REPORT OF THE COMMITTEEE
Thursday, November 28, 2013
The Standing Senate Committee on Banking, Trade and Commerce has the honour to table its
SECOND REPORT
Your committee, which was authorized to examine the subject matter of those elements contained in Divisions 2, 3, 9, and 13 of Part 3 of Bill C-4, A second Act to implement certain provisions of the budget tabled in Parliament on March 21, 2013 and other measures, has, in obedience to the order of reference of Tuesday, November 5, 2013, examined the said subject matter and now reports as follows:
In addition to officials from the Department of Finance, the committee heard from the Conflict of Interest and Ethics Commissioner, and a representative of the Institute for Governance of Private and Public Organizations and the Canadian Bankers Association. Several groups from the financial sector and the legal community were invited to speak about the proposed amendments in Divisions 2, 3, 9 and 13 of Part 3 of Bill C-4. These groups declined the invitation to appear. The committee held three meetings to examine these divisions; the Conflict of Interest and Ethics Commissioner and Department of Finance officials appeared on 21 November 2013, the Executive Chair of the Board of Directors of the Institute for Governance of Private and Public Organizations appeared on 27 November 2013 and representatives from the Canadian Bankers Association appeared on 28 November 2013. The Federation of Law Societies of Canada made a written submission to the committee.
Division 2
Division 2 of Part 3 includes two sets of proposed amendments that officials from the Department of Finance indicated were part of the federal government’s effort to update the conflict of interest provisions in various statutes. Firstly, Division 2 would amend the Bank Act, the Insurance Companies Act and the Trust and Loan Companies Act to allow agents of the Crown, and federal and provincial employees, to sit as directors on the boards of federally regulated financial institutions. Secondly, Division 2 would amend the Office of the Superintendent of Financial Institutions Act and the Financial Consumer Agency of Canada Act to remove the requirement for the members of the Financial Institutions Supervisory Committee, the Deputy Superintendent of Financial Institutions and the Deputy Commissioner of the Financial Consumer Agency of Canada to notify the Minister of Finance when borrowing money from a federally regulated financial institution. The officials noted that these provisions were in place prior to the enactment of the Conflict of Interest Act and before changes were made to strengthen the Values and Ethics Code for the Public Sector; these provisions are no longer required.
Regarding proposed amendments that would allow government employees to sit as directors on boards of financial institutions, the officials stated that the purpose of this proposed change is to provide federally regulated financial institutions with access to a larger number of potential candidates for positions on their boards. Moreover, this proposed change could make it easier for the federal government to find skilled board members for its Crown corporations.
Several senators expressed concern that, even if there is no conflict of interest, this proposed change could provide an opportunity for the board member to exert undue influence on government policies through his/her work in the public service; moreover, the objectivity of such employees was questioned. Officials asserted that the Conflict of Interest Act, the conflict of interest policies of individual Crown corporations, the Values and Ethics Code for the Public Sector and the conflict of interest policies for the boards of federally regulated financial institutions, the last of which are required by the Office of the Superintendent of Financial Institutions (OSFI), would prevent any potential conflicts. They indicated that the Department did not consult provincial governments regarding Division 2; however, the conflict of interest policies for the boards of federally regulated financial institutions would be sufficient to address any conflict of interest regarding provincial employees. Irrespective of these comments, several senators were quite skeptical of the need for and merit of this proposed amendment.
Some senators questioned the circumstances under which a public servant would sit on the board of a financial institution. In response, the officials provided the example of a provincially-regulated credit union for federal public servants, that has federal public servants on their board of directors, that becomes a federal credit union under the Bank Act; currently, the board members that are public servants would not be permitted to be on the board even if there was no conflict of interest. They also indicated that the Department has been approached by federally regulated financial institutions seeking to recruit a public servant, and that board members of Crown corporations have been offered positions on the boards of federally regulated financial institutions. Moreover, the officials noted that OSFI would have publicly expressed the need for the boards of federally regulated financial institutions to be comprised of people with greater financial sector expertise. However, they acknowledged that the Department did not know whether any particular public servant would be qualified to sit on the board of a financial institution.
The Conflict of Interest and Ethics Commissioner noted that boards created under the statutes that Bill C-4 proposes to amend do not fall under the scope of the Conflict of Interest Act; thus, federal public servants on those boards would presumably be governed by the Values and Ethics Code for the Public Sector. The Commissioner stated that if the proposed amendments were to result in some of the federal public servants falling under the supervision of the Conflict of Interest and Ethics Commissioner, there is no automatic prohibition under the Act that would prevent these individuals from accepting positions on the boards of financial institutions. Moreover, the Commissioner indicated that Bill C-4 would amend the Act to allow the Governor in Council to designate groups that would fall under the scope of the Act; however, at this time, the groups that would be designated are not known.
The Institute for Governance of Private and Public Organizations did not propose any amendments to Bill C-4. It questioned the manner in which the amendments proposed in Division 2 would improve the governance of federally regulated financial intuitions. It argued that, if governmental officials serving as board members were to receive board-related remuneration that is several times the amount of their public service salary, these officials could become complacent when fulfilling their public service responsibilities. The Institute also observed that the boards of financial institutions often avoid the recruitment of federal public servants due to the limited contributions that such individuals could make as board members as a result of potential conflicts of interest. As well, it expressed concern about the commitment of time required to serve as a board member while holding a full-time public service position. Furthermore, the Institute disagreed with the assertion by the Department officials that federally regulated financial institutions require access to a larger number of potential candidates when seeking to full positions on their boards; in its view, Canada has a sufficient number of potential candidates, including retired public servants.
The Canadian Bankers Association indicated that the provisions of Bill C-4 that would have an impact on federally regulated financial institutions are mainly technical in nature. It indicated that it did not ask the Department of Finance for these changes to the Bank Act, nor did any of their members request them to do so.
The Canadian Bankers Association indicated that it did not have concerns regarding the proposed amendments in Division 2, stating that there is a robust framework in place in the federal and provincial governments, within the policies of the board of the financial institutions and through the common law duty of directors to deal with potential conflicts of interest. Furthermore, it noted that the proposed amendment would apply to a limited number of individuals and that, if there is a conflict of interest, then it will be dealt with on a case-by-case- basis; if required, the individual could recuse himself or herself and refrain from voting. According to the Canadian Bankers Association, it is not clear which public servants would be eligible to be a board member on a federally regulated financial institution. Some senators had concerns that public servants sitting on boards could have divided loyalties, and that a public servant's loyalty should be to Canadians and not shareholders of a bank.
Regarding the proposed amendments that would remove the borrowing notification requirements for designated governmental officials, the officials stated that it is normal for an individual to have loans with a financial institution, and that governmental officials receiving loans should not be required to notify the Minister of Finance of this fact. However, the officials indicated that, if one of these designated officials attempted to obtain a rate of interest lower than that offered to others, there would be a conflict of interest that would be prohibited by the relevant legislation or the Values and Ethics Code for the Public Sector.
The Institute for Governance of Private and Public Organizations stated, for example, that it is “wise” for the Minister of Finance to be aware of situations in which an OSFI official is borrowing large amounts of money from a federally regulated financial institution.
Regarding the proposed amendments to the borrowing notification requirements, the Canadian Bankers Association stated that these proposed changes would modernize the legislation and that there is nothing exceptional about the notion of certain officials obtaining loans from financial institutions.
Division 3
In 2012, Bill S-5, An Act to amend the law governing financial institutions and to provide for related and consequential matters, established that the Minister of Finance must approve transactions above a certain threshold amount when a federally regulated financial institution of a certain size acquires a foreign financial institution. Division 3 of Part 3 of Bill C-4 would amend the Bank Act, the Trust and Loan Companies Act, the Insurance Companies Act and the Cooperative Credit Associations Act to clarify that federally regulated financial institutions would be prohibited from indirectly acquiring a foreign financial institution.
The officials indicated that this proposed amendment would ensure that ministerial approval is required for all acquisitions of foreign financial institutions, regardless of how the acquisition is structured. They noted that, regarding the transactions that require approval, there are only minimum thresholds and no ceilings; as well, they observed that the capitalization of banks remains under the supervision of the Superintendent of Financial Institutions.
In speaking about the proposed amendments in Division 3, the Canadian Bankers Association stated that the proposed amendment should be consistent with the intent of the government policy and statements made by the Minister of Finance.
Division 9
Division 9 of Part 3 would amend the Financial Administration Act to permit Crown corporations designated by the Minister of Finance to pledge cash and securities as collateral when engaging in over-the-counter (OTC) derivatives.
The officials explained that the reform of the OTC derivatives market that was undertaken by the Group of Twenty nations in response to the global financial crisis encourages the use of collateral and central clearing for OTC derivatives transactions; Crown corporations that participate in the OTC derivatives market face increased costs for their transactions because they are unable to provide collateral. As well, the officials indicated that Division 9 would not provide a government guarantee for OTC derivatives transactions, and noted that the division does not propose that the federal government or its Crown corporations act as central clearing houses. They remarked that the United Kingdom, Denmark and Sweden have adopted a similar policy.
Division 13
Division 13 of Part 3 would amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to clarify that nothing in the Act would require information that is protected by solicitor-client privilege to be disclosed to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Division 13 would also ensure that information disclosed by FINTRAC to law enforcement agencies regarding a contravention of Part 1 of the Act, or Part 1.1 when it comes into force, can only be used by law enforcement agencies for purposes related to that contravention.
The officials explained that these proposed amendments are an attempt to clarify the government’s intentions regarding these provisions as a result of the findings of the British Columbia Court of Appeal in Federation of Law Societies of Canada v. Canada (Attorney General), 2013 BCCA 147. The court found that the current sections of the Act contain some ambiguity with respect to the potential interpretation of these provisions. In response to the concern of senators that this proposed amendment could inhibit criminal investigations regarding money laundering and terrorist financing, the officials clarified that these proposed provisions are only applicable to FINTRAC’s role in enforcing compliance with the Act.
The Federation of Law Societies of Canada’s written submission to the committee stated that, while the amendments proposed in Division 13 would provide greater protection for information subject to solicitor-client privilege, the proposed amendments would not address other components of the solicitor-client relationship that need to be upheld, such as the independence of the Bar and the duty of loyalty that lawyers owe to their clients. The Federation indicated that Parliament should respect the British Columbia Court of Appeal’s conclusion that lawyers should not be subject to the obligations of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
The Canadian Bankers Association noted that, in relation to the proposed amendments in Division 13, it will ask its members about the reporting of monies deposited in trust accounts.
Respectfully submitted,
IRVING GERSTEIN
Chair