial to consumers. That recommendation was not ultimately implemented, but that may be something that may be reconsidered in light of the Government’s carbon net zero targets.

We understand there is still considerable consumer hesitancy around purchasing electric vehicles until the technology has matured or resale value is better established. However, if leasing were a more cost-effective option, more consumers may be willing to lease electric vehicles, which would ultimately help to aid in the Government’s carbon net zero targets. Increasing competition in vehicle leasing by permitting FRFIs to engage in leasing may be one way to make leasing more cost effective. Moreover, we do not believe that there are any significant prudential concerns with allowing FRFIs to be involved in auto leasing, and the original policy concerns are not nearly as significant today given most of the auto dealer lease programs have either disappeared (in favour of the programs of large corporate dealerships or the manufacturers) or are now largely funded by the FRFIs in any event.

Permitted infrastructure investments

As part of the 2018 Federal Budget, the Government introduced a new category of permitted investments for federally regulated life insurance companies. Under this new power, life insurance companies would be permitted to acquire control of, or acquire or increase a substantial investment in, a “permitted infrastructure entity” (PIE), subject to terms and conditions to be prescribed by regulation that are necessary to bring the amendments into force. On February 11, 2023, draft Regulations for Permitted Infrastructure Investments were published in the Canada Gazette. There are a number of issues with the amendments and draft regulations.

PIE is defined in the ICA to mean an entity that, in accordance with prescribed conditions, only makes investments in “infrastructure assets” or engages in any other activity prescribed by regulation. This would effectively preclude a life company from co-investing with other participants in a fund that makes infrastructure investments, as the fund would not be a PIE by virtue of the fact that it engages in activities that a PIE is not permitted to engage in (i.e., raising funds to provide investment diversification and returns, and professional investment management to holds of the funds’ units). We do not believe this makes sense, as the Government should be encouraging diversification.

We would also note that Schedule 1 to the regulations provides a prescriptive list of “infrastructure assets”, which may not capture all types of infrastructure investments that are being contemplated or that may be contemplated in the future. In addition, all “infrastructure assets” of a PIE must involve a public body, which essentially means investments need to be limited to government sponsored projects.

Specialized financing regulations

The Specialized Financing Regulations under the FI Acts limit certain types of investments that can be made by way of specialized financing activities, including acquiring or holding control of, or a substantial investment in, a Canadian entity: (i) that acts as an insurance broker or agent in Canada; or (ii) that is primarily engaged in the leasing of motor vehicles in Canada.

The FI Acts were amended in 2001 to enable FRFIs to acquire control of, or a substantial investment in, entities that engage in financial services activities (including an insurance agent or broker). However, a corresponding change was not made to the Specialized Financing Regulations to remove the same restriction. We believe that was an oversight and should be rectified, as we do not believe there are any policy reasons to restrict an institution from acquiring, by way of specialized financing activities, an entity that acts as an insurance broker or agent in Canada. Similarly, if the restrictions on motor vehicle leasing are removed from the FI Acts, a corresponding change should also be made to the Specialized Financing Regulations.

We also believe that the individual investment threshold of $250 million should be materially increased, as that threshold was implemented in 2001 (increased from the previous threshold of $90 million).

Continuance for sole purpose of amalgamating

Sections 223(1.2) and (1.3) of the BA explicitly enable one or more local cooperative credit societies to continue as an FCU for the sole purpose of immediately amalgamating with an FCU or immediately amalgamating and continuing the local cooperative credit societies as one FCU. Prior to amending the BA to include the FCU regime, the BA already contemplated a continuance and amalgamation process (i.e., a provincial entity could continue as a bank and then amalgamate with an existing bank under the BA). Accordingly, we would argue that the addition to the BA must have been intended to provide for an abbreviated process for small credit unions to amalgamate with larger FCUs on an expedited basis (otherwise the amendment would be unnecessary). We believe a corresponding provision should be added to the ICA and TLCA enabling one or more provincial companies to continue federally for the sole purpose of immediately amalgamating with an insurance company or trust company, as applicable, and that OSFI should update its guidance to contemplate this expedited/streamlined process.

Federal credit union amendments

Section 143(2) of the ICA provides that the Minister has the flexibility to exempt a company from the requirement to send a notice of special meeting in respect of an amalgamation to voting policyholders “having regard to the size of the company and the companies or the body corporate with which it proposes to amalgamate”. We believe a corresponding provision should be added to the BA that could be used to exempt an FCU from the need to hold a special meeting of members to approve an amalgamation with a small provincial credit union.

We also believe that the BA should be amended to remove the requirement that an FCU obtain Ministerial approval in an amalgamation scenario where the difference in asset size of the two credit unions is below a certain threshold, and where the merger does not affect the FCU’s existing members’ and shareholders’ rights.

We also believe that, where an FCU purchases all or substantially all of the assets of a smaller provincial credit union, the provincial credit union’s deposit liabilities should be subject to the same transitional relief regime that is available in respect of a federal continuance.

In addition, section 179.1 of the BA provides that the directors of a bank, which is not an FCU, may appoint one or more additional directors if the by-laws of the bank allow them to do so, and the by-laws determine the minimum and maximum numbers of directors. The result of the exclusion is that the acquiring FCU in an asset transaction cannot give assurances to members of the provincial credit union that their communities will be represented in the post-transaction board of directors, and therefore we believe that the exclusion of FCUs should be removed.

Related parties

In its August 11, 2017 Second Consultation on the Review of the Federal Financial Sector Framework, entitled Potential Policy Measures to Support a Strong and Growing Economy: Positioning Canada’s Financial Sector for the Future, the Department of Finance indicated that it was considering potential changes to the FI Acts in order to include, as a related party of an FRFI, a person who holds a non-controlling significant interest in an entity that controls the FRFI. We do not believe there is a reasonable basis for making this change, as it is inconsistent with the purpose of the self-dealing regime.

When the FI Acts were being overhauled and modernized in the early the 1990’s, the Government started by tabling Bill C-83 (An Act to revise and amend the law governing federal trust and loan companies and to provide for related and consequential matters) in November 1990. In the self-dealing regime in Bill C-83, entities which were controlled by a related party, including entities de facto controlled pursuant to section 3(1)(d), were considered related parties. However, in the House of Commons Standing Committee on Finance (the Committee) report to Parliament dated March 25, 1991, following its clause-by-clause review of Bill C-83, the Committee proposed that the definition of related party be narrowed to circumstances in which legal control existed by adding what are now sections 474(7) and (8) to the TLCA. We understand that the Committee made these changes for two related reasons.

First, given the significance of the characterization as a related party, it was important for FRFIs to be able to make a definitive determination whether an entity was a related party, without the inherent uncertainty and potentially changing nature of whether the related party has “direct or indirect influence that, if exercised, would result in control in fact”. Second, while the FI Acts generally carried over the provisions from the CBCAregarding the circumstances in which directors could be held personally liable under the applicable legislation, the FI Acts added personal liability for directors for transactions entered into in contravention of the related party regime in each of the FI Acts.

The above background clearly illustrates that Parliament made a conscious decision to limit the category of entities which were considered related parties to persons who legally control an FRFI, but the FI Acts did include a provision providing the Superintendent with the power to designate as a related party of an FRFI any person whose direct or indirect interest in or relationship with the institution might reasonably be expected to affect the exercise of the best judgment of the institution in respect of a transaction.

The 2017 proposal goes beyond even the 1990 proposal that Parliament deemed inappropriate by including as related parties’ entities that could be minority stakeholders in an FRFI’s upstream companies but who have no influence whatsoever over the institution. We strongly discourage this proposed change as it is misaligned with the policy rationale for the self-dealing regime, and it is impractical (and maybe even impossible) for an FRFI to require a non-controlling holder of a significant interest in an upstream entity to provide information to the FRFI.

Carbon trading

In our view, many carbon trading-related activities appertain to the business of banking/providing financial services, and therefore, are permitted under the FI Acts. However, given the importance of the financial services sector to the Canadian economy, in order to ensure that Canada is at the forefront of achieving net zero emissions, we believe the FI Acts should be amended to explicitly permit a broad range of carbon-related activities (to the extent these activities are not undertaken primarily for the purpose of speculating in the price of carbon credits) and provided that the FRFI implements internal policies and procedures to appropriately manage and control the risks associated with those activities.

Electronic documents regulations

It is critical that the Electronic Documents Regulations under the respective FI Acts (EDRs) be amended to improve the ability of FRFIs to communicate electronically with their customers. With more financial services being conducted online or on mobile devices, interactions between FRFIs and their customers have changed, and the onerous, unnecessary requirements imposed by the EDRs (which date from the early days of electronic communication) fail to recognize this evolution. Accordingly, we propose that the EDRs be modernized to enable FRFIs to communicate electronically with their customers unless they have been specifically advised by their customers that the customer prefers another form of communication.

BA consumer framework

Electronic notices

Several provisions under the new BA Financial Consumer Protection Framework (the Framework) require banks to communicate with customers within specific time frames. Notices can be sent to customers electronically where customers have given banks express consent to do so, but as explained above, the express consent regime is archaic. The Framework does allow banks to send alerts by “electronic means” without express consent when credit cards, lines of credit or deposit account available credit or balances reach specified thresholds, but it is not as clear in other notification provisions that banks can send notification by electronic means without express consent.

If the EDRs are not changed as recommended above, at the very least we would propose that other provisions of the Framework that require banks to send notifications or disclosures to customers within specific time frames be amended to make it clearer that banks are able to send such notifications/disclosures by “electronic means” without express consent (e.g., sections 627.6 (for products that automatically renew) and section 627.61 (for promotional offers).

Complaints handling process

Section 627.43(1)(a) of the BA and section 14 of the Financial Consumer Protection Framework Regulations require all complaints to be dealt with within a specified time period (56 days). This arbitrary time period fails to recognize the complexity of certain complaints and the time required to resolve them. We propose that the Framework be amended to build in more flexibility to enable banks to take the necessary time to resolve complaints.

2018 Fintech amendments

As part of Budget 2018, the FI Acts were amended to provide greater flexibility for FRFIs to undertake and leverage broader fintech activities. Those amendments are still not in force, as they are subject to regulations that have not yet been published. After those regulations are released, it may be desirable to make further amendments to the FI Acts (and/or the draft regulations) if they are not sufficiently broad and put FRFIs at an unfair competitive disadvantage as compared to unregulated companies.

In addition, while our view is that health-related services/activities appertain to the business of providing of financial services and life insurance companies will be permitted to invest in entities engaging in such activities as part of the 2018 fintech amendments, we believe the ICA should be amended to remove any ambiguity and explicitly permit life companies to engage in health-related services/activities, as there is a natural nexus between insurance and health services.

Ministerial approval of foreign financial institutions

The FI Acts provide that an FRFI with equity of $2 billion or more must obtain approval from the Minister where it acquires control of a foreign regulated financial institution and the value of that entity’s assets, plus the aggregate value of the assets of all other foreign regulated financial institutions acquired by the FRFI in the preceding 12 months, exceeds 10% of the FRFI’s consolidated assets. Accordingly, if an FRFI exceeds the threshold as a result of a larger cross-border acquisition, it would need to obtain Ministerial approval for any acquisition of a foreign regulated financial institution in the 12 months following, regardless of the size of that entity. We believe that a materiality threshold should be added to the FI Acts which would exempt an FRFI from the requirement to obtain approval from the Minister in certain cases where the 10% threshold had already been exceeded.

Ministerial approval of provincially regulated entities

The FI Acts require FRFIs to obtain approval from the Minister when acquiring control of a provincial loan company, trust company, insurance company, credit union or securities dealer from a person who is not a member of the FRFI’s group. We understand that this requirement was inserted into the FI Acts in 2001 following the rejection of bank mergers to ensure that banks could not sell provincially regulated subsidiaries to each other without a Ministerial approval. However, as drafted, this provision catches a lot more transactions than originally intended, and therefore, we believe a materiality threshold should be added to the FI Acts to exempt an FRFI from the requirement to obtain approval from the Minister below that threshold (approval of the Superintendent would still be required in those circumstances).

Exempt market dealer and portfolio manager

The FI Acts technically prohibit an FRFI from acquiring an entity whose activities include primarily acting as a portfolio manager/investment advisor if the entity also, as an ancillary part of its business, has an exempt market dealer registration. We do not believe there is a prudential or policy reason for this restriction and would recommend that this technical glitch be addressed.