Standing Senate Committee on Banking, Trade and Commerce

Report of the committee

Thursday, June 9, 2016

The Standing Senate Committee on Banking, Trade and Commerce has the honour to table its

FOURTH REPORT

Your committee, which was authorized to examine the subject matter of those elements contained in Divisions 3, 4, 5, 6 and 10 of Part 4 of Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures, has, pursuant to the motion adopted by the Senate on May 3, 2016, examined the said subject matter and now reports as follows.

The committee held two meetings and heard from officials from a federal department and other federal entities, and representatives from the financial services sector.

A. Division 3

Division 3 would amend the sunset provisions contained in the governing legislation of Canada’s financial institutions by extending the current statutory sunset date by two years to March 29, 2019. This proposed change, which would amend the Trust and Loan Companies Act, the Bank Act, the Insurance Companies Act and the Cooperative Credit Associations Act, would allow time to conduct a legislative review.

An official from the Department of Finance (the Department) told the committee that the sunset provisions require Parliament to renew the financial institutions’ governing legislation every five years, and are designed to ensure that this legislation is reviewed regularly and kept up to date. The official further stated that the proposed extension of the sunset date would provide time to complete certain initiatives that are under way with respect to recent and proposed amendments to the legislation. He also clarified that the Department did not officially consult with the sector’s stakeholders about the proposed extension.

Another official from the department indicated that other extensions to the sunset date, varying in length from six months to one year, have been granted in the recent past; specific mention was made of 1990, 2006 and 2011. Witnesses felt that five years is generally an appropriate amount of time between reviews of the financial institutions’ governing legislation. They mentioned that extraordinary circumstances, such as major prudential regulatory changes for financial institutions and a federal election, have caused the current legislative review to be delayed.

An official from the Office of the Superintendent of Financial Institutions (OSFI) spoke to the committee about OSFI’s support for Divisions 3, 4, 5 and 6 of Bill C-15, stating that the proposed provisions would strengthen financial institutions’ regulatory framework. Furthermore, she indicated that Division 3 would provide sufficient time to conduct an appropriate review of the financial institutions’ governing legislation.

Representatives from Canada’s financial sector highlighted their desire to consult with the federal government and parliamentarians during the upcoming review of the financial institutions’ governing legislation. In mentioning the review by the Task Force on the Future of the Canadian Financial Services Sector, which is commonly known as the MacKay Task Force, the Canadian Credit Union Association asked that the upcoming review be more comprehensive than in the recent past. It also suggested that the implications of applying international standards intended for large banks to credit unions should be considered.

B. Division 4

Division 4 would amend the Bank Act to provide protection for provincially regulated cooperative credit societies that are in the process of becoming federal credit unions. The official from the department explained that the Division would allow the Minister of Finance to: exempt a cooperative credit society that is involved in such a transition from a technical procedural entry requirement if that credit society is otherwise in substantial compliance with the Act; exempt federal credit societies from certain technical procedural requirements related to voting for up to three years after their transition from a provincially regulated cooperative credit society, providing there is substantial compliance with the Act; and offer a transitional loan guarantee.

The departmental official informed the committee that the federal credit union framework was developed in response to requests from provincially regulated cooperative credit societies, and is consistent with federal objectives to promote competition in Canada. He further stated that the proposed amendments would be the third occasion on which the framework has been amended. As well, the official indicated that these proposed changes are the result of consultations with provincially regulated cooperative credit societies that are considering a transition to federal credit union status; they have indicated a need for greater procedural certainty during the transition.

In describing the Minister of Finance’s ability to exempt a cooperative credit society from requirements related to voting for the first three years after transitioning from the provincial to the federal regulatory system, the departmental official suggested that this period would allow a transitioning cooperative credit society to adjust its practices with respect to voting, as provincial and federal requirements in this regard differ.

The departmental official characterized the proposed transitional loan guarantee as a liquidity tool or temporary insurance, and emphasized that the guarantee would be provided to the transitioning credit societies at a cost. The official explained that this proposed measure would, for example, provide insurance for a provincially regulated cooperative credit society in a province that guarantees 100% of deposits; such a credit society may be unsure about depositors’ reactions to a change to the federal deposit insurance regime, which does not provide a 100% guarantee. The Canadian Credit Union Association added that members of a provincially regulated credit society transitioning to federal credit society status may face new restrictions on their ability to sell insurance in its branches; this practice is allowed in many provincial jurisdictions, but is prohibited at the federal level. 

The official from OSFI clarified that its primary role in relation to prospective federal credit societies is to conduct a prudential review of a provincially regulated cooperative credit society that has applied to the Minister of Finance to become a federal credit society, and to consider whether the credit society can meet the procedural requirements of the Act or needs exemptions from certain requirements.

C. Division 5

Division 5 would amend the Canada Deposit Insurance Corporation Act and the Bank Act to create a legislative framework for a bail-in regime for domestic systemically important banks, and to make corresponding amendments to the existing bank resolution framework. In the unlikely event that a domestic systemically important bank fails, the proposed bail-in framework would allow the Canada Deposit Insurance Corporation (CDIC) to convert certain debt of that bank into common shares in order to facilitate recapitalization and allow it to remain in operation. This process is sometimes referred to as a bail-in conversion.

Regarding the Canada Deposit Insurance Corporation Act, the official from the department said that the proposed changes would provide the CDIC with the power to undertake a bail-in conversion and would enhance existing provisions related to the management of bank failures.

With respect to the Bank Act, the departmental official told the committee that the proposed provisions would enable the Superintendent of Financial Institutions to designate banks as systemically important, thereby making them subject to the bail-in regime. The systemically important banks would also be required to maintain a prescribed amount of regulatory capital and debt that would be subject to a bail-in order.

The departmental official described the bail-in regime as an additional tool to help authorities protect the financial stability of Canada if a domestic systemically important bank fails. He underscored that the bank’s shareholders and creditors would be responsible for any losses, and that the conversion of debt into common shares would only occur with respect to eligible long-term debt securities. Witnesses emphasized that, although the debt that would be eligible for conversion into common shares is not specified in the proposed provisions but would be included in forthcoming regulations, no deposits or currently existing debt would be eligible for conversion. The official from the department clarified that the process for converting debt into common shares, and the manner in which the value of the debt would be converted into shares, would also be specified in forthcoming regulations.

The departmental official and the Canadian Bankers Association mentioned that extensive stakeholder consultations were undertaken prior to the drafting of the proposed provisions in relation to the bail-in regime. In their view, if the provisions are enacted, Canada’s bail-in regime would be consistent with the international best practices and standards proposed by the Financial Stability Board and endorsed by the G20.

The official from OSFI noted that, in March 2013, six Canadian banks were identified as being domestic systemically important banks — RBC, the Toronto-Dominion Bank, Scotiabank, CIBC, BMO and National Bank — and that these banks are now subject to higher capital requirements, greater supervisory intensity and enhanced disclosure requirements. According to her, the proposed provisions would require domestic systemically important banks to have sufficient debt instruments that could be converted into common shares for the purpose of recapitalization in the event of failure. The official also indicated that, under the proposed bail-in regime and in consultation with other federal agencies and the Minister of Finance, OSFI’s role would be to set, monitor and enforce domestic systemically important banks’ minimum capacity to absorb losses.

In speaking to the committee, an official from the Bank of Canada supported the proposed provisions in relation to a bail-in regime for Canada, stating that such a regime would strengthen Canada’s financial system, and protect the safety and soundness of domestic financial markets.

D. Division 6

Division 6 would replace the CDIC’s Chairperson with its Chief Executive Officer as a member of the Financial Institutions Supervisory Committee. It would also propose amendments to several acts to provide: that information obtained under these acts could be shared with the CDIC’s Chief Executive Officer, rather than its Chairperson; and that the CDIC’s Chief Executive Officer, instead of its Chairperson, would be consulted by the Minister of Finance before certain recommendations to the Governor in Council are made. 

In speaking to the committee, the departmental official and an official from OSFI suggested that members of the Financial Institutions Supervisory Committee would benefit from the CDIC Chief Executive Officer’s participation on the committee given his/her active role in — and knowledge of — the CDIC’s core activities.

E. Division 10

Division 10 would amend the Special Import Measures Act to modify trade remedy procedures in relation to North American Free Trade Agreement partners. The proposed amendments would make the following two changes: a finding of insignificance with respect to the margin of dumping or amount of subsidy at the preliminary determination stage could no longer be used to preclude a full trade remedy investigation; and expiry review proceedings would have to be initiated two months prior to the five-year expiry date of an anti-dumping or countervailing duty measure.

An official from the Canada Border Services Agency (CBSA) explained that, in trade remedy investigations, its role is to determine whether imported goods are dumped or subsidized, and to determine the margin of dumping or amount of subsidy on those goods. According to him, the Canadian International Trade Tribunal’s (CITT’s) role is to determine whether the dumped or subsidized goods have caused, or are threatening to cause, material injury to the Canadian industry. The official indicated that information is exchanged between the CITT and the CBSA at certain points during their respective investigations.

Regarding the proposed change in relation to the finding of insignificance and the full trade remedy investigation, the CBSA official informed the committee that, while provisional duties are generally enforced when an investigation moves from the preliminary to the final stage, no duties would be assessed on the goods that were found to have an insignificant margin of dumping or amount of subsidy. According to him, this proposed amendment to continue investigations of goods found to have an insignificant margin of dumping or amount of subsidy at the preliminary stage would provide investigators with more time to verify whether the goods are dumped or subsidized before terminating an investigation at the final phase.

Witnesses indicated that, since 2004, there have been occasions on which — at the preliminary stage of an investigation — the CBSA has had a finding of insignificance. A departmental official asserted that, in those cases, additional time would have enabled a more fulsome analysis and the verification of information. Furthermore, she noted that the amount of dumping or subsidization that is determined by the CBSA in the preliminary stage of an investigation is often adjusted in the final stage. According to her, the Canadian Steel Producer’s Association requested this proposed change.

In relation to the proposed requirement that expiry review proceedings would have to be initiated two months prior to the five-year expiry date of an anti-dumping or countervailing duty measure, the CBSA official stated that the proposed changes to the expiry review process would increase the number of days, from 120 to 150, that the CBSA has to determine whether the expiration of the order or finding would likely result in the resumption or continuation of dumping or subsidizing of the goods. She clarified that anti-dumping and countervailing duties do not apply to services.

The departmental official noted that the federal government has launched public consultations with respect to a broader set of potential amendments to the trade remedy system.

APPENDIX – List of Witnesses

Meeting of June 2, 2016

Jean Bédard, Q.C., Acting Chairperson (Canadian International Trade Tribunal)

Michèle Govier, Chief, Trade Rules, International Trade and Finance (Department of Finance Canada)

Darryl Larson, Director, Anti-dumping and Countervailing, Consumer Products, Programs Branch (Canada Border Services Agency

Marc-André Pigeon, Director, Financial Sector Policy (Canadian Credit Union Association)

Chris White, Vice President, Government Relations (Canadian Credit Union Association)

Meeting of May 19, 2016

Judy Cameron, Managing Director, Approvals and Precedents (Office of the Superintendent of Financial Institutions)

Glenn Campbell, Director, Financial Institutions, Financial Sector Policy Branch (Department of Finance Canada)

Michèle Govier, Chief, Trade Rules, International Trade and Finance (Department of Finance Canada)

Darren Hannah, Vice President, Finance, Risk and Prudential Policy (Canadian Bankers Association)

Daniel Robinson, Senior Project Leader, Financial Sector policy Branch (Department of Finance Canada)

Steve Thomas, Assistant General Counsel, Executive and Legal Services (Bank of Canada )

Jeremy Weil, Senior Economist, Financial Sector Policy Branch (Department of Finance Canada)

Chantal Richer, Vice President, Corporate Affairs, and General Counsel (Canada Deposit Insurance Corporation)

DAVID TKACHUK

Chair