Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 19 - Sixth Report of the Committee
Thursday, November 27, 2014
The Standing Senate Committee on Banking, Trade and Commerce has the honour to table its
SIXTH REPORT
Your Committee, which was authorized to examine the subject matter of those elements contained in Divisions 9, 12, 18, 22, 26 and 27 of Part 4 of Bill C-43, a second Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures, has, in obedience to the order of reference of October 30, 2014, examined the said subject matter and now reports as follows.
The Committee held three meetings, the first of which was with the Honourable Joe Oliver, P.C., M.P., Minister of Finance, who was accompanied by officials from the Department of Finance. At the second meeting, the Committee heard from officials from Industry Canada, the Business Development Bank of Canada, the Department of Finance and the Bank of Canada. The Committee also received testimony from Credit Union Central of Canada, Atlantic Central, Vancity Credit Union, the Canadian Payments Association and the Canadian Bar Association.
Division 9 — Proposed Amendments to the Investment Canada Act
Division 9 would amend the Investment Canada Act to oblige foreign investors to give notice each time they acquire control of a Canadian business through the realization of security granted for a loan or other financial assistance; however, the Act would not apply if the acquisition is subject to approval under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act. As well, Division 9 would authorize the Minister of Industry to disclose publicly certain information relating to national security reviews. That said, the Minister would be required to inform the investor who is the subject of the information before communicating or disclosing any information. If the investor satisfies the Minister that communication or disclosure of the information would prejudice him/her/it, the Minister would be prohibited from communicating or disclosing the information.
In his appearance before the Committee, the Minister of Finance indicated that foreign investment into Canada likely would not be affected by the proposed amendments requiring notification to be given by foreign investors for the realization of security granted for a loan.
Industry Canada officials stated that Division 9 would require a foreign investor to file a form with Industry Canada if he/she/it acquires control of a Canadian business through the default of a loan. They noted that the frequency with which this situation arises in Canada is not known, although the proposed amendments would allow data to be collected on this type of foreign investment. Moreover, the officials clarified that, while this type of investment would continue to be subject to review from a national security perspective, it would not be subject to review under the Investment Canada Act's ''net benefit test.'' As well, according to them, the proposed amendments would not affect the flow of capital into and out of Alberta's oil sands, and would not increase the administrative burden on investors; however, the officials agreed that there may be unintended consequences that could prevent a lender from realizing security.
The officials from Industry Canada also explained that Division 9 would allow the disclosure of certain information, such as notices sent to investors, in relation to national security reviews. They indicated that the Governor in Council decides whether to conduct such a review of a foreign investment; the factors considered in a national security review are not enumerated in the Act. As well, they mentioned that it is difficult to compare the criteria for national security reviews among the G20 nations, as this information is not readily available.
Since its implementation in 2009, the Canadian Bar Association has expressed concern about the broad application and lack of guidance from the government about the types of investments that are subject to a national security review. It highlighted that the inability of lawyers to advise foreign investors of the likelihood or outcome of such a review could limit foreign investment into Canada.
Moreover, the Canadian Bar Association suggested that disclosures about the national security review process should not be made by the government unless the investment has been publicly disclosed by the parties involved in the investment. As well, it asked that Industry Canada's annual report contain aggregate data about the frequency and outcome of national security reviews; this information is already provided in relation to net benefit reviews. In its opinion, the notification requirements proposed in Division 9 could marginally increase the possibility of a national security review.
Division 12 — Proposed Amendments to the Business Development Bank of Canada Act
Division 12 would amend the Business Development Bank of Canada Act to clarify the financial and management services that the Business Development Bank of Canada (BDC) is authorized to provide.
The BDC told the Committee that the two most recent 10-year reviews of the BDC — by the Standing Senate Committee on Banking, Trade and Commerce in 2010, and by Industry Canada in 2014 — concluded that the Business Development Bank of Canada Act should be amended.
The BDC stated that the proposed amendments, which it characterized as minor, would provide the BDC with the tools it needs to fulfil its mandate of helping entrepreneurs.
According to the BDC, Division 12 would allow it to: help small and medium-sized enterprises expand internationally; invest in a venture capital fund legally established outside of Canada, provided that the fund's management team is based in Canada and that BDC's investment in the fund will benefit Canadian companies; and provide indirect financing through third-party organizations.
The BDC explained that the proposed amendments would allow the Governor in Council to make regulations with respect to additional financial tools and management services that the BDC could provide, update the scope of the BDC's management services while ensuring that they are complementary to those offered by the private sector, and align the Act's governance provisions with industry practices.
Division 18 — Proposed Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act
Division 18 would amend Part 1.1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to add certain foreign entities that are engaged in money services businesses, or that carry out services similar to money services businesses, to the definition of the term ''foreign entity.''
In his appearance, the Minister of Finance told the Committee that the proposed amendments would specify the types of foreign entities that could be subject to countermeasures under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
Officials from the Department of Finance explained that Part 1.1 of the Act allows the Minister of Finance to issue countermeasures against a foreign state or entity in order to safeguard the Canadian financial system against illicit funds flowing into Canada; countermeasures can include a requirement that a Canadian reporting entity monitor a financial account opened by a foreign entity or state. They indicated that Division 18 would ensure that foreign money services businesses — such as money transmitters or dealers in virtual currencies that operate online — would be considered to be both a reporting entity and a foreign entity under the Act, with the result that these businesses could be subject to countermeasures issued by the Minister.
Division 22 — Proposed Amendments to the Bank of Canada Act, the Canada Deposit Insurance Corporation Act, the Bank Act and the Cooperative Credit Associations Act
Division 22 would amend the Bank of Canada Act, the Canada Deposit Insurance Corporation Act, the Bank Act and the Cooperative Credit Associations Act to reduce federal intervention in relation to provincial central cooperative credit societies.
The Minister of Finance told the Committee that Division 22 would implement the 2014 federal budget announcement that Office of the Superintendent of Financial Institutions (OSFI) supervision of provincial central cooperative credit societies will end, and would clarify the access that provincial credit unions and caisses populaires have to federal aid.
According to the Minister, some credit unions are considering a transition from provincial to federal regulation. He explained that Division 22 would streamline the amalgamation process for provincial credit unions that wish to make such a transition. The officials from the Department of Finance noted that — to date — no credit union is, or has applied to become, federally regulated. They stated that the proposed amendments would provide a framework for provincially regulated credit unions to ''continue federally and merge,'' and highlighted the consultations that were held with provincial regulators and the credit union sector.
The Department of Finance's officials also mentioned that Division 22 can be considered as having two major parts, the first of which would make technical changes to the Cooperative Credit Associations Act, the Canada Deposit Insurance Corporation Act and the Bank of Canada Act to clarify the federal regulation of provincial central cooperative credit societies; these societies are financial institutions that provide credit unions with support, including liquidity, payments, technology and other administrative services.
Moreover, according to the Department of Finance's officials, this first part of Division 22 has three components. First, OSFI would cease its supervision of provincial central cooperative credit societies. Second, the Canada Deposit Insurance Corporation would no longer lend to provincial central cooperative credit societies or provincial deposit insurers. Third, access to the Bank of Canada's emergency lending assistance would be provided to a credit union or a caisse populaire only if a province has agreed to indemnify the Bank for any potential loss resulting from a loan to a credit union or a caisse populaire.
The Bank of Canada spoke about its current policy for emergency lending assistance, indicating that credit unions and caisses populaires are not ordinarily eligible for such assistance; their eligibility is considered if two situations exist: there is a systemic risk to the Canadian financial system; and a province agrees to indemnify the Bank of Canada for any potential loss associated with a loan that the Bank has provided to a credit union or caisse populaire. Therefore, according to the Bank, the proposed change to the Bank of Canada Act would reflect the current practice. The Bank of Canada mentioned that, in its discussions with the provinces, provincial regulators, credit unions and caisses populaires, some entities opposed the proposed indemnification requirement.
In describing the reaction by entities that would be affected by Division 22, the officials from the Department of Finance noted that the federal government consulted with the provinces and the credit union sector by releasing a technical paper on 16 October 2014; the paper contained information about the proposed changes to the federal regulatory regime in relation to credit unions and caisses populaires, as provinces may need to make legislative changes to allow them to have sole responsibility for regulating provincial central cooperative credit societies. According to the officials, the provinces will provide their views on the technical paper by the end of December 2014 in order to identify a coming-into-force date for Division 22. They also mentioned that no province is opposed to the measures proposed in Division 22. Credit Union Central of Canada indicated that the provinces will need to review their supervisory frameworks and perhaps modify them, and that proposing legislation before receiving responses to the technical paper has created additional challenges for the provinces and the credit union sector.
Regarding the potential impacts of Division 22 on credit unions and provincial central cooperative credit societies, the Department of Finance's officials said that the proposed amendments should have no material consequences for the operation of any credit union or provincial central cooperative credit society, including Desjardins. Credit Union Central of Canada, Vancity Credit Union and the Canadian Payments Association stated that the ability of credit unions to access the Canadian payments system would be unchanged by Division 22.
In commenting on the proposed timeline for implementing Division 22, Credit Union Central of Canada noted that credit unions did not request the proposed amendments, and that adjusting to the proposed legislation will take time, particularly for institutions that operate across provincial boundaries. It requested clarity with respect to the starting point of two-year period for the transition to the end of OSFI supervision and, along with Vancity Credit Union, asked that credit union stakeholders be granted sufficient time to prepare for the transition.
The officials from the Department of Finance explained that the second part of Division 22 proposes changes to the Bank Act to enable credit unions to offer services nationally. They stated that this part would be implemented in two ways. First, changes to the Act would allow provincial cooperative credit societies to ''continue federally and merge.'' They noted that Division 22 would reduce the timelines and streamline the requirements for a continuance and amalgamation ''transaction,'' and would allow each member of an affected credit union to vote once in relation to a ''transaction''; a transaction could be comprised of two or more steps. The officials provided the example of a provincially regulated credit union wanting to amalgamate and then to continue as a federally regulated entity; in this case, a credit union member would vote once for the entire continuance and amalgamation ''transaction,'' rather than voting for amalgamation and then for continuance. Second, a consequential change would ensure that credit unions wishing to be federally regulated will have a period of time in which to separate their insurance operations from their deposit-taking activities.
Atlantic Central expressed concern that the changes proposed in Division 22 would divide the credit union system by creating barriers between federally and provincially regulated entities. It encouraged the government to enact legislation that would enable cooperation among cooperatives.
The Department of Finance's officials stated that other consequential amendments would facilitate the dissolution of Credit Union Central of Canada, which plans to transition to a trade association.
Division 26 — Proposed Amendments to the Canadian Payments Association Act
Division 26 would amend the Canadian Payments Act regarding the governance structure and administrative obligations of the Canadian Payments Association.
In his appearance before the Committee, the Minister of Finance stated that the proposed amendments would improve the accountability of the Canadian Payments Association, allow the Association's board of directors to act more independently, and expand the ministerial powers in relation to issuing directives to the Association. He noted that Division 26 would ensure that the ''payments clearing and settlement infrastructure'' is operated for the benefit of Canadians and the economy. Lastly, he asserted that a person's business and educational background are considered when appointments are made to the Canadian Payments Association's board of directors.
The officials from the Department of Finance mentioned that Division 26 would introduce an accountability framework for the Canadian Payments Association through an annual report and an annual five-year corporate plan, the latter of which would require ministerial approval. They indicated that some of the proposed amendments are in response to the 1998 and 2012 reviews of the Canadian payments system, which found deficiencies in the Canadian Payments Association's governance structure. According to them, Canadian banks are overrepresented on the Association's board of directors, and more attention needs to be paid to the payments system's aging infrastructure and the needs of those who use the system. The officials explained that Division 26 would establish a smaller board of directors, with the members of the board appointed by the Association's membership; seven of the 13 directors would be independent, while the remaining directors would be members of the Association. They noted that an independent director could not have a relationship with any member of the Association or with the Association itself; the term ''independent,'' which would be based on the standard that exists in securities law, would be defined in regulations.
The Canadian Payments Association said that the proposed amendments would enhance its governance, functioning and accountability. In its view, the smaller and more independent board of directors would be more representative of the stakeholders in the payments system. The Association suggested that the regulations should specify a time period, such as 30 or 60 days, for ministerial approval of the proposed annual corporate plan, as it operates systems and infrastructure that are critical to the day-to-day business operations of the financial system. It noted that it would continue to operate if the Minister of Finance did not approve the proposed plan by a particular date, and that — as the Association and the Department of Finance meet on a regular basis — the Department should already be aware of any major initiatives proposed in the corporate plan.
Division 27 — Proposed Amendments to the Payment Clearing and Settlement Act
Division 27 would amend the Payment Clearing and Settlement Act to expand and enhance the oversight powers of the Bank of Canada with respect to designated clearing and settlement systems.
The officials from the Department of Finance told the Committee that Division 27 would allow the Bank of Canada to oversee payment system risk, in addition to its current authority to oversee systemic risk.
The Bank of Canada noted that two additional persons would be required in order to fulfill the responsibilities that are being proposed for it in Division 27. In its view, the proposed amendments would have no impact on the speed of payments or on individual consumers.
The Canadian Payments Association stated that the proposed amendments would expand the Bank of Canada's authority to designate, for purposes of Bank oversight, payment systems of systemic importance. According to it, the Bank could designate the Automated Clearing and Settlement System under this proposed expanded authority. It urged the government to ensure that this possible duplication of oversight would not have a negative effect on the Association's role in governing the Automated Clearing and Settlement System.
Committee Observations
The Committee supports Divisions 9, 12, 18, 22, 26 and 27 of Part 4 of Bill C-43 and proposes that they be adopted as written, but has two observations.
Firstly, the Committee notes that Division 9 could have an effect on foreign investment in Canada. In particular, unintended consequences could prevent a lender from realizing security on a loan.
Secondly, the Committee suggests that the federal government should ensure that credit union stakeholders and the provinces have sufficient time to prepare for the transitions that would be required in relation to Division 22.
IRVING GERSTEIN
Chair
Appendix — List of Witnesses
Wednesday, November 19, 2014
Department of Finance Canada:
The Honourable Joe Oliver, P.C., M.P., Minister of Finance;
Paul Rochon, Deputy Minister;
Rob Stewart, Assistant Deputy Minister, Financial Sector Policy Branch;
Brian Ernewein, General Director, Tax Policy Branch.
Thursday, November 20, 2014
Industry Canada:
Jenifer Aitken, Director General, Investment Review Sector;
Paul Halucha, Director General, Strategic Policy Branch.
Business Development Bank of Canada:
Michel Bergeron, Senior Vice President, Marketing and Public Affairs;
Mathieu Belleville, Assistant Vice President, Legal Affairs.
Department of Finance Canada:
Sophie Amberg, Senior Project Leader;
Lisa Pezzack, Director, Financial Sector Policy Branch;
Glenn Campbell, Director, Financial Sector Policy Branch;
Eleanor Ryan, Senior Chief, Financial Sector Policy Branch;
Erin O'Brien, Chief, Financial Sector Policy Branch.
Bank of Canada:
Ron Morrow, Chief, Financial Stability;
Robert Turnbull, Special Counsel, Financial System.
Credit Union Central of Canada:
Martha Durdin, President and CEO;
Marc-André Pigeon, Director, Financial Sector Policy.
Atlantic Central:
Michael Leonard, President and CEO (by video conference).
Vancity Credit Union:
Cristobal (Chris) Dobrzanski, Chief Economist.
Canadian Payments Association:
Doug Kreviazuk, Vice President, Next Generation Clearing and Settlement;
Deborah Wilson, Senior Legal Counsel;
Geoffroi Montpetit, Director, Public Affairs.
Canadian Bar Association:
Omar Wakil, Chair of the Foreign Investment Review Committee, Competition Law Section;
Noah Arshinoff, Staff Lawyer, Law Reform.