October 27: Canadian Financial Regulatory Updates

Despite the challenges to the global economy and significant pressures on the financial sector, Canada's financial regulators continue to issue guidance explaining and expanding the regulatory requirements applicable to financial institutions.

As noted in our articles published on June 29, 2020 and August 12, 2020, Canadian financial regulators issued many updates over the summer specific to the economic consequences of COVID-19. Recent regulatory updates issued in September and October reflect a renewed attention to continuing policy development unrelated to the COVID-19 pandemic.

In this article, we review three of these recent updates. The regulatory updates summarized in this article relate to the following topics:

• the Office of the Superintendent of Financial Institution's activities related to foreign entities operating in Canada on a branch basis and anti-money laundering/anti-terrorist financing supervision;
• the Financial Consumer Agency of Canada's annual report for 2019-2020; and
• proposed amendments to Manitoba's The Credit Unions and Caisses Populaires Act.

The notices relate to the following sectors and categories:

• Banks
• Insurance
• AML Reporting
• Credit Unions

Banks

1. Update and consultation on the Office of the Superintendent of Financial Institution's (OSFI's) activities related to foreign entities operating in Canada on a branch basis

On October 27, 2020, OSFI published its draft Guideline E-4 Foreign Entities Operating in Canada on a Branch Basis, which will replace existing guidelines E-4A Role of the Chief Agent and Record Keeping Requirements and E-4B Role of the Principal Officer and Record Keeping Requirements. The consultation had been delayed due to COVID-19.

In the draft Guideline E-4, OSFI places greater emphasis on the expectations of the foreign entity operating in Canada and clearly states its expectations that management of the branch should have a comprehensive, in-depth understanding of the foreign entity's federally regulated business in Canada carried on through the branch, and be responsible for, and have the necessary authority to carry out, the overall management of that business in Canada. This Guideline is relevant for both foreign bank branches operating in Canada and foreign insurance company branches operating in Canada.

Comments can be submitted to OSFI up to and including December 18, 2020. OSFI plans to issue its final guidance in spring 2021.

2. Financial Consumer Agency of Canada (FCAC) releases its Annual Report 2019-2020

On September 25, 2020, the FCAC released its Annual Report 2019-2020 which shows how it has delivered on the commitments in its 2019-2020 Business Plan. Among the accomplishments highlighted in the Annual Report are:

1. Implementing the Financial Consumer Protection Framework

• On April 30 2020, amendments to the Financial Consumer Agency of Canada Act (FCAC Act) and to the Bank Act (introduced to strengthen the role and increase the powers of the FCAC) came into force. This marked the first step in the implementation of the new consumer protection framework introduced in Bill C-86.
  • The amendments included:
    • FCAC Act amendments that introduce: (i) higher administrative monetary penalties for a violation of the Bank Act consumer provisions and (ii) mandatory naming of the entities that the FCAC finds commit a violation.
    • Bank Act amendments that grant FCAC additional powers to direct a special audit and to direct banks to comply with their legal obligations.
  • The other elements of Bill C-86 will come into force over time, as the corresponding regulations to these provisions are currently being drafted.

2. Industry Review: Banks and Consumer Complaints

• On February 19, 2020, the FCAC released two reports following its review of banks' complaint handling procedures and external complaint bodies in response to a request from the Minister of Finance:
  • Industry Review: Bank Complaint Handling Procedures (the "CHP Report"); and
  • Industry Review: The Operations of External Complaints Bodies (the "ECB Report").
• CHP Report
  • The CHP Report focused on whether the six largest Canadian banks had implemented policies and procedures to handle complaints in a way that is: (i) effective or to most consumers' satisfaction, (ii) accessible to most consumers, and (iii) timely.
  • The CHP Report found that while banks resolve most complaints in an effective, accessible, and timely way, consumers face delays and complications when they escalate a complaint beyond the first point of contact.
  • FCAC will address the concerns raised by the review through its supervisory activities and will also create guidance on expectations to address common issues.
• ECB Report
  • The ECB Report focused on whether the two external complaints bodies that are authorized by the Ministry of Finance – the ADR Chambers Banking Ombuds and the Ombudsman for Banking Services and Investments – were performing their functions in a way that is consistent with their obligations.
  • The ECB Report found that the two external complaints bodies are fulfilling most requirements and that their practices are generally comparable to international best practices. The ECB Report also discussed broader concerns related to having multiple external complaints bodies and related conflict of interest considerations.

3. COVID-19 Response

• FCAC's response to COVID-19 included producing a web page in mid-March of 2020 to provide Canadian financial consumers with information on how to manage their finances during the pandemic as well as government and bank relief measures.

Insurance

Update and consultation on the Office of the Superintendent of Financial Institution's (OSFI's) activities related to foreign entities operating in Canada on a branch basis

On October 27, 2020, OSFI published its draft Guideline E-4 Foreign Entities Operating in Canada on a Branch Basis, which will replace existing guidelines E-4A Role of the Chief Agent and Record Keeping Requirements and E-4B Role of the Principal Officer and Record Keeping Requirements. The consultation had been delayed due to COVID-19.

In the draft Guideline E-4, OSFI places greater emphasis on the expectations of the foreign entity operating in Canada and clearly states its expectations that management of the branch should have a comprehensive, in-depth understanding of the foreign entity's federally regulated business in Canada carried on through the branch, and be responsible for, and have the necessary authority to carry out, the overall management of that business in Canada. This Guideline is relevant for both foreign bank branches operating in Canada and foreign insurance company branches operating in Canada.

Comments can be submitted to OSFI up to and including December 18, 2020. OSFI plans to issue its final guidance in spring 2021.

AML Reporting

Update and consultation on OSFI's activities on anti-money laundering / anti-terrorist financing (AML/ATF) supervision

On October 16, 2020, OSFI published a letter providing an update on its revised approach, in collaboration with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), to supervising federally regulated financial institutions' AML/AFT programs.

In an effort to be consistent with guidance from The Basel Committee on Banking Supervision, going forward: FINTRAC will be conducting AML/ATF assessments of federally regulated financial institutions to ensure compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and associated regulations (PCMLTFA/R). OSFI will henceforth focus on the prudential implications of that compliance, as part of its ongoing assessment of a federally regulated financial institution's regulatory compliance management framework.

• After suspending both its policy development work and the transition of AML supervisory activities to FINTRAC due to COVID-19 in March 2020, OSFI has now restarted these efforts, including:
  • Reviewing Guideline E-13 (Regulatory Compliance Management) to consider whether it should be adjusted to incorporate expectations for managing compliance in relation to AML/ATF; and
  • Assessing whether Guideline B-8 (Deterring & Detecting Money Laundering and Terrorist Financing), which replicates elements of the PCMLTFA/R and does not align with OSFI's new supervisory approach, should be rescinded.
• The October 16 letter indicates that OSFI has initiated this review and is seeking comments from federally regulated financial institutions by November 30, 2020. In particular OSFI would like comments on:
  • Regarding Guideline E-13:
    • Whether amendments are needed; and
    • The extent any amendments are needed in relation to AML/ATF supervision or to clarify OSFI's expectations for compliance risk management more broadly.
  • Regarding Guideline B-8:
    • Whether it should be rescinded in its entirety; or
    • If elements should be incorporated in a revised Guideline E-13.

Credit Unions

Manitoba's Bill 22 – The Credit Unions and Caisses Populaires Amendment Act

The Legislative Assembly of Manitoba has completed a first reading of Bill 22, which proposes to amend The Credit Unions and Caisses Populaires Act (the "Act") to create an oversight framework for Manitoba's provincial credit unions, following OSFI's withdrawal from providing such services.

Context

Manitoba's credit union system consists of the following tiers:

1. Credit unions and the caisse populaire, which are provincially regulated financial institutions;
2. The central, which act as a clearing agent for the entities in #1 and manages their liquidity; and
3. The guarantee corporation, which guarantees deposits in the entities in #1 and acts as their prudential regulator.

• Bill 22 proposes to give greatly expanded oversight powers to: (i) the guarantee corporation, over credit unions, the caisse populaire, and the central, and (ii) the provincial Registrar of Credit Unions, over the guarantee corporation.
• Bill 22 also proposes various changes to the oversight framework in the Act, including:
  • The board of the guarantee corporation would be appointed by the Lieutenant Governor in Council on the minister's recommendation, after consulting with the central and the caisse populaire. The Deputy Minister of Finance would be a non-voting member of the board.
  • The guarantee corporation would be able to:
    • Make binding standards for sound business practices and prudential standards, on topics such as governance, liquidity and capital – subject to the registrar's approval;
    • Issue directives and compliance orders to a credit union, the caisse populaire or the central; and
    • Subject a credit union, the caisse populaire or the central to a special audit, or place them under supervision.
  • The central would:
    • Be required to pay an annual oversight fee to the guarantee corporation. This fee could be capped by the cabinet via regulation; and
    • No longer have its by-laws approved by Registrar of Credit Unions.
  • The Registrar of Credit Unions would be able to:
    • Issue compliance orders to the guarantee corporation; and
    • Temporarily act in place of the guarantee corporation.
• There are various other changes to the Act that are contemplated by Bill 22, many of which may be dealt with by regulation.

Conclusion

If you have any questions as to how these regulatory changes may impact your organization's obligations, please contact your Gowling WLG professional. Our Financial Services Regulatory Team at Gowling WLG will continue to keep you informed as further developments arise.