Proceedings of the Standing Senate Committee on
National Finance
Issue 9 - Evidence - Meeting of June 15, 2010 - afternoon meeting
OTTAWA, Tuesday, June 15, 2010
The Standing Senate Committee on National Finance met this day at 3:04 p.m. to study Bill C-9, An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures (topic: Parts 12, 13, 14, 16 and 17).
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, yesterday, we had our first meeting on Bill C-9, An Act to implement certain provisions of the budget.
[English]
Over the course of two meetings, departmental officials reviewed the provisions of seven parts of the bill. As colleagues know, this bill has 24 parts, a total of 2,208 clauses, and almost 900 pages. In the coming days, we will hear from officials who will explain each one of these different parts to us.
This afternoon, we will focus on parts 12, 13, 14, 16 and 17. These parts deal with issues including the proposed payment card networks act, the Financial Consumer Agency of Canada, the Canada Deposit Insurance Corporation Act, federal credit unions and proceeds of crime.
To help us understand these parts, we will start with Part 12 of the bill, dealing with the proposed payment card networks act. Honourable senators, that part can be found at page 541 of this bill.
We are pleased to welcome from the Department of Finance Canada, Leah Anderson, Director, Financial Sector Division; and her colleagues, Kevin Thomas, Senior Economist, Payments, Financial Sector Policy Branch, and Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch.
We will follow the same process that we have used before. We will ask Ms. Anderson to tell us what is in this bill. We are particularly interested in knowing what each clause is trying to achieve.
Leah Anderson, Director, Financial Sector Division, Department of Finance Canada: Good afternoon. We are happy to be here to answer any questions in relation to the proposed payment card networks act. I will begin with a short overview of the proposed legislation, as well as some historical context on why this legislation was required.
Last year, merchants began raising concerns regarding debit and credit cards. Their concerns focused primarily on the complexity and lack of transparency of the credit card contracts and the fee structure for credit cards.
On November 19, 2009, the government released a draft code of conduct for the credit and debit card industry in Canada to respond to some of the concerns that had been expressed. The code of conduct was developed in consultation with market participants, including merchants, credit and debit card networks, payment card issuers and acquirers. The purpose of the code of conduct is simple. It is aimed at promoting fair business practices and ensuring that merchants and consumers clearly understand the costs and benefits associated with credit and debit cards.
We are pleased to say that on May 17, 2010, the code of conduct was adopted by all credit and debit card networks, including major issuers and acquirers. Most elements of the code will come into force on August 16, 2010, with the remaining elements in force by May 17, 2011.
The proposed payment card networks act, which we are here to discuss today, is an adjunct to the code of conduct that allows the government to institute regulations regarding the commercial practices of the credit and debit card networks, including Visa, MasterCard, American Express and Interac, if required.
Once a draft code of conduct was put in place, the minister said he would enact regulations, should the various market participants not adopt the code of conduct, but they have now adopted it. Under the payment card networks act, the regulation-making authority, proposed section 6, allows the minister to recommend regulations to the Governor-in-Council regarding the commercial practices of the payment card networks, card issuers and payment processers or acquirers, including specifying which rates must be disclosed, when and how such rates will be disclosed, how and to whom premium payment cards may be issued, and the conditions that a network operator must include in its agreements with the acquirers.
Proposed section 5 of the payment card networks act makes related amendments to the Financial Consumer Agency of Canada Act. Specifically, the mandate of the agency is expanded so that it may supervise the compliance by payment card network operators with the provisions of the payment card networks act and its regulations, including any voluntary codes of conduct that have been adopted. These powers mirror the Financial Consumer Agency of Canada's current consumer enforcement powers in respect of consumer-related legislation and regulations.
Both the payment card networks act and the code of conduct have been well received by the merchant community. We are happy to answer any questions regarding the proposed legislation.
The Chair: At page 543 of the act that you have before you, I see the Financial Consumer Agency of Canada. That is the section to which you referred. However, the related amendments are in section 8 of the proposed act, at page 545. You were talking about section 5 having related amendments as well.
Ms. Anderson: Section 5 provides the powers for the agency to enforce the act and there are other consequential amendments in clause 1835 of the bill.
The Chair: The way this is structured, if credit card companies adopt this code, then the minister does not have to invoke any regulations or enforce it. Is that correct?
Ms. Anderson: That is correct.
The Chair: With the code adopted, does that give individuals the right to bring action against the card company if it does not follow the code? Is there a private right of action?
Ms. Anderson: The code sets out certain expectations and rights for consumers and merchants, and network operators have certain obligations. It is a voluntary code of conduct. However, with the powers that we have given to the Financial Consumer Agency of Canada, the agency will monitor the adoption of the code by network operators and other market participants. Merchants and consumers have a right to make a complaint to the FCAC and to market participants if they have concerns.
The Chair: They can make a complaint to the Financial Consumer Agency of Canada.
Ms. Anderson: That is correct.
The Chair: What sanctions can the Financial Consumer Agency of Canada take against a company that has voluntarily adopted the code?
Ms. Anderson: A voluntary code does not have formal sanctions; there is monitoring. The commissioner of the Financial Consumer Agency of Canada will file a report annually to the Minister of Finance. The commissioner can communicate with the Minister of Finance more frequently as required.
The expectation is that all market participants will comply fully with the code. If we are not satisfied that the code is respected, this regulation comes into play. The minister has the power to enact a regulation. If a regulation is in place, the commissioner will have more formal compliance tools to use, including administrative monetary penalties. The Financial Consumer Agency has the power to require information from institutions. The approach is graduated.
The Chair: Regulations will not be generated unless monitoring indicates there should be some and the minister decides to generate regulations.
Ms. Anderson: That is correct.
The Chair: I think I now understand.
Coming into force is on page 551. You talked about coming into force and you gave the dates May 17, 2010, August 2010 and 2011: The code was adopted in May and it will come into force on the following dates.
Ms. Anderson: Those dates are in respect of the code of conduct. Most of the provisions will come into force this summer. We gave participants 90 days to comply with the code for most elements. For other elements with respect to disclosure, we gave them nine months because they require significant systems changes. For elements of the code that require institutions to reissue payment cards, they have been given up to one year to comply. One or two elements of the code may require institutions to reissue cards.
The Chair: On page 551 regarding the clause on coming into force, sections 6 and 7 of the proposed act will come into force on a date fixed. That date does not matter. It might be far into the future because section 6 relates to generating regulations. We will not see those regulations until monitoring indicates that the minister may decide to generate regulations.
Ms. Anderson: That is correct.
The Chair: There is nothing pressing in relation to coming into force. Is that correct?
Ms. Anderson: That is correct.
Senator Murray: I may also ask this question as we proceed in relation to other parts.
We will hear interested parties from outside the government that will make statements on various parts of this bill. Have there been many or any requests to appear before us with regard to Part 12 and Part 13 of the bill?
The Chair: It is the clerk who knows that information. We will let you know as soon as I am able to do that.
Senator Murray: It will be interesting to know if these parts of the bill have generated interest among those directly or indirectly affected.
The Chair: We received several requests for appearances, but you will appreciate that there are 24 different parts. We will sort out if witnesses asked to appear with regard to these parts and let you know.
Senator Murray: I did not read through the House of Commons committee hearings. I do not know if there were many, or any, witnesses making representations on these particular parts.
The Chair: Can I assume from your inquiry that you believe we should have interested parties appearing?
Senator Murray: Not necessarily; if they are interested, surely they will let us know. I do not think we necessarily have to recruit them.
Senator Ringuette: You indicated that all parties in the industry adopted the voluntary code of conduct. Can you please provide us with the list of parties that have adhered to the voluntary code of conduct?
Ms. Anderson: We do not have that with us today. However, we have a list that we can forward to the committee.
Senator Ringuette: I appreciate that.
I understand that most of these proposed sections currently apply only to the voluntary code of conduct because there is no regulation. Based on the sections here, how does one make a complaint to the Financial Consumer Agency of Canada?
Ms. Anderson: On your first point, the regulation-making authority under section 6 of the proposed act gives the government authority to regulate in those areas relating to the code of conduct. The provision does not bring the code of conduct into effect until we draft those regulations, which will be provisions that essentially mirror elements of the code.
If one wanted to make a complaint about the code of conduct, or adherence to it by stakeholders, they would contact the Commissioner of the Financial Consumer Agency of Canada. The commissioner currently monitors a number of consumer-related codes of conduct. They have systems in place to receive complaints from consumers and others regarding adherence to codes of conduct.
With consumer-related legislation, any time there is a complaint against an institution, the consumer or merchant is encouraged to follow up first with the party, whether it is a bank or the network. However, the agency is present to receive complaints so the commissioner can inform the minister about how well the code is being adhered to.
Senator Ringuette: What power in the clause before us are we giving the Financial Consumer Agency to act upon a complaint?
Ms. Anderson: Which clause are you referring to?
Senator Ringuette: What is the power that we are giving to the Financial Consumer Agency of Canada to act upon a complaint?
Ms. Anderson: There is a clause that indicates that they may report to the minister —
Senator Ringuette: That they "may" report to the minister?
Kevin Thomas, Senior Economist, Payments, Financial Sector Policy Branch, Department of Finance Canada: They are required under the current act and the proposed payment card networks act to report at least once per year to the minister.
Senator Ringuette: Is that to report that they have received complaints, investigated complaints or enacted and enforced complaints?
Mr. Thomas: At least once per year, they are required to conduct an examination to ensure that all parties are in compliance with the code of conduct. Following the conclusion of that examination, they are required to provide a report to the minister.
Ms. Anderson: The relevant clause is clause 1848 at the bottom of page 550.
Senator Ringuette: Will that report be tabled in both houses of Parliament?
Ms. Anderson: Yes.
Senator Ringuette: Clause 1843 proposes a maximum penalty in the case of a violation committed by a payment card network operator. What would such a violation consist of and what would the penalty be?
Ms. Anderson: That penalty occurs only where regulations are in effect. Penalties cannot be applied for voluntary codes of conduct.
Senator Ringuette: How many of these clauses are subject to regulations by the minister, which are absent from this bill?
Ms. Anderson: I do not know if I understand your question.
Senator Ringuette: How many clauses in the bill will apply only if the minister develops regulations, given that we have no regulations from the minister yet?
Ms. Anderson: I think that the bulk of the provisions are only if regulations are brought into effect. What this proposed act does for the code of conduct, in effect, is give the commissioner the authority. Previously, the Financial Consumer Agency of Canada did not have the mandate to monitor a voluntary code that applies to a payment card network. This proposed act gives the commissioner that power and the power to report to the Minister of Finance.
Senator Ringuette: It is not a power. It is a responsibility.
Ms. Anderson: That is right.
Senator Ringuette: That is the extent of what we can expect to be enacted regarding payment card networks in this proposed act. There are no penalties and no complaint process. As well, there is no process regarding the yearly examining and reporting by the agency to the ministry.
Ms. Anderson: There is the provision that I referred to on page 550. The commissioner is required to deliver an annual report to the minister on her views on how well the code has been adhered to. The FCAC is already active with all companies that have adopted the code. FCAC has had a range of preliminary meetings and are engaged in working with companies to ensure they adhere to the code.
Senator Ringuette: I look forward to reading, hopefully tomorrow at the latest, the list of individual industries.
The Chair: Ms. Anderson has undertaken to provide that list to the committee.
Ms. Anderson: It includes all the major acquirers and the key issuers of payment cards.
Senator Ringuette: We are looking at all the banks that issue cards and the providers of the relevant technology because they sign the agreement with the merchants under the voluntary code of conduct. We are looking at Visa, MasterCard and American Express. That is the extent of the list of individual interveners that have complied with the voluntary code of conduct.
Ms. Anderson: The minister had requested that, by May 17, these institutions formally adopt the code. We will give you the list of the institutions that formally adopted the code.
Senator Callbeck: Thank you, chair. The Financial Consumer Agency of Canada will supervise the payment card network, even when it is on a voluntary basis, and will report to the minister once a year. In six months, if the commissioner finds real problems, will the commissioner go to the minister before that year is up?
Ms. Anderson: The commissioner, with our various supervisors, can communicate at any time with the minister on their views in respect of adherence to codes and regulations. The commissioner has that flexibility.
Senator Callbeck: I read somewhere that they will charge for supervising. How will that charge be established?
Ms. Anderson: That is to be determined by the Commissioner of the FCAC. One of the provisions in the code is such that institutions that adopt the code also agree to provide the commissioner with the necessary information, and to be assessed so that they can be properly monitored.
Senator Callbeck: Currently, we have no idea what the charges might be or how they will be assessed.
Ms. Anderson: The commissioner sets those terms.
Senator Callbeck: Will the commissioner receive guidelines from the government on setting the fees?
Ms. Anderson: We have not had discussions on that subject.
Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: Most of the budget of the Financial Consumer Agency of Canada is derived from assessments on the federally regulated financial institutions in respect of the commissioner's responsibilities with regard to the consumer protection framework that she administers. The assessments are imposed on federally regulated financial institutions. We have experience with this area, and the commissioner has experience with devising a means for assessing the participants. She will need to gauge the expected cost of the resources that will be required for monitoring and come up with assessment levels to cover that cost.
Senator Callbeck: Under the voluntary code, there is no penalty, but it will be reported to the minister at the end of the year.
Ms. Anderson: That is right.
Senator Callbeck: The minister will not introduce regulations right away. Will the minister introduce them if one person does not abide by the code?
Ms. Anderson: It is not a mathematical formula. The minister will look at the information provided by the commissioner and make a determination based on a balance of the evidence.
Senator Callbeck: You mentioned that the merchant can complain to the consumer agency. How does the merchant know that?
Ms. Anderson: I cannot speak for merchants, but individuals have been engaged with us in this process, primarily through the Canadian Federation of Independent Business and the Retail Council of Canada. They have been active with their members. They have been extremely helpful in giving us information and disseminating information to their members. They receive a lot of the information from those important associations, if not directly from us.
Senator Callbeck: Many businesses are not members of that independent business association. How do small businesses learn that they can complain if there is a problem?
Ms. Anderson: It happens as part of the requirements. Some of the key issuers of credit cards and debit cards, who are adherers to voluntary codes and this one, post it on their respective websites, such as the Canadian Bankers Association and all the major banks who are card issuers. We require, as much as possible, for industry participants to set out publicly the information on their websites and post the code, as appropriate. The main channels for that pulic disclosure include disclosure by the industry through industry associations.
Senator Callbeck: You are leaving it up to associations outside of government. Government will not communicate this information?
Ms. Anderson: It is on the federal government website. When the code was announced, a formal press release was issued and the information was shared. We are using the tools available to us through our department to communicate the information to interested parties.
Mr. Thomas: As part of the amendments to the FCAC Act, the FCAC is responsible for promoting public awareness of the obligations of the card networks. The FCAC will go out there and communicate that this avenue is available to merchants.
Senator Callbeck: Will they receive the money they will spend on that communication, such as for advertising, from the operators?
Mr. Thomas: Your question is whether that money would be part of the assessments of the operators?
Senator Callbeck: Yes.
Mr. Thomas: That is a question for the FCAC. I cannot comment on whether that expense would be included as part of the expenses for the supervision of the compliance with the code of conduct.
Senator Callbeck: Section 8 of the proposed act states:
The minister may, by order, exempt a payment card network operator from any of the provisions of this Act or the regulations.
How will the public know that information? Will it be published in the Canada Gazette?
Mr. Thomas: Yes, it would be published in the Canada Gazette.
Senator Callbeck: I will go on the next round.
Senator Runciman: In your opening comments, you talked about the code being well received, and this component of Bill C-9 being well received. Can you elaborate on the kind of response you have had with respect to this initiative and, in response to Senator Murray's comment, if there were any concerns expressed at the time this part of the budget document was announced.
Perhaps I am wrong, but I think the only concern might have been that it was not mandatory. In terms of the code itself, it seems to me that virtually all the comments were laudatory. Perhaps you can expand on that response.
Ms. Anderson: As you noted, the comments have been laudatory. When we went out with the draft code and the final code, the business associations, the Canadian Federation of Independent Business, the Retail Council of Canada and the Consumer Agency of Canada were all happy with the code of conduct and they indicated their full support for it. The business associations, in particular, as the code itself is largely focused on bringing back fairness to merchants in their relationship with payment card networks, were encouraged and liked the voluntary approach. They thought it was a major step forward.
Senator Runciman: Having the mandatory provision hopefully provides that extra incentive for compliance, in terms of delaying passage of Bill C-9 and in terms of the ministry or the government having the ability to take the mandatory route. That ability is precluded until this legislation is passed.
Ms. Anderson: Until the legislation is passed, the commissioner does not have the authority to monitor adherence or report on the code.
Senator Runciman: I do not think you commented on whether you heard any dissent or unhappiness with the code as it was structured, through the House of Commons committee hearings or through any other area.
Ms. Anderson: I did not hear any negativity from those benefiting from the code. We heard a lot from the stakeholders, the acquirers, the networks and the issuers about certain complexities in implementing parts of the code, particularly the disclosure elements, which require a lot of changes to their system. We had an excellent dialogue, and refined parts of the code through that discussion. I feel they are all partners in this code, and they think it will have an effect. Everyone is encouraged to adhere, and they want to make it work.
Senator Runciman: The mandatory element is an extra incentive to protect small businesses and retailers.
Ms. Anderson: Absolutely.
The Chair: Thank you, Senator Runciman. Ms. Anderson, as a point of clarification, can you define who those acquirers and issuers are? I notice that network operator is defined, so I can see that.
Ms. Anderson: The networks are Interac, American Express, Visa and MasterCard. The issuers are the financial institutions that issue those cards to consumers, such as the major banks, for example. The acquirers are those entities that place the terminals on merchants' counters. There are some names, such as Global Payments, Manaris Corporation and TD Merchant Services, for example. There are about six or seven major ones, and we will provide a list of them.
The Chair: What do you call an individual who has the card and uses it?
Ms. Anderson: A consumer.
The Chair: Thank you.
[Translation]
Senator Poulin: Ms. Anderson, thank you for your excellent presentation. There has been a lot of discussion around the relationship between the Financial Consumer Agency of Canada, the merchants and the managers, which I call the credit cards themselves. How would the new legislation on credit card networks affect the consumer or cardholder?
Ms. Anderson: The elements of the code are most often applicable to merchants. There are some aspects that involve consumers. There are networks where issuers have sometimes distributed or issued credit cards, and even privilege cards, to consumers even though they do not have much money. The legislation seeks to protect consumers from such practices.
[English]
For consumers, with respect to the premium cards, we received certain complaints in that the distribution of them was too wide, and consumers should not receive premium cards that have a higher interchange rate and therefore a higher cost to merchants. Too many people were receiving them.
This code refines the distribution practices by indicating they have to be at specific income thresholds and defined groups of individuals. Those requirements will benefit both merchants and consumers, consumers in that they will not pay higher fees than they need to and merchants in that they will not suddenly face higher interchange rates for a wider range of cards.
[Translation]
Senator Poulin: Why is it voluntary and not mandatory?
[English]
Ms. Anderson: The government has used voluntary codes on consumer-related measures with credit and debit cards. There are a whole other set of measures that protect consumers. That is why this code is, as I said, directed more at merchants. It has worked well. As I said earlier, it is a graduated approach, and we have a mechanism in place to monitor adherence to it.
Regulation is more costly as there must be more intensive supervision, and it is more costly to the institutions as well. By putting in place this regulation-making authority, the government has said it is prepared to go that route if this approach does not work. It is a first step towards regulatory burden.
[Translation]
Senator Poulin: If I look at it from the perspective of the credit card industry — a very important industry in Canada — why should I comply with what I call the code of ethics? According to the minister's report, if I am caught, there is a possible penalty of $50,000 or $200,000, depending on my status, in other words, whether I am a natural person or a financial institution.
[English]
Ms. Anderson: With many of these companies, they rely on consumers to earn money. They need to issue cards, so their reputation matters. The agency has the ability, in a regulatory context, to put information out there about specific institutions. It is clearly an administrative monetary penalty. There is a bit of a name-and-shame aspect to it. Anyone with a business and a name would want to keep that name, so the incentive structure is there for them to adhere to.
Senator Murray: Is there one, or are there several, voluntary codes?
Ms. Anderson: There are several voluntary codes. There is one that is the adjunct of this bill, the one dealing with fairness to merchants. One code pertains to the payment credit and debit card space. The Commissioner of the Financial Consumer Agency of Canada monitors other codes of conduct, largely related to consumer protection issues.
Senator Murray: Do the codes involve the payment card networks, the credit cards?
Ms. Anderson: Yes.
Senator Murray: Was the government involved in the drafting of that code or these codes? Let us stick with the one code that is touched on in this bill. Was the government involved in the drafting of that code?
Ms. Anderson: The one related to this bill, yes; we very much provided a leadership role.
Senator Murray: How was the code adopted? What was the process by which it was adopted?
Ms. Anderson: We released a first draft of the code last fall.
Senator Murray: You did?
Ms. Anderson: The federal government did.
Senator Murray: The voluntary code?
Ms. Anderson: Yes; that had been based on much discussion with all stakeholders concerned.
Senator Murray: Of course.
Ms. Anderson: We had many rounds of meetings, and then we released a final version of the code last May.
In terms of adoption, it was released in April, and institutions were given a month to adopt it formally. They had either written to the Minister of Finance to say that they formally adopted the code or they posted the code on their website to indicate their adherence to it. Again, we will provide that list to this committee.
Senator Murray: Were there any or many such institutions that declined?
Ms. Anderson: No.
Senator Murray: They have all subscribed?
Ms. Anderson: Yes.
Senator Murray: That is the adoption process?
Ms. Anderson: Yes.
Senator Murray: It is a public document, one assumes?
Ms. Anderson: The code is, yes.
Senator Murray: In addition to the voluntary code, there is the regulation-making power of the Governor-in-Council in which, as I read it, the Governor-in-Council can regulate, and regulations are mandatory, as we know. The code and regulations pretty well cover the waterfront. Regulations can specify the types of rates that the operator must disclose and the manner in which disclosure must be made. The government can regulate, prescribing the time and manner in which the operator must give notice of any new rates or changes in rates, prescribing conditions regarding the issuance of payment cards that a payment card network operator must include and any agreement entered into with an issuer, conditions that a payment card network operator must include in any agreement entered into with an acquirer and so on. There are seven regulation-making powers and they are broad. Have these regulations been drafted?
Ms. Anderson: No.
Senator Murray: Are they in the process of being drafted?
Ms. Anderson: No; we have the code of conduct, and the minister was clear that if parties did not adopt the code of conduct, we would have made the code involuntary.
Senator Murray: This involuntary code is something you are holding over their heads as a fall-back position for the government.
Ms. Anderson: Those are your words, but it is a tool.
Senator Murray: It is a statement of the government's ultimate authority, if the government wants to exercise it, right?
Ms. Anderson: That is right.
Senator Murray: Are there any penalties in here?
Ms. Anderson: Not for the code of conduct itself. There can be a monetary penalty only once regulations are in force.
Senator Murray: If the voluntary code is infringed in any way, what happens then?
Ms. Anderson: The commissioner reports to the Minister of Finance.
Senator Murray: Who does what?
Ms. Anderson: The minister then considers all the facts, whether the minister is comfortable with the adherence and whether the minister thinks it is prudent to proceed to regulation in the area.
Senator Murray: That would be if there was prevalent or widespread infringement of the code. What happens if there is one operator off base?
Ms. Anderson: It is the minister's decision. I cannot speak to how the minister will look at that issue.
Senator Murray: I suppose the others can isolate the operator who is offside.
Ms. Anderson: Our expectation is that institutions, for the reasons I have discussed, will fully adhere to the code. Institutions have a lot invested in their brands and want to maintain the value of those brands.
Senator Ringuette: I have three short questions. You indicated it will be one year to reissue. The voluntary code of conduct prohibits co-badging. We know of at least one Canadian financial institution that has issued co-badge cards, both debit and credit on the same card. Does that mean that the financial institution has one year to retract those cards or else the minister will find that the institution has not complied with the code?
Ms. Anderson: For those provisions, like with co-badging or co-branding, they have a year to reissue cards that are not now in compliance. The commissioner at that time, after a year, will monitor the situation to ensure that all issuers and networks are in compliance.
Senator Ringuette: Another main concern of mine is the power of the Financial Consumer Agency of Canada. Last year, we heard in another Senate committee that the particular agency also has the responsibility to work with financial institutions, credit card issuers and credit card networks to provide education.
Part of the commissioner's mandate and responsibility is to provide education, and now the commissioner must work with these entities with regard to their compliance. Is that mandate not a conflict of interest?
Ms. Anderson: I think the commissioner has had a lot of experience with that.
Senator Ringuette: I am not talking about the person. I am talking about that entity and its legislative responsibility; the current responsibility that it has notwithstanding this additional responsibility that you are providing. The entity is whoever, and it is not related to the person who acts as commissioner. Is there a situation of conflict when, on the one hand, one act is asking the entity to work with those financial institutions, the credit card issuers and the network operators to provide what they call "consumer education"? The commissioner has clearly indicated that, on a routine basis, she works on a marketing strategy with these entities to put forth educational material. On the other hand, that same entity will be asked to monitor the compliance of these financial institutions and credit card companies. Is that not a conflict? Have you looked into legislation with regard to conflict with respect to the additional mandate you are providing to this agency?
Ms. Anderson: On the conflict point, I can speak personally. I do not see it.
I can speak a little to the consumer education or awareness aspect. Over the years, I think it has worked well. For example, on credit cards, the FCAC, since its inception, essentially has posted for consumers information on all the different credit cards, and consumers can see which one is the best value. I see promoting awareness as complementary to the commissioner's role as a supervisor.
Senator Ringuette: I will reiterate my question to you.
When you proposed this legislation and this additional mandate to the Financial Consumer Agency of Canada, did you look at whether there was a conflict with regard to the different participants the commissioner must work with?
The Chair: Did you check with the Department of Justice to determine whether their interpretation would be conflict or no conflict?
Ms. Anderson: We worked closely with the Department of Justice in drafting the bill. That issue was not raised to us as a concern in this bill.
Senator Ringuette: Can you follow up with the Department of Justice with regard to this issue? I have concerns because of the arguments I have provided to you.
You can also look at the testimony of the agency last May in the Standing Senate Committee on Banking, Trade and Commerce with regard to its tightly knit activities with the people that the commissioner is now asked to supervise or to oversee their compliance. If you can come back to the clerk and indicate in your research with the Department of Justice that there is not a situation of conflict, I will feel better than I feel right now about this additional mandate to the institution.
Ms. Anderson: We will follow up with our colleagues.
Senator Callbeck: Does this voluntary code of conduct cover areas that would be covered if we had regulations? Will all these things noted here that you will make into regulations if the voluntary code does not work out be the same as what is in that voluntary code?
Ms. Anderson: I cannot speak to what the regulations would be in the absence of their being drafted and how things evolve over the next year, but at this time, had institutions not formally adopted the code, the elements of the code were what we were thinking of in terms of the substance of a regulatory package.
Senator Callbeck: Can you table the code with the committee?
Ms. Anderson: Yes.
The Chair: That is the end of my list, which is good. Ms. Anderson, thank you for helping us in understanding this new piece of legislation. Will you stay on? I note that Part 13 deals with the Financial Consumer Agency of Canada Act amendments.
Ms. Anderson: Another colleague of mine will join the panel.
The Chair: We will reconvene with our next witness, honourable senators, for Part 13.
[Translation]
I want to welcome Pascale Dugré-Sasseville. Madam, you have the floor.
Pascale Dugré-Sasseville, Chief, Consumer Issues, Financial Institutions Division, Department of Finance Canada: Thank you, Mr. Chair. It is a pleasure to be here today to discuss the amendments to the Financial Consumer Agency of Canada Act and certain consequential amendments to acts in relation to financial institutions.
I will start with a brief overview, and then I will be happy to answer any questions.
[English]
The Financial Consumer Agency of Canada is responsible for monitoring the compliance of financial institutions with the consumer provisions set out in the federal financial institutions statutes. The agency is also mandated with expanding consumer awareness of financial services matters.
Budget 2010 announced the government's intent to take a more proactive and forward-looking approach to consumer protection.
Leveraging the agency's marketplace proximity, the proposed amendments to the Financial Consumer Agency of Canada Act and to the financial statutes will enable the agency to undertake research on financial consumer trends and emerging issues. The agency will then be able to feed more fulsome and timely information to the government to help inform the public policy decision-making process.
As the financial sector is dynamic and constantly evolving, the government needs to be more responsive to emerging issues. The amendments will also enable the agency to oversee compliance with ministerial undertakings and directives.
[Translation]
As requested by the chair of the committee, I would like to focus on a few key clauses that reflect that political agenda, especially clause 1856, which is probably the main clause and which adds to the agency's objects the authority to gather more information, and, in particular, paragraph 3(2)(f), which comes under that section.
Clause 1857 addresses, once again, the commissioner's power to gather information in furtherance of the agency's objects. Clause 1858 describes the ability of the agency or power of the minister to issue a written directive to the commissioner and the manner in which that directive is to be conveyed to the agency.
Clauses 1859, 1860, 1861 and 1862 are consequential amendments to ensure that everything fits into the agency's normal procedures. Finally, clauses 1863 to 1866 are consequential amendments on financial institutions, authorizing the minister to ask the Financial Consumer Agency of Canada to supervise the terms, conditions and undertakings imposed by the minister insofar as the purpose is to protect the customers of those financial institutions.
[English]
The Chair: I am looking at the consequential amendments at page 554, clause 1858 and following, amending the Bank Act, Cooperative Credit Associations Act, trust companies, and so forth. Is the commissioner that is referred to the commissioner under the Financial Consumer Agency of Canada?
Ms. Dugré-Sasseville: Exactly.
The Chair: That is defined in the act somewhere. It is the same person.
Ms. Dugré-Sasseville: That is right. The term is already defined in the financial statutes.
The Chair: It is referred back to somewhere, presumably. Somewhere in this legislation are the credit unions, and if they reincorporate federally and are supervised federally, we presume the same commissioner will be involved in supervising them.
Ms. Dugré-Sasseville: Absolutely; as my colleagues have indicated, where credit unions want to operate federally, they will do so under the Bank Act, and as such, will be subjected to the same overall framework as banks and other federally regulated financial institutions.
The Chair: The Financial Consumer Agency of Canada, I presume, is a line item, and there is an allocation each year for this agency to function.
Ms. Dugré-Sasseville: The agency is mostly funded through assessments from financial institutions, in the same fashion that Office of the Superintendent of Financial Institutions is also funded through assessments on the regulated entities.
The Chair: That was the point I was coming to. You said "mostly." Presumably, some portion of their annual budget for salaries, et cetera, come through an allocation. Is that allocation within the Department of Finance — the Ministry of Finance?
Ms. Dugré-Sasseville: The agency does not receive any funding from the government for any portion of its operation except for finite funding that is dedicated to undertaking financial literacy initiatives, so the funding does not come through the regular allocations.
The Chair: The agency is self-sufficient, then.
Mr. Rudin: Most of FCAC's funding, as my colleague said, comes from its assessments on financial institutions. A portion is provided directly to the institution from the Consolidated Revenue Fund of Canada in support of financial literacy activities, and that is statutory rather than funding through the appropriations act.
The Chair: That is helpful.
Senator Ringuette: I suppose that this is to comply with the credit card statements issued and the information on those statements that the minister directed last summer must be there. Am I right?
[Translation]
Ms. Dugré-Sasseville: Yes and no. The agency is already responsible for supervising the regulations made last year. The amendments before you do not change the current situation. It is already part of the agency's mandate to do that. That is why I say yes and no. It is one of their responsibilities, but it does not change under the amendments you have before you.
Senator Ringuette: It is the same situation, aggravated by the fact that the agency's funding is in large part provided by the financial institutions, and it must receive and supervise consumer complaints against those financial institutions. It is clearly a conflict of interest if, in addition to maintaining a relationship as described in the previous section, the agency is operating on funding that comes from those institutions. In French, we have a saying: ne mords pas la main qui te nourrit.
The Chair: That is Acadian!
[English]
Senator Ringuette: Don't bite the hand that feeds you. These two parts, in regard to the Financial Consumer Agency of Canada, reiterate the conflict of interest situation of that agency in regard to the financial institutions in this case, and in regard also to credit cards — the payment network — in the other case.
I will ask you the same question that I asked the witness before in regard to those sections: Have you talked to, and have you had the advice of, the Department of Justice in regard to conflict of interest situations with respect to clauses 1851 to 1861 in regard to the Financial Consumer Agency of Canada?
[Translation]
Ms. Dugré-Sasseville: Thank you for that question because I think some clarification is needed.
The user-pay principle of financial regulatory agencies is one that is universally accepted around the world. Let us be clear about what that means: the agency determines how much each financial institution has to pay. Of course, they have operating budgets. They are very transparent with their operating budgets and their priorities, and they have a formula to determine how that budget should be divided between the regulated agencies.
The formula is also transparent to clearly indicate how the amounts will be allocated. That does not mean that the institution has a choice. The institution is informed of its fee and has to pay it. Non-payment is a violation of the law and may be punishable by a fine or other compliance measure.
The Office of the Superintendent of Financial Institutions is funded in the exact same way. If we look at regulatory agencies in the U.S. and Europe, they operate on the same principle. The agency receives money from the government, but just for the part where it is really active. One element of public policy is to try to improve Canadians' level of financial literacy. That is why it receives public money. As for the rest, I believe it is an accepted principle: it should not be Canadians or taxpayers paying for the supervision of financial institutions, but the regulated organizations themselves.
Senator Ringuette: Under that method, is the payment made to the agency directly, or does it go through Revenue Canada?
Ms. Dugré-Sasseville: The agency.
Senator Ringuette: The agency.
Ms. Dugré-Sasseville: Yes. In fact, the financial services are provided by the Office of the Superintendent of Financial Institutions, precisely to be more efficient and effective and to avoid any duplication of services. So the payments are directed to a single place and then allocated accordingly.
Senator Ringuette: There is a fundamental difference between OSFI and this agency. The agency is required to deal with consumer complaints under Part 13 and merchant complaints under Part 12.
Ms. Dugré-Sasseville: Yes.
Senator Ringuette: It is not the same thing. OSFI has to verify reserves and federal regulations with respect to financial institutions. It is not responsible for dealing with consumer or merchant complaints, as we see in these two sections here.
For that reason, I will ask you to check with the Department of Justice about the agency's conflict of interest situation with respect to Part 13. And could you provide the committee members with the analysis undertaken by the Department of Justice, as soon as possible?
Ms. Dugré-Sasseville: Absolutely, request received.
[English]
Senator Murray: Briefly, let me observe that these provisions should not be before this committee. They should be before the Banking Committee, which has much more experience and expertise in dealing with the regulation of financial institutions.
However, let me presume that the provisions we are talking about here have been, in one fashion or another, discussed with the institutions that will be affected by them. In other words, you have consulted on this stuff — or somebody has.
Ms. Dugré-Sasseville: The legislation is out there in the public domain for everyone to see.
Senator Murray: I am talking about the drafting process. Before the legislation came into the public domain, there must have been consultation. Perhaps I am going too far, although I do not think so, in suggesting that the provisions generally — I do not mean the text of the bill — were discussed with those whom they will affect in those institutions. Is that correct?
Ms. Dugré-Sasseville: Because they were part of the budget bill, there is no public consultation on a budget bill before it is tabled before the house. However, since the bill has been in the public domain, we have not heard any particular comments from stakeholders about concerns they may have with the current drafting.
Senator Murray: Where was the drafting done?
Ms. Dugré-Sasseville: As it always is, in the Department of Justice.
Senator Murray: I understand where the drafters are; I did not phrase my question well. Was it somewhere in one of the agencies under the Department of Finance? I am talking about the policy.
Ms. Dugré-Sasseville: Yes, the policy stems from the Department of Finance.
Senator Murray: Which part of Finance?
Ms. Dugré-Sasseville: The financial sector policy branch.
Mr. Rudin: That is us.
Senator Murray: And you did not consult?
Mr. Rudin: As Ms. Dugré-Sasseville said, there is no public consultation on a budget bill. We speak frequently with a variety of stakeholders, including the financial institutions, about a variety of frameworks.
Senator Murray: I am not suggesting there is anything wrong with that approach.
Mr. Rudin: I am only answering the question. We did not put these specific provisions in front of stakeholders before they were made available to Parliament and the public.
Senator Murray: I will put the same question or add the same comment, chair, which is whether there has been any interest expressed on the part of financial institutions or others to make representation to us with regard to these parts of Bill C-9. I want to know at some point.
The Chair: Several financial institutions are impacted, as you will see at pages 554 and 555. We will look into that to find out question. It may be that there is a bankers' association that might be able to speak to us on behalf of the banks.
[Translation]
Senator Poulin: If I look at the original Financial Consumer Agency of Canada Act in conjunction with today's amendments, I see that your amendments primarily affect the commissioner's mandate.
What are the main changes to his mandate in terms of his work and responsibilities under the enabling legislation?
Ms. Dugré-Sasseville: Excellent question. The amendments you are looking at will not change the fundamental nature of the activities and responsibilities of the commissioner or his agency. The amendments are simply an extension of what they are already doing. I would point to three specific changes in the enabling statute.
First, there is the extension of their ability to gather information from all the interest groups they interact with. Previously, their ability to collect information was relatively limited to the provisions they were supposed to supervise, so if the information was not covered under the current act or regulations, the ability of the commissioner and his agency to obtain that information was very limited. With this new, more proactive approach, they do not have to wait until there is a regulation to ask the question; instead they can ask the question to determine whether there is a problem. So, in the future, the agency and the commissioner will be able to broaden the scope of the questions about which they can gather information and interact with interest groups.
Second, but this is not new to the overall regulatory framework, the minister has similar powers with respect to other agencies. So all that is happening is that the Financial Consumer Agency of Canada is being put on the same level as other agencies. Its powers and responsibilities in that regard are very similar to what exists elsewhere.
Third, I would point out that the minister must approve a number of transactions in the financial sector as stipulated in the Bank Act. Under the approval process, the minister must issue terms and conditions that the financial institution has to satisfy as a condition of approval.
It is a mechanism that is used regularly in prudential supervision, but also, once again, one that fits into this much broader and more proactive vision. The minister can set the terms and conditions to better protect the customers of these financial institutions. This change will allow the Financial Consumer Agency of Canada to supervise those terms and conditions when they are intended to protect consumers. So the Office of the Superintendent of Financial Institutions Canada will be able to continue supervising terms and conditions of a prudential nature, and the agency will be able to supervise terms and conditions that seek to protect consumers.
Senator Poulin: Thank you very much for your patience and your answer.
Ms. Dugré-Sasseville: That is our job. Thank you.
[English]
Senator Marshall: Can you give us some insight into the relationship between the agency and the Department of Finance? Did the agency or the commissioner have any responsibility for, or any role in, drafting the legislation?
Ms. Dugré-Sasseville: The department and the agency have to work closely for the system to work. The department is responsible for putting out the legislation and regulations, but the task would be incomplete if we did not liaise with the regulator to ensure that the legislation and the regulations work from a practical standpoint. We must always ensure that the process works from intent to realization of the policies.
When we drafted this legislation, we ensured that, from a legal standpoint also, it will work from FCAC's perspective and that it will not create unintended consequences in terms of how the agency performs its mandate.
Senator Callbeck: I want to ask about clause 1853 on page 552 of the bill. You propose amending the act by adding section 5.1. Proposed subsection 5.1(1) says:
The Minister may give a written direction to the Commissioner if the Minister is of the opinion that it can strengthen consumer protection and the public's confidence in that protection or enhance the public's financial literacy.
Then proposed subsection 5.1(4), in clause 1853, says:
The Statutory Instruments Act does not apply to a direction given under subsection (1).
Why do you need subsection 5.1(4)?
Ms. Dugré-Sasseville: As I said before, this directive power is akin to what already exists, so this is not a change in policy. To better explain, the minister has the ability to regulate, so if the minister chooses to issue a directive, it is likely because there is a time-sensitive issue and the minister wants to be able to issue that directive and have it complied with.
When one goes through due process with a statutory act, it is not timely, and that kind of defeats the purpose of the instrument.
Senator Callbeck: In other words, the minister has the authority and it will not be reviewed like regulations; it will not be reviewed by Parliament?
Ms. Dugré-Sasseville: No, it will not.
Senator Callbeck: The minister makes directives. Will all those directives apply broadly to all financial institutions, or can the minister make a directive targeted to a particular institution?
Ms. Dugré-Sasseville: The minister sets the rule for everyone. There is nothing that prevents a specific, but if we look at the legislative cadre and the regulatory cadre, they set the circumstances for which the directive applies and then the organizations see whether the directive applies to them or not. It is likely that the directive will apply in the same fashion, that it will not name a particular situation but will say what ought to happen for anybody who is involved in this type of activity, as opposed to targeting specific organizations.
Senator Callbeck: Give me an example, please.
Ms. Dugré-Sasseville: To be frank, directives have not been used yet, but we have learned from the financial crisis that we must be ready for anything. It is in that spirit that the directive power was added to the Financial Consumer Agency of Canada Act to ensure that the minister has the ability to see what is happening, and to react adequately in every area for which the minister is responsible: consumer protection, prudential aspects and deposit insurance aspects. The minister has similar powers with all these institutions.
It may not be directed at specific financial institutions; it can be directed at the agency itself; asking the agency to do something, such as to gather further information about a particular pressing issue. The minister can issue a directive that is directed at the agency itself.
Senator Callbeck: Are you saying it is a time factor? Is that why that provision is there?
Ms. Dugré-Sasseville: Yes.
Senator Banks: I apologize, colleagues, if this question has been asked and answered; I was late arriving here.
On page 552 of the bill, in clause 1851 of the bill amending subsection 3(2), it says that the act is amended by adding "and" at the end of the paragraph, et cetera. Then proposed subparagraph (f) says:
monitor and evaluate trends and emerging issues that may have an impact on consumers of financial products and services.
I presume that in the course of that monitoring and evaluation, information will be collected, some of which might be private information proprietary to the institution or to individuals who are customers of the institution, and while the confidential nature of the information collected under section 5 is protected in clause 1854, amending section 17, is there a protection somewhere else of the privacy of the information collected under the amendment to subsection 3(2) of the act? I am sure there is but I do not know.
Ms. Dugré-Sasseville: This is not different from other circumstances.
Senator Banks: Does the act say that somewhere else?
Ms. Dugré-Sasseville: Exactly; other acts such as the Personal Information Protection and Electronic Documents Act, PIPEDA, already cover that.
The Chair: Such as what; I am sorry?
Ms. Dugré-Sasseville: Another piece of legislation also applies.
Mr. Rudin: Personal Information Protection and Electronic Documents Act.
Ms. Dugré-Sasseville: Yes, that act also applies. It governs privacy.
The Chair: Honourable senators, we have copies of all statutes that are impacted, but I do not bring them every time. It is a cartload of statutes. If you need to gain access to any one of them quickly, I have them in my office. I will be pleased to make them available.
Senator Murray: My questions were supplementary to those that Senator Callbeck asked a few minutes ago. I will ask both of them out of curiosity.
With regard to clause 1853 adding proposed subsection 5.1(3) to the act, what is the consideration, legal or otherwise, that leads you to put in a provision stating that the commissioner's compliance with the direction is deemed to be in the best interests of the agency? That is my first question.
Second, proposed subsection 5.1(5) provides that
The Minister shall cause a notice to be published in the Canada Gazette that a direction was given . . . as soon as is feasible after the direction is implemented.
Why would we require that the minister cause a notice to be published after the direction is given as soon as it is given? Can you satisfy my curiosity on those two points?
Ms. Dugré-Sasseville: With respect to the first point, if I can go back, this is a clarification. Again, the fact that the directive comes from the minister, it is in the best interest of the agency. There is truly no more magic than that.
[Translation]
Senator Murray: It goes without saying.
Ms. Dugré-Sasseville: It goes without saying, exactly. To read it is to see it and understand it.
[English]
That is so there is no debate as to whether the agency should go in a different direction. Now, the directive is: What is in the best interests for everyone.
Senator Murray: Yours is not to reason why — you accept it and you implement it — right?
Ms. Dugré-Sasseville: Yes; with respect to the question of the publication, as I said, there is time sensitivity around these things and the Canada Gazette is not always published in, again, a timely enough fashion. Again, they do not want the doing to get in the way of the publishing, or vice versa. When a directive is issued, it is because there is urgency to act. The agency will focus on implementing the directive, and will publish at the earliest opportunity.
Senator Murray: The minister will publish?
Ms. Dugré-Sasseville: The minister, yes.
The Chair: All these points that have been brought up in the last little while relate to clause 1853, at the bottom of page 552. This process is new and you indicate it has not been used in the past — the minister acting by way of directive as opposed to acting by way of regulation.
Ms. Dugré-Sasseville: That is right.
The Chair: The protection for the public and for parliamentarians is that it publishes in the Canada Gazette. We can go there to see if the minister is publishing anything. In another time it would have been a regulation that would have been subject to scrutiny of regulations.
Ms. Dugré-Sasseville: Directives are not a substitute for regulations. The minister has made many regulations and will continue to do so where appropriate. As I said, a directive is a different instrument to answer to different circumstances, whereas if regulations are warranted, the minister will go forward with regulations.
The Chair: What would you have done before this section was here and there was no possibility for a directive?
Ms. Dugré-Sasseville: That is an interesting question. Obviously, I think we have been fortunate in Canada where we have not been placed in a situation where this instrument was warranted. However, again, these are lessons learned from the crisis. We know we need a full tool box to oversee any situation that may be thrown our way. That is why the directive power was added to the act.
The Chair: It is not unique to this act?
Ms. Dugré-Sasseville: No, it is not.
The Chair: There have been recent amendments to other pieces of legislation we have looked at that provide this new directive power.
Ms. Dugré-Sasseville: The latest of which is probably the Canada Deposit Insurance Corporation.
The Chair: I had imperfect recollection as to which the latest was, but I recall seeing it, and finding this trend interesting.
Seeing no other questions, it is for me to thank you, Ms. Dugré-Sasseville, for being here and helping us with this particular part. Your explanation was clear and along the lines we wanted.
Honourable senators, we are pleased to have new witnesses from the Department of Finance Canada for Part 14. We have Rachel Grasham, Chief, Financial Crimes — Domestic, Financial Sector Policy Branch. We also have Annik Bordeleau, Senior Project Leader, Financial Crimes — Domestic, Financial Sector Policy Branch. Thank you both for being present. Will one of you take us through Part 14?
Rachel Grasham, Chief, Financial Crimes — Domestic, Financial Sector Policy Branch, Department of Finance Canada: Yes, I will do that.
The Minister of Finance is responsible for ensuring the integrity of the Canadian financial system but is also responsible for the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which is Canada's anti-money-laundering and anti-terrorist-financing legislation. As a backdrop, this is the government's primary instrument for preventing, detecting and deterring money laundering and terrorist financing.
In terms of the new measures proposed through the budget bill, the rationale is essentially that the Canadian anti- money-laundering and anti-terrorist-financing regime is comprehensive, but one of the gaps we have identified is that the government lacks the ability to take legally enforceable, graduated and proportionate targeted measures with respect to money laundering and terrorist financing threats that come from outside of Canada. What we mean by that is, specifically, foreign jurisdictions and foreign entities that lack effective anti-money-laundering and anti-terrorist-financing controls may be unwittingly facilitating money laundering and terrorist financing.
Our partners, such as the United States and the United Kingdom, have put measures in place to enable them to take action against such high-risk targets. Therefore, it was determined that Canada needs to keep pace with partners as well as international standards pertaining to combating money laundering and terrorist financing, or we run the risk of becoming a destination of choice or a weak link in the international financial system. At worst, we will attract illicit funds to Canada because we do not have the effective measures in place to take such countermeasures.
What will the measures do? The measures proposed will enable the government to act in a graduated and proportionate manner to bring targeted financial countermeasures against high-risk targets, foreign jurisdictions and entities that lack effective controls to combat money laundering and terrorist financing. Two new authorities are put forward through the Minister of Finance. One is the ability to issue directives that require —
The Chair: Can you refer to the clause of the bill?
Ms. Grasham: I am not going clause by clause.
The Chair: You are still providing an overview.
Ms. Grasham: Yes.
The Chair: After you have finished, perhaps you can take us to the clauses that pertain to what you are talking about.
Ms. Grasham: I am dealing now with clause 1869, which sets out the two specific powers. One is the ability for the Minister of Finance to issue directives that require reporting entities under the act to take targeted and preventive measures with respect to these high-risk targets. The legislation sets out a number of different areas for the countermeasures that deal with customer due diligence, client identification and verification, monitoring of transactions, reporting requirements and compliance requirements.
Second is a regulation-making authority so that the Governor-in-Council on the recommendation of the Minister of Finance and in consultation with the Minister of Foreign Affairs can issue regulations that limit or prohibit reporting entities from engaging in financial transactions, again with the high-risk targets.
Two possible triggers can be used to bring these limits about, both in the case of a directive as well as a regulation. One is a call from an international body of which Canada is a member, such as the Financial Action Task Force, the G7 or the G20. Such a call would be based on a prima facia case that is developed by the international body and based on objective facts.
The second call would be based on domestic considerations where there is a particular need, given the Canadian context, to allow Canada to act in concert with other countries where there is not necessarily a call by an international body per se or there is an explicit Canadian context where we think we need to take steps to protect the integrity of the Canadian financial system.
In the case of directives, they will be published in the Canada Gazette. The minister will also ask the director of Financial Transactions Reports Analysis Centre of Canada, FINTRAC, to communicate them publicly, and we will probably ask the superintendent of Office of the Superintendent of Financial Institutions of Canada, OSFI, to communicate them as well. Regulations will be subject to the full regulatory process: consultation, pre-publication, final publication, et cetera. Both directives and regulations will be reviewed a minimum of every three years to ensure they are still relevant and needed. Although this is the default, for the most part, the need for them will be reviewed more frequently through the Financial Action Task Force process, which is the international body that tends to look at these things.
A permitting process will be associated with the regulation so that application can be made to allow for legitimate transactions to go forward or business to be wound up. There is also the possibility in a regulation of having specific exemptions put into place; for example, allowing for lower amounts of remittances to be conducted. Compliance with this new part of the act will be monitored by FINTRAC. Those are my remarks.
The Chair: Perhaps you can help us with the clauses. You told us all of these things, now I am trying to find them in Part 14. You do not have to repeat yourself but briefly help us find the clauses.
Ms. Grasham: The directive-making power and the regulation-making power come in through clause 1869.
The Chair: At page 558 and following.
Ms. Grasham: It is under the heading, "Protection of Canada's Financial System."
The Chair: Let us stop there. You indicated two new powers. One is the directive power, and the other is the regulation-making power. Is that correct?
Ms. Grasham: That is correct, yes.
The Chair: You were here for the last part we had a discussion on, and Mr. Rudin was here. Is that the same new power we talked about under the agency situation?
Mr. Rudin: Not exactly; In the case of the agency, we are talking about the minister directing the agency to take a particular step. In this case, this directive is aimed at the entities that have obligations under the money-laundering legislation to take countermeasures. It is a directive where, if you are a bank and you are engaging in a transaction with the following foreign jurisdiction or foreign entity, you must take additional measures, whether it is enhanced customer due diligence, et cetera.
These are directives that, although they are administered by the Financial Transactions and Reports Analysis Centre of Canada, FINTRAC, they fall on money service businesses and financial institutions that fall within the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, PCMLTFA.
The Chair: They are an alternative to regulations?
Ms. Grasham: The intention is that the legislation sets out the broad parameters for what would be a directive, also under clause 1869. Then regulations will be brought forward to provide more explicit clarity around what a countermeasure will look like.
We will bring the regulations forward. Following that, the minister will issue a directive further to those regulations. They will not be under the Statutory Instruments Act, but they are required to be published in the Canada Gazette and also communicated by FINTRAC to reporting entities.
The Chair: I see there is a statutory instrument at page 560, but I found it interesting that the directive prevails in the event of any inconsistency between a regulation, which because of parliamentary scrutiny, I would have thought would have a higher level of authority than a directive, which it does not have, yet the directive prevails.
Ms. Grasham: The regulation that is referred to in that case is the second instrument.
Annik Bordeleau, Senior Project Leader, Financial Crimes — Domestic, Financial Sector Policy Branch, Department of Finance Canada: It says any regulation.
The Chair: I am on page 560, proposed section 11.46.
Ms. Grasham: The issue is that the act and regulations already set out measures that have to be followed by reporting entities. There are already requirements under the act for customer identification and verification, recordkeeping, reporting requirements, et cetera.
The directive will introduce additional requirements on top of those in the case of a high-risk jurisdiction. Provisions already exist in the act for a higher obligation when there is a deemed risk. These provisions allow for the minister to determine that a jurisdiction or situation is high-risk, and then these additional measures will be brought in.
The Chair: You talked about these international bodies and the Financial Action Task Force. Explain how Canada operates in that regard and how we gave up jurisdiction to that international body, if we have?
Ms. Grasham: The Financial Action Task Force is the international standard-setting body. It has a membership of 35 countries that have made the political commitment to implement the standards it sets. It created a standard of the 40 plus 9 recommendations setting out the anti-money-laundering and anti-terrorist-financing measures, such as the requirement to identify their customer, keep records and report suspicious transactions to a financial intelligence unit. In the case of Canada, that is FINTRAC. On the terrorist financing side, it criminalizes terrorist financing and requires reporting, et cetera.
Those are the standards. Canada made the commitment to implement them. Our regime is based roughly on those standards.
The FATF also runs on a system of peer pressure and review. Canada has also agreed by virtue of its membership to undergo a comprehensive and detailed evaluation by this organization. We have had three such evaluations. The standards are also reviewed on a regular basis and updated as criminals and terrorist financiers find new ways to conduct business. The standards need to be updated to keep pace.
Eight regional bodies are modelled after the Financial Action Task Force. Collectively, with the FATF membership and these other regional bodies, 180 countries have agreed to adopt these standards and implement them in a manner consistent with that spelled out by the FATF.
The Chair: The minister may make a recommendation only that this Financial Action Task Force has called upon. We are, in effect, giving up ministerial authority.
Ms. Grasham: The minister is not obliged to. The two triggers are roughly modelled after the Special Economic Measures Act.
First, the minister can choose to issue a directive further to a call by an international body. We anticipate the call normally would be from the Financial Action Task Force because that is their main line of business. The minister is not obliged to issue a directive; it remains Canada's decision.
Second, it will be based on domestic considerations whether Canada wants to act unilaterally or in concert with other countries in the absence of a call. That decision may be taken by the minister.
Mr. Rudin: I want to reinforce this point because it is important.
Canada has given up no jurisdiction in this area. We participate in the Financial Action Task Force, which is an important body, but it does not make decisions that are binding in Canada. The minister has powers related to money laundering, which are those that Parliament gives the minister. If there is discretion, it is exercised by the minister.
In this case, the clause says the minister can use these powers only if he or she has good reason. Evidence of good reason will include, but is not limited to, a call by the Financial Action Task Force to take such measures. Nonetheless, it is permissive, but not obligatory. The minister may act in response to such a call, but it does not say the minister must respond to such a call.
Furthermore, proposed subparagraph (ii) at the bottom of page 561 goes on to say that the minister may act in this regard even in the absence of a call from any existing or recognized international body if the minister is satisfied that there is sufficient risk.
The Chair: There is a subparagraph (ii) of paragraph (a). Is that where you are reading from?
Mr. Rudin: Yes.
The Chair: There is a conjunctive "and," meaning both elements must be included. That is the way I read it, if you go up to subsection (3) above that —
Mr. Rudin: You are correct. I am referring to the wrong item. There are two items, paragraph (3)(a) has two tests and the international organization makes a call, for which there is indeed such a risk. Then on page 562 is paragraph (3)(b) where "the Minister is of the opinion." That is the "or." You are correct senator. Thank you.
The Chair: I am glad we sorted that out. It seemed strange to me in reading subsection (3) on page 561 where it says, "The Minister may . . . only make a recommendation" and the recommendation is for the order-in-council to pass a regulation. It says the Minister can do that only if this international body has pronounced on that, but the "or" helps us.
Senator Murray: Again, my curiosity is piqued by a couple of provisions in clauses 1871 and 1872. Clause 1871 amending subsection 52(3) states: ". . . the Director shall, at the Minister's request, disclose to the Minister any information that the Minister considers relevant . . . ." Clause 1872 adding after section 53, subsection 53.1(2) states: "If the Director is of the opinion that information received or collected by the Centre . . .would assist the Minister . . . the Director may disclose that information or analysis to the Minister." It continues in section 53.2: ". . . the Director shall not disclose any information that would directly or indirectly identify any person or entity other than a foreign entity."
I have a question mark in regard to that point.
There is a provision in proposed section 53.3 that if the director is asked to disclose information to the minister that comes from federal or provincial law enforcement agencies, federal government institutions or federal government agencies, government of a foreign state and various agencies, that the director shall not disclose that information before having obtained the consent of those bodies.
I find that odd within the government.
Senator Runciman: I think there is an urgent message waiting for you, senator.
Senator Murray: I have to go make my speech in the chamber.
Finally, in clause 1874 amending paragraph 55(3)(b) and paragraph 55(3)(b.1), I think this says that information can be disclosed to the Canada Revenue Agency if the centre "has reasonable grounds to suspect that the information is relevant to an offence" related to the fraudulent attempt to obtain a rebate, or they can also disclose information of the Canada Border Services Agency if the centre "has reasonable grounds to suspect."
Are there any other statutes under which, if information comes to an official or an agency in the course of their duties, they are permitted or encouraged to pass information along to the tax or the customs department? I did not realize that was the practice of the government somehow.
Please forgive me; I will have to read your answers to these questions because I am now advised that the time has come for me to make my speech on my motion to split this bill.
You might also answer, if you will, whether, with respect to the provisions you are here discussing, there have been many representations made to you since they became public from what you call the stakeholders — complaining, wanting changes made or whatever. I think that information will be relevant for our consideration.
The Chair: Thank you, Senator Murray. We understand that you are required to leave.
Ms. Grasham, there were two or three questions, and I believe you made note of them. If you can help us with those various sections that he found peculiar, that will be helpful.
Ms. Grasham: I will group them and start with the issue regarding the Canada Revenue Agency and the Canada Border Services Agency. This amendment is a consequential amendment that was required as a result of another budget measure, that tax evasion be made a predicate offence for money laundering. That provision was added through an amendment to a Criminal Code regulation, so it is a different part of the budget bill.
Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, FINTRAC can disclose to CRA in the event that there are reasonable grounds to suspect money laundering and terrorist financing, and currently, the way the act reads, if FINTRAC also determines that the information is relevant to an offence of obtaining or attempting to obtain a refund, rebate, et cetera.
Because now tax evasion is a predicate offence for money laundering, we have lowered the threshold for FINTRAC to be able to disclose to CRA on those grounds. In the past, it was not a money laundering offence, so there was a higher threshold where FINTRAC had to determine. Now, consistent with other situations where there are reasonable grounds to suspect money laundering or terrorist financing, and it is considered to be relevant to a tax offence, they can disclose to CRA.
The Chair: You are looking at clause 1874 on page 565.
Ms. Grasham: On page 557; I am sorry, you have a different page number than I do. It is clause 1874.
The Chair: On page 565.
Ms. Grasham: Yes, sorry, my version is different from yours. This particular amendment is consequential to that other budget measure. That explains the intent of that amendment.
In terms of the other disclosure provisions, it is complicated, as the senator explained. Currently, under the act, there are many restrictions in terms of what FINTRAC can do with the information it receives.
It brings in detailed information about Canadians and it can only disclose that information about Canadians or particular Canadian entities to the disclosure recipients that are named in the act, and under particular circumstances. That is, FINTRAC has to establish there are reasonable grounds to suspect money laundering or terrorist financing before it can make a disclosure to the RCMP, the Canadian Security Intelligence Service or other law enforcement agencies.
We want to amend the act to enable FINTRAC to share information pertaining to foreign entities — only foreign entities. The other restrictions under the act remain, that FINTRAC would not disclose, for the purposes of the new part, any information about individual Canadians or Canadian entities. The amendment creates a small gap whereby FINTRAC can disclose on foreign entities.
For the other part, in terms of the minister asking for the information, it may be that something comes to the minister and the minister is of the view that Canada should look into a particular matter. The minister will be in a position to ask FINTRAC for that information. On the other hand, FINTRAC, in its operations, may uncover something and think that maybe this is something that might be of interest to the minister. FINTRAC can provide that information spontaneously to the minister, so it is enabling that two-way communication.
The other question pertains to the requirement for FINTRAC to seek prior consent. Because the information is sensitive, and FINTRAC receives information from various partners — international counterparts, different organizations, as well as the RCMP and CSIS — in the course of their investigations, it is to ensure that any information provided will not compromise an ongoing investigation. The information required for this investigation is fairly high level, but the provision provides a safeguard to ensure that there are no investigations being compromised.
The Chair: That "director to seek consent" to which you are referring, is that on page 564, proposed section 53.3. Is that what you are discussing?
Ms. Grasham: Yes.
The Chair: From whom is the director of FINTRAC seeking consent or permission?
Ms. Grasham: It is from a law enforcement agency. It can be the RCMP or CSIS; it can be from its counterpart in the United States — for example, FinCEN or another financial intelligence unit.
FINTRAC has entered into a number of memorandums of understanding, MOUs, with counterparts around the world to disclose information. Those MOUs state that the information will not be provided without prior consent. They are in keeping with the safeguards that are already in place.
The Chair: I think I have seen that legislation, where there is protection as to how the information that they are sharing is protected by the receiving party. Is that correct?
Ms. Grasham: Yes.
Senator Runciman: How does this legislation line up with, for example, two countries that have had challenges in this area — the United States and Great Britain; how does this legislation line up with those jurisdictions?
Ms. Grasham: It brings us more into line with what they have. The U.S. has a fairly comprehensive sanctions program, whereby they can identify and take measures against jurisdictions, prevent transactions or bring in enhanced due-diligence requirements. The United Kingdom, also following on that, does the same thing.
The international standard is there and this will bring Canada into compliance with the international standards set by the Financial Action Task Force. We are basing it on that model, but we talked to our counterparts in the U.S. and the U.K. in developing the measures.
Senator Runciman: I read an article with respect to this item where the casino sector was perhaps problematic. Has it been utilized both for criminal money laundering and terrorism activities, terrorism funding? Has the casino sector been an area of concern?
Ms. Grasham: It has been an area of concern. As a result, casinos are covered in the legislation currently. They are a reporting entity under the act and that is based on evidence.
Senator Runciman: Did they have reporting obligations before?
Ms. Grasham: They have been reporting under the act since 2000. Casinos have been a reporting entity under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in Canada.
Senator Runciman: This legislation will impose penalties if they do not comply, is that it? How does the legislation address that compliance?
Ms. Grasham: This bill does not specifically pertain to casinos. The way the act is structured right now is that a number of reporting entities are covered — financial institutions, casinos, accountants, dealers in precious metals and stones and others. They have reporting requirements. They have customer identification requirements; they have to keep records. They have to report large cash transactions over $10,000 to FINTRAC.
International electronic funds of $10,000 or more transferred into or out of Canada are reported to FINTRAC, as well as suspicious transactions reports. FINTRAC is required to have a compliance regime in place with trained personnel who understand the requirements and obligations under the act. FINTRAC can go in and assess compliance with the act. FINTRAC can levy administrative monetary penalties if they find cases of non-compliance. There is also the potential for criminal penalties in more egregious situations. The casinos have been part of that regime since 2000, when the legislation was promulgated.
The new part gives the Minister of Finance additional authorities to safeguard the Canadian system from threats originating outside Canada. Where a jurisdiction or foreign entity lacks effective money-laundering and terrorist- financing controls, it might be unwitting, but we want to have the measures in place, as our partners have, to take targeted measures against them.
Senator Runciman: Are charities included?
Ms. Grasham: Charities are not a reporting entity under the act, although there are provisions under the charities registration act. I cannot speak to that in detail because that falls under the Canada Revenue Agency. There is coverage under Canada's anti-terrorist financing regime to cover charities.
Senator Runciman: Omar Khadr was running a so-called charity that was funnelling money into Afghanistan for less than charitable causes.
[Translation]
Senator Poulin: Ms. Grasham, you just said that when certain foreign countries do not have a regulatory system that provides as much rigour, clarity and protection as Canada's, the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act make necessary changes to tighten up our system.
Will there be a list of foreign entities or countries that pose a risk of the money laundering activities you talked about? Will a list be prepared?
[English]
Ms. Grasham: I would not table a list at this time, but the Financial Action Task Force has been working on identifying and reviewing countries that are deemed to have weak regimes in place. The task force has made public announcements with respect to some of those jurisdictions.
[Translation]
Senator Poulin: Are those assessments available to financial institutions, to accountants, to every professional providing financial services in Canada?
[English]
Ms. Grasham: Yes; as I mentioned before, being a member of the FATF or one of these other regional bodies means that we are required to submit to a full and comprehensive mutual evaluation against the FATF standards. Those reports on any FATF member that undergoes an evaluation are made public. I believe that most of the other bodies that conduct those evaluations make them public as well. It is a matter of public record where they stand vis-à-vis whether they have criminalized money laundering or terrorist financing; they have put a financial intelligence unit in place that receives suspicious transaction reports; whether they are able to cooperate internationally in terms of sharing intelligence with law enforcement or between regulators, et cetera.
[Translation]
Senator Poulin: Thank you. Mr. Chair, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act was referred to the Senate in 2000. As Ms. Grasham mentioned, the Standing Senate Committee on Banking, Trade and Commerce was charged with studying the legislation. I was a member of the committee at the time, and we set the current $10,000 threshold. It was set in 2000.
I agree with what Senator Murray was saying earlier. Bill C-9 has 24 parts; we are currently studying part 14. I would have liked for our colleagues on the Standing Senate Committee on Banking, Trade and Commerce to have the opportunity to review certain parts of the legislation so they could bring their experience with respect to the other bills affecting Bill C-9 to the table.
[English]
Senator Banks: I will go back to amendments proposed to section 11. You referred earlier to the constraints on the minister in issuing directives pertaining to recommendations. Proposed section 11.42 (4)(a) and (b) pertain to directives and set out the same constraints on the minister. Do I assume correctly that those constraints apply to all of section 11.42?
Ms. Grasham: Can you repeat the question?
Senator Banks: I am asking about the constraints on the minister issuing a directive, as at page 559 of my copy, section 11.42(4). It says that the minister may issue a directive only if (a) and (b), both of which have to do with foreign entities, not anything domestic —
Ms. Grasham: It applies only to foreign entities.
Senator Banks: Do those constraints apply to all of section 11.42?
Ms. Grasham: Yes; the directive will be issued only as a result of those conditions being met, and there is a similar trigger set out for the regulation.
Senator Banks: Good.
Ms. Grasham: It is only in the case of a foreign jurisdiction or foreign entity.
Senator Banks: My final question is on proposed section 11.47, found at page 560. A directive is not a statutory instrument but it must be published in the Canada Gazette. It does not say when that is to happen or "at the first opportunity," "when practicable" or anything else. It can be published a year after the directive is listed, which will make it difficult for someone who is susceptible to something in the directive because they will not have known about it to comply with it. Is that safe?
Ms. Grasham: Certainly, it was the intention that it would be published as soon as possible. It would come into force, and we would want to be transparent and open with the reporting entities that would be subject to a directive. The idea was to have it published in the Canada Gazette and the minister would ask the director of FINTRAC to communicate the directive at the same time to ensure that everyone is aware of their obligations.
Senator Banks: The "as soon as possible or practicable" or, as in the previous example, "feasible," is absent in this section. I raise the question because when a different committee looked at the application of regulations deemed to be not statutory instruments, I noted that the publication of them was essential to the capacity of persons who would be susceptible to knowing that they exist. If a person or entity does not have access to knowing that a regulation has been properly publicized, they can hardly be held responsible for contravening it.
Do you think that the application of the word "feasible" in this section is advisable, as it is used in the other section dealing with recommendations?
Mr. Rudin: As my colleague said, in this case the government has every incentive to publicize these directives as widely as possible. That is why the amendments provide for the minister to have the director of FINTRAC distribute it directly to the reporting entities. This distribution is likely to be the most effective way to send the word out quickly. If they are running a money services business, they might open the Canada Gazette from time to time. However, after they have been inspected by FINTRAC, they will open the letters and emails that come from FINTRAC.
In other cases where we have a directive, one of the reasons we have a publication requirement is to provide a brake on the discretion that is provided to the minister who has the power to give the directive. Regulations that fall under the Statutory Instruments Act have prepublication requirements. There is a lot of sunlight.
If the directive will be used in exigent circumstances to be able to move quickly, we want to ensure there is an ex post-publication so the minister, before issuing such a directive, will know that he or she is obliged to make it public.
In this case, although there would not be an objection to having a timeliness requirement, all the government's incentives are to send this out to the public in as timely a manner as possible.
Senator Banks: The question is, to whom and by what means. A directive will not always be issued by me to you. It might have a much wider application than simply only to you, or a directive that I make known by electronic means or by mail or whatever to 10 entities, but there might be another 10 entities to which it would apply. Timeliness would not be a disadvantage.
Mr. Rudin: I agree. In this case, the directive falls only on those entities that have reporting responsibilities under the act, and at least the ones that are acting on that are all known to FINTRAC because that is to whom they send their reports and that is who inspects them for compliance with the act.
Senator Callbeck: If a minister issues a directive that a financial entity disagrees with, is there any process to challenge that directive?
Ms. Grasham: Not explicitly, although we consult back and forth with them, and one of the mechanisms to ensure we hear what they have to say is that we will be issuing regulations outlining the directive, the specific countermeasures and our intention. We have told them that we will consult with them on issuing regulations, so that they have time to put in place any measures that are required to put a directive into effect.
We are not trying to take anybody by surprise. There will be that back and forth consultation.
Senator Callbeck: That is for the regulations.
Ms. Grasham: There are two sets of regulations. There are the regulations that we will bring into effect that have yet to be developed, that pertain to the directive-making power to give more clarity around how the directives will work, so we will have full consultations with the private sector on that front. Then there is the other regulation-making power where the minister wants to take specific action against a high-risk target.
The Chair: I am glad you clarified the two different groupings of regulations. I am making a note here.
Senator Banks: Is the coming into force provision there for general convenience, because it is usually there, or because things have to happen first before this can reasonably be brought into force, and, if so, what are those things?
Ms. Grasham: Nothing technically has to happen except that we would put these regulations into force, and we wanted to have time to consult more extensively with the private sector about the directives.
The Chair: Thank you. That was helpful, Senator Banks.
On behalf of the Standing Senate Committee on National Finance, I want to thank you, Ms. Grasham and Ms. Bordeleau. Mr. Rudin, you were here for a number of parts, and we appreciate your advice and guidance as well.
Honourable senators, that concludes our session today, and that is the end of Part 14. We will sit tomorrow evening at our normal sitting time for another session, and we will start with parts 18, 19 and 20, which include the environment, National Energy Board, National Research Council and Atomic Energy of Canada Limited. The meeting is now concluded.
(The committee adjourned.)