Article
Canadian financial regulatory updates — October 2016
GENERAL FRFI
Department of Finance (canada)
Consultation Document for the Review of the Federal Financial Sector Framework (published on August 26, 2016)
The Department of Finance Canada released a consultation paper for the review of the federal financial sector legislative and regulatory framework, entitled “Supporting a Strong and Growing Economy: Positioning Canada’s Financial Sector for the Future.” in order to seek views on the priorities for the review and how to position the framework for the future. Submissions will inform the development of a policy paper for further consultation in 2017.
The paper reviews reforms adopted since the financial crisis and presents key trends that are influencing, and are expected to continue to influence, the financial sector such as FinTech and emerging risks. Readers are asked:
- For views on trends or challenges expected to significantly influence the financial sector going forward and what lessons can be learned from other jurisdictions.
- How well does the financial sector framework currently balance trade-offs between the three core policy objectives of stability, efficiency and utility?
- What actions could be taken to strengthen the financial sector framework and promote economic growth, including with respect to the identified themes and how should those actions be prioritized?
- What other actions should be taken to ensure the financial sector framework remains modern and technically sound?
The closing date to provide comments is November 15, 2016.
http://www.fin.gc.ca/activty/consult/ssge-sefc-eng.asp
OSFI (Canada)
OSFI releases for public consultation revisions to its CAR Guideline (published on September 9, 2016)
OSFI released for public consultation revisions to its Capital Adequacy Requirements Guideline (CAR). The CAR Guideline is based on requirements agreed by the Basel Committee on Banking Supervision. In this draft, OSFI outlines its discretionary approach to the implementation of the Basel III countercyclical buffer regime in Canada as well as provides guidance on the application of Basel’s equity investment in funds rules, which require institutions to hold adequate capital against equity investments in funds. The draft CAR Guideline has also been updated to include planned revisions to the treatment of insured residential mortgages.
The implementation date for these changes is set for November 1, 2016 for institutions with an October 31 year end, and January 1, 2017 for institutions with a December 31 year end. OSFI is inviting comments on the proposed updates, which it will consider during the development of the final version of the guideline. The deadline for submitting comments is October 18, 2016.
http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/CAR17_nr20160906.aspx
AMF (Québec)
Continuous Disclosure Review Program - AMF releases 2015-2016 Activity Report (published on September 15, 2016)
AMF released the 14th edition of the Activity Report for the Continuous Disclosure Review Program. The report outlines the oversight measures applied during fiscal 2015-2016 and makes key recommendations for companies regarding the presentation of compliant continuous disclosures. The report also highlights the findings of the review of financial measures that do not comply with generally accepted accounting principles (GAAP), which showed that many issuers are still not adhering to the guidance in CSA Staff Notice 52-306 (revised).
The report also specifies the principal areas the AMF will focus on in its 2016-2017 reviews. In addition to non-GAAP financial measures, the AMF will pay particular attention to disclosures by companies on the representation of women on boards and in senior management positions, impairment of assets, and disclosures related to mineral projects and cyber security measures.
INSURANCE
Supreme Court of Canada — Decision
Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 (published by SCC on September 12, 2016)
This case revolves around a builders’ risk insurance policy subscribed by a general contractor and the interpretation of an exclusion under the policy.
The dispute began when damage was sustained to the EPCOR Tower near its completion when a cleaning company hired by the general contractor to remove dirt and debris accumulated on the windows at the time of their installation, scratched the windows in the cleaning process. The estimated the cost to replace the windows was $2.5 million. The insurer refused to cover the loss based on an exclusion in the insurance policy namely, the “cost of making good faulty workmanship”.
Builders’ risk insurance covers physical damage on a construction site and as described by Justice Wagner, these policies are meant to account for the fact that work of different contractors overlaps in a complex construction site and it is possible that damage by one tradesman may occur to the property of another and to the construction as a whole. The exclusion under the policy provided:
“This policy section does not insure: […]
(b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.”
In deciding how to interpret such an exclusion clause and insurance policies in general, the Court found that insurance policies are standard form contracts subject to a different standard of review than are negotiated contracts. It reasoned that correctness must be the standard of review for standard form contracts. As such, the factual matrix i.e., answers to the case specific questions of who, what, where, when and why the contract was concluded will be similar to all insurance subscribers. For example, policy holders for automobile insurance have similar needs and are subject to standard industry language to provide coverage of their vehicles. Therefore, the interpretation of standard form contracts, such as an automobile policy, is likely to be of precedential value in future disputes. This finding refined the principles applicable to the interpretation of contracts established in the court’s decision Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53.
In interpreting the exclusion clause, the court found that the general rules of contract construction resolve the ambiguity. It serves to exclude from coverage only the cost of redoing the faulty work, that is, the cost of recleaning the windows and not the cost to replace the windows themselves which were not subject to faulty workmanship at the time of installation.
Justice Cromwell in dissent agreed with the disposition of the appeal however, applied Sattva because the question raised involves applying a legal standard to a set of facts and does not give rise to any general extricable question of law.
https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/16121/index.do
OSFI (Canada)
Ruling 2016-01: Promotion of a “Comprehensive Credit Insurance” Policy by a Bank (published by OSFI on September 29, 2016)
The ruling deals with the issue of whether a bank may, under the Insurance Business (Banks and Bank Holding Companies) Regulations, promote within its Canadian branches a policy of “comprehensive credit insurance” (CCI). Such a policy provides insurance to a seller of goods or services against a loss incurred due to the non-payment for goods or services sold to a purchaser located in or outside Canada.
It has been established that banks may promote export credit insurance (ECI). OSFI is of the view that ECI is strictly confined to the coverage of losses incurred by exporters due to a non-payment for exported goods or services. Given that CCI would not be confined to such losses, OSFI is of the view that CCI does not constitute ECI, it may not be promoted by banks.
http://www.osfi-bsif.gc.ca/Eng/Docs/ccibnk.pdf
OSFI Publishes Revised Transaction Instruction Reinsurance on an Assumption Basis (“Assumption Reinsurance”) – Index No. 10.1 (published by OSFI on August 9, 2016)
The information requirements and administrative guidance for Assumption Reinsurance transactions were revised by OSFI.
http://www.osfi-bsif.gc.ca/Eng/fi-if/app/aag-gad/ti-io/tinda-iona/Pages/rpto10-1.aspx
OSFI Issues the Final Version of the Life Insurance Capital Adequacy Test (LICAT) Guideline (published by OSFI on September 12, 2016)
OSFI issued the final version of its Life Insurance Capital Adequacy Test (LICAT), a capital adequacy guideline for federally regulated life insurance companies. Under the LICAT, the amount of capital required to be held in the life industry, as a whole, is not expected to change significantly compared to that required under the MCCSR. However, the new framework may require individual institutions to evaluate their overall plans based on the business lines in which they are engaged, the risks they choose to take on and how these are managed.
Effective January 1, 2018, the LICAT guideline will replace the Minimum Continuing Capital and Surplus Requirements (MCCSR) guideline.
http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/LICAT_nr20160912.aspx
OSFI Issues for Public Consultation a Draft Advisory Updating its Capital Requirements for Residential Mortgage Insurance Risk (published by OSFI on September 23, 2016)
OSFI released for comment a draft advisory updating the capital requirements for residential mortgage insurance risk. The draft advisory – Capital Requirements for Federally Regulated Mortgage Insurers, provides a new standard approach for residential mortgage insurance that is more risk sensitive, and incorporates new key drivers of risk and loss including creditworthiness, remaining amortization, and outstanding loan balance. The planned changes to the regulatory capital framework for mortgage insurers will ensure that capital requirements keep pace with market conditions and more accurately reflect the underlying risks.
OSFI is inviting comments on the draft advisory, which it will consider in developing the final advisory. The deadline for receipt of comments is October 21, 2016. The proposed advisory will come into force on January 1, 2017 and will replace OSFI’s current advisory: Interim Capital Requirements for Mortgage Insurance Companies, released in January 2015.
http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/cptins_nr20160923.aspx
Department of Finance (Canada)
Department of Finance Canada Launches Deposit Insurance Review Consultations (published on September 16, 2016)
The Department of Finance Canada launched a consultation process on the deposit insurance framework to ensure it continues to meet the evolving marketplace in the Canadian financial sector. The consultation process will help determine if the scope of products targeted requires adjustments. The consultation will further ensure that the deposit insurance framework will continue to serve Canadians most effectively.
Comments are due by November 30, 2016 at the latest.
http://www.fin.gc.ca/n16/16-111-eng.asp
British Columbia
ICN 16-004 Improper Arrangements Between Insurance Licensees and Third Parties (published by the Insurance Council of British Columbia on September 6, 2016)
The Insurance Council of British Columbia (“Council”) is concerned that one or more motor vehicle dealerships (“Dealership”) may be restricting which automobile insurance products a general insurance agent (“Agency”) can discuss and offer to the insurance buying public (“client(s)”), as a condition of an Agency being allowed to provide automobile insurance services at their Dealership. As such, Council published a notice to remind insurance licensees about some of the requirements surrounding conflict of interest.
Council will be taking steps to monitor the concerns outlined in the notice. In the event that Council learns of conduct that is not serving the public’s best interest, the Agency, its nominee(s), and any of its insurance licensees involved in such matters will be subject to investigation, which could result in disciplinary action.
ICN 16-005 Suitability of Insurance Licensees Who are the Subject of Enforcement Action by Another Financial Services Regulator (published by the Insurance Council of British Columbia on October 5, 2016)
In an effort to ensure the public maintains confidence in the insurance industry and to maintain consistency between financial services sectors, the Council will take reciprocal enforcement against a licensee, if an insurance licensee’s licence or registration with another financial services regulator is suspended, terminated, or otherwise ended, or if the other regulator puts the licensee under supervision, or if an insurance licensee’s licence or registration with another financial services regulator becomes subject to conditions or restrictions due to misconduct that creates the potential for risk to the insurance-buying public.
Council will exercise its authority under section 238 of the Financial Institutions Act (the “Act”) in order to avoid undue delay and to ensure the public is properly protected.
Ontario
FSCO-approved insurance policy covers Uber drivers, passengers and vehicle owners (developed in June 2016 by Intact Insurance Company)
FSCO approved an auto insurance policy that covers all Uber drivers, passengers and vehicle owners in Ontario from the moment the Uber app is turned on to the moment passengers exit the vehicle. FSCO has also approved the use of an electronic insurance card (pink slip), enabling you to show proof of coverage to the police while engaged in ridesharing for Uber.
This coverage came into effect on July 7, 2016.
https://www.fsco.gov.on.ca/en/auto/Pages/ridesharing-info.aspx#approve
Saskatchewan
Life A&S Code of Conduct (released by Life Insurance Council of Saskatchewan in August 2016)
This Code builds on the requirements of The Saskatchewan Insurance Act and the Bylaws of the Life Insurance Council to provide specific guidance for the conduct of a licensee. It also gives the public information about what they should expect from licensees. It identifies minimum standards of conduct with the recognition and expectation that conduct of licensees will rise above the minimum requirements.
This Code applies to all Life Insurance and Accident and Sickness Insurance Licenced Agents in the Province of Saskatchewan
https://www.skcouncil.sk.ca/download%20files/LICS%20Code%20of%20Conduct%20(Sept%202016).pdf
BANKING & CREDIT UNIONS
British Columbia
Credit Union Bulletin CU-2016-02 Credit Union Constitution And Rules Amendments (published by Financial Institutions Commission on October 5, 2016)
This bulletin sets out the Financial Institutions Commission’s (FICOM) requirements for applications for preliminary and formal consent for Special Resolutions amending a credit union’s Constitution or Rules.
http://www.fic.gov.bc.ca/pdf/info_bulletins/CU-2016-02.pdf
SECURITIES /DERIVATIVES
Canadian Securities Administrators (“CSA”)
Regulators Publish Update on Consideration of Concerns Regarding Reduced Access to Canadian Foreign-Currency Fixed Income Offerings (published by the CSA on September 1st, 2016)
The CSA published Staff Notice 31-346 – Guidance as to the Scope of the International Dealer Exemption in relation to Foreign-Currency Fixed Income Offerings by Canadian Issuers.
The notice addresses concerns raised by Canadian institutional investors over reduced access to international dealers that trade foreign-currency-denominated fixed income securities issued by Canadian issuers. In addition, it provides guidance to clarify the scope of the international dealer exemption in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and confirms the willingness of CSA Staff to recommend exemptive relief, if required, to facilitate greater access to global fixed income markets by Canadian issuers and Canadian institutional investors.
https://www.securities-administrators.ca/aboutcsa.aspx?id=1515
Canadian Securities Regulators Provide Update on Consideration of Concerns Regarding Report of Exempt Distribution (published by the CSA on September 29, 2016)
The CSA published Staff Notice 45-308 (Revised) – Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions. The notice includes revised guidance to address certain of the comments raised by foreign dealers conducting offerings into Canada, and Canadian institutional investors, about the unintended effect of the certification requirements and other issues in Form 45-106F1 Report of Exempt Distribution (the report).
The revised guidance aims to clarify the following points:
- Certification: The guidance points out that the director or officer may be able to rely on a reasonable diligence defence under securities legislation.
- Issuer Information Verification: The guidance sets out examples of reasonable steps that an underwriter filing the report is expected to take in order to obtain and confirm the information regarding the issuer required by Form 45-106F1.
- Purchaser Status Verification: For certain purchasers, such as Canadian financial institutions, Schedule III banks and pension funds, the guidance states that the seller may not need to reconfirm the purchaser’s status for each distribution to that purchaser.
- Accredited Investor Exemption: The guidance specifies that the filer can now indicate multiple paragraphs of the “accredited investor” that are potentially applicable, if it is not clear to the filer whether the purchaser is purchasing securities for its own account or is purchasing securities on behalf of a fully managed account.
https://www.securities-administrators.ca/aboutcsa.aspx?id=1524
Canadian Securities Regulators Publish Update on Cyber Security for Market Participants (published by the CSA on September 27, 2016)
The CSA published Staff Notice 11-332 Cyber Security to promote cyber-security awareness, preparedness and resilience in Canadian capital markets. CSA members intend to re-examine the disclosure of some of the larger issuers in the coming months. CSA findings and recommendations stemming from those reviews are anticipated to be published subsequently. This Notice updates Staff Notice 11-326 Cyber Security, published on September 26, 2013.
https://www.securities-administrators.ca/aboutcsa.aspx?id=1520
Canadian Securities Regulators Issue Guidance on Derivatives Reporting Obligations (published by the CSA on September 29, 2016)
The Multilateral Staff Notice 91-305 Frequently Asked Questions relating to Multilateral Instrument 91-101 Derivatives: Product Determination and Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (the “Notice”) was published.
The Notice provides guidance to persons that are parties to over-the-counter derivatives, in the form of answers to frequently asked questions, on certain matters related to Multilateral Instrument 91-101 Derivatives: Product Determination and Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting.
In all jurisdictions except Newfoundland and Labrador, derivatives reporting obligations under MI 96-101 began on July 29, 2016 for clearing agencies and derivatives dealers, and will begin on November 1, 2016 for all other reporting counterparties. In Newfoundland and Labrador, derivatives reporting obligations are anticipated to begin on November 1, 2016 for all reporting counterparties.
https://www.securities-administrators.ca/aboutcsa.aspx?id=1525
Prince Edward Island
Consultation Draft - Business Corporations Act & Consultation Draft - Securities Transfer Act
A discussion paper has been prepared by the Department of Justice and Public Safety (the Department) in order to facilitate public consultation regarding proposed new legislation consisting of: (i) a new Business Corporations Act to replace Part I of the Companies Act; and (ii) a new Securities Transfer Act based on uniform Canadian securities transfer legislation.
Comments were due to be submitted by September 9th, 2016.
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