Reducing regulatory barriers in the financial services sector

Improving the competitiveness of credit unions

Credit unions need more scale to thrive and survive, and to make necessary investments in technology and risk management. In our view, stronger credit unions would provide more competition in the financial services sector and improve access to services (credit unions are community focused and tend to lend primarily to consumers, small businesses and rural communities, which may currently be underserved by the bigger banks).

In Canada, credit unions can be federally or provincially regulated, with most operating under provincial oversight (three are currently under federal purview). While federal credit unions can operate across Canada, provincial credit unions, in general, are not permitted to carry on business outside of their home jurisdiction or to merge with (or purchase assets from) credit unions in other provinces. Accordingly, the only way for a provincial credit union to operate across Canada is to continue as a federal credit union under the Bank Act (Canada) (the BA) or amalgamate with an existing federal credit union (a provincial credit union must first continue under the BA before it can amalgamate with a federal credit union, but the process can be completed at the same time). The process to continue or continue for purposes of immediately amalgamating is long and cumbersome, and involves approval from the federal Minister of Finance for both the continuance and the amalgamation, as well as member approval from each amalgamating credit union.

As a result, in order to help facilitate a more efficient merger process we recommend the following actions:

1. To accelerate the approval process, the BA should be amended to remove the requirement that a federal credit union obtain Ministerial approval in an amalgamation scenario where the difference in asset size of the two credit unions is below a certain threshold.  
2. The BA should be amended to include a provision similar to section 143(2) of the Insurance Companies Act (Canada) that would exempt a federal credit union from the need to hold a special meeting of members to approve an amalgamation with a small provincial credit union. We do not believe such meetings should be required where the amalgamation would have little impact on the affairs of the credit union.
3. In addition to these legislative changes, the Office of the Superintendent of Financial Institutions (OSFI) should streamline their review process for federal continuance by factoring into their review that a provincial credit union could have an established track record of carrying on business for decades and would already be subject to provincial regulatory and supervisory standards (which in many provinces are generally consistent with those of OSFI).
4. In order to enable provincial credit unions to conduct business extra-provincially (without having to become a federal credit union under the BA), amend provincial credit union legislation to permit provincial credit unions to acquire all the assets of a credit union in another province in exchange for the issuance of membership shares to the selling credit union members, and to permit the acquiring credit union to continue to carry on the business of the selling credit union in the other province as a division of the acquiring credit union. This would, of course, require coordination among the provincial regulators but could be an efficient way to expand business incrementally without the added regulatory burden of becoming a federal credit union.

Harmonizing provincial consumer protection legislation

Banks/federal credit unions and other lenders operating across Canada must comply with different consumer protection legislative frameworks for each province and territory (in addition to the framework under applicable federal legislation). To a certain extent, these frameworks are harmonized but each provincial/territorial consumer protection act also has its own unique attributes which unnecessarily add to the institutions’ regulatory compliance burden. Any time a financial institution that operates across Canada wishes to amend its consumer-facing documentation, it must review and assess its compliance with each provincial/territorial framework. This costly and time-consuming exercise does not result in greater consumer protection, as it frustrates efforts to provide consistent and clear information to consumers.   

In our view, harmonization of consumer protection legislation is required to provide consistent consumer protection as well as reduce the compliance burden for financial institutions and other players in the financial sector. As fintech’s presence in the financial services sector expands, the need to harmonize provincial/territorial consumer protection legislative frameworks will also become critical, since many fintechs do not have the resources to bear the compliance burden caused by unharmonized consumer protection legislation.

We are hopeful that a renewed focus on strengthening Canada will continue to gain momentum and result in meaningful change.