Below our authors summarize and discuss potential implications resulting from the proposed "priority" amendments to the Bank Act, the Trust and Loan Companies Act and the Insurance Companies Act (collectively, the Acts) emanating from the Budget Implementation Act. Blair Keefe is partner and co-head of the firm's Financial Institutions Practice. Eli Monas is a senior associate who recently returned to the firm after a six-month secondment to the Legislation and Approvals Division at the Office of the Superintendent of Financial Institutions.
On March 27, Bill C-741 (the Budget Implementation Act) was introduced to implement certain "priority" amendments identified in the Budget tabled in Parliament on February 27, 2018 (for background, see our earlier bulletin "Budget 2018's Impact on the Canadian Financial Sector").
What You Need To Know
The Budget Implementation Act proposes:
- broad new powers for financial institutions to provide referrals of their customers to other entities (subject to potential restrictions in regulations);
- broad powers for financial institutions to engage in collecting, manipulating and transmitting information, as well as to engage in a broad range of technology-related activities without any regulatory approval (but subject to potential restrictions in regulations);
- new powers for financial institutions to commercialize activities developed in-house and provide them to third parties (subject to potential restrictions in regulations);
- broad new powers for financial institutions to provide identification, verification and authentication services outside of the financial services sector;
- new powers for financial institutions to invest in entities a "majority" of whose activities consist of financial services activities that a financial institution is permitted to carry on (subject to new regulations that will define the meaning of majority and may impose other restrictions);
- broad new powers for life insurance companies to make infrastructure investments (in accordance with regulations to be drafted);
- to allow credit unions and trust and loan companies to use the term "banking" and similar terms as long as they make it clear that they are not regulated as a bank (and other disclosure); and
- to reset the sunset clauses in the Acts to June, 2023.
Financial Technology Activities
The Acts currently permit banks, trust and loan companies and insurance companies governed by the Acts (collectively, financial institutions) to enter into networking arrangements with other financial institutions and "permitted entities," and they are interpreted restrictively such that "permitted entity" means an entity for which a financial institution would have received any necessary approval to hold. In addition, financial institutions are currently unable to collect referral fees from entities that are not financial institutions or "permitted entities."
Proposed amendments would clarify that a financial institution may enter into networking arrangements with "permitted entities" regardless of whether the financial institution had received approval to acquire such entity, and would include a broad new power to provide referrals of the financial institution's customers to other entities, regardless of whether they are permitted entities. The current powers under the Acts are restrictive from both the perspective of the financial institutions and the perspective of fintech companies, and therefore the proposed broadened power could help increase competition in the fintech and other sectors by expanding the networks available to these companies. However, it is possible that regulations may be made under these provisions which could limit some of the broad new powers, and as a result, potential new regulations will need to be monitored closely.
In addition to the power to carry on the business of banking with respect to banks, and the power to carry on business which appertains to the business of providing financial services with respect to other financial institutions, the Acts currently permit financial institutions to carry on certain other activities. These activities include engaging in the collecting, manipulating and transmitting of information that is primarily financial or economic in nature with the prior written approval of the Minister of Finance when the activity occurs in Canada, and, with the prior written approval of the Minister of Finance, to develop, design, hold, manage, manufacture, sell or otherwise deal with data transmission systems, information sites, communication devices or information platforms or portals that are used to provide information that is primarily financial or economic in nature.
The Budget Implementation Act proposes to amend the Acts to provide a power to engage in the collection, manipulation and transmission of information (not limited to "information that is primarily financial or economic in nature") without the approval of the Minister of Finance. In addition, it is proposed that financial institutions may, without the approval of the Minister of Finance, design, develop, manufacture, sell and otherwise deal with technology to the extent those activities relate to activities that the financial institution or its affiliates are engaged in, or to the provision of financial services by any other entity.
Technology is not defined in the proposed amendments, and we believe it should be given a broad interpretation to include both computer hardware and software. In addition, there is no specific grandfathering of activities currently carried on under the provisions which are being replaced, and we believe that these provisions should be interpreted as broad enough to encompass those activities—as a policy matter, we believe that these proposed amendments are intended to expand and not restrict activities.
Finally, the financial institutions will have new powers to engage in any activity that relates to the provision of financial services by the financial institution and its affiliates. This is an important new power in connection with the investment regime, as it should allow in-house activities that the financial institutions engage in to be commercialized in subsidiaries and used outside of the financial services industry.
We expect that the new powers under these provisions will be subject to new regulations that have yet to be drafted, but these regulations will still permit a significant expansion of the current powers and greater flexibility for financial institutions.
Identification, Authentication and Verification Services
The Budget Implementation Act proposes to add a paragraph to each Act which would specifically provide that a financial institution may "provide identification, authentication or verification services." While we believe that there were already strong arguments that the provision of identification, authentication and verification services falls within the scope of the business of banking with respect to banks, and the power to carry on business which appertains to the business of providing financial services with respect to other financial institutions, this proposed amendment will ensure that there is no longer any ambiguity when these services are applied outside of the financial services sector.
The Acts currently provide that if a substantial investment by a financial institution is not made in a regulated financial institution, the business of the entity being acquired must be limited to certain enumerated permitted activities.
One of the major concerns about investing in fintech companies under the current versions of the Acts relates to the fact that if, in addition to its primary business, the entity carries on activities that are not permitted activities for financial institutions (for example, a fintech company that also has a food delivery app), a financial institution is not permitted to invest in the entity, even where the entity's primary business is a permitted investment for a financial institution. A proposed amendment to the Acts would allow for financial institutions to make substantial investments in entities that engage in non-permitted activities so long as the "majority" of the activities of the entity's business consists of financial service activities. New regulations are expected to be drafted to define the meaning of "majority" and may impose other restrictions. We would note, however, that this proposed expansion would not apply in respect of the "Additional Powers" discussed above and the current additional powers permitted under the Acts (i.e., a financial institution would continue to be restricted to investing in entities whose activities are limited to activities falling with the additional powers).
Life Insurance Companies (Infrastructure Investment)
The Budget Implementation Act proposes to amend the Insurance Companies Act, which would permit a life company (under prescribed terms and conditions) to acquire control of, or acquire or increase a substantial investment in, a "permitted infrastructure entity." A "permitted infrastructure entity" would mean an entity that, in accordance with prescribed conditions, only makes investments in infrastructure assets or engages in any other activity prescribed by regulation, and "infrastructure assets" would mean physical asset, including a long-lived physical asset that supports the delivery of public services, prescribed by regulation.
The Budget Implementation Act proposes to permit trust and loan companies and credit unions to use the terms "bank," "banker" or "banking," so long as such entity discloses the type of entity it is, the jurisdiction under whose laws the entity is primarily regulated, and whether it participates in a deposit insurance system in Canada (and if so, the name of that system), as well as any other information that is prescribed.
The Budget Implementation Act proposes to extend the sunset provision in the Acts for an additional five years (to 2023). We note that the sunset clauses were previously extended from 2017 to 2019. Based on what was described in the Budget about proposed amendments relating to corporate governance, clean-up amendments and a consumer framework, we expect that the Government will continue to work on those initiatives and not wait until 2023 to propose those amendments.
Coming Into Force
The Budget Implementation Act provides that each of the proposed amendments discussed above (other than the "Identification, Authentication and Verification" power, the "Bank Terminology" and the "Sunset Provisions") will come into force on a day or days to be fixed by order of the Governor in Council. We expect these provisions will come into force when related regulations being drafted are ready to be proclaimed in force. With respect to the "Identification, Authentication and Verification" power, the "Bank Terminology" and the "Sunset Provisions," we would expect these provisions to come into force before the House rises for the summer at the end of June.
1 An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures
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