Archived - Supporting Stable Financing – Consultations on Leasing 

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Consultations Responses: Please note that the Department of Finance publishes consultation responses in PDF format and language of submission only.

Closing date:  May 8, 2009

Who may respond: 

These consultations are open to anyone. 

Comments regarding any element of this paper are invited and can be emailed to

Also, written comments can be forwarded to:

Jane Pearse
Financial Sector Policy Branch
Department of Finance
L'Esplanade Laurier
15th Floor, East Tower
140 O'Connor Street
Ottawa, Canada K1A 0G5

Subject to the consent of the submitting party, comments will be posted on the Department of Finance website to add to the transparency of the process.  Once received by the Department of Finance, all submissions will be subject to the Access to Information Act and may be disclosed in accordance with its provisions.  Should you express a desire that your submission be considered confidential, the Department will make all efforts to protect this information within the requirements of the law.

Supporting Stable Financing

1.  Introduction

The financial markets turmoil that has prevailed since 2007 has reduced the availability of affordable financing for Canadian households and businesses.  It is also giving rise to a new financial market landscape; one where non-bank entities are playing a smaller role in the lending system. In the past year the Government has taken a number of measures to provide liquidity to the financial system and support access to financing.  This policy consultation is an extension of those efforts.

Chief among the areas where access to affordable financing is an issue as a result of the financial market turmoil is financing for vehicles and equipment for consumers and businesses.  To address this shortage, Budget 2009 announced the Canadian Secured Credit Facility (CSCF), which will support the purchase of up to $12 billion in term asset-backed securities backed by loans and leases on vehicles and equipment.  The CSCF is only a temporary measure.  To ensure that the private sector supports a diverse range of financing alternatives, available on a stable basis over time for consumers and businesses, structural policy initiatives also need to be considered. 

In Budget 2009, the Government of Canada announced the intention to consult market participants on the potential merits of changing the legislative and regulatory regime governing leasing activities by federally regulated financial institutions. These consultations seek to determine whether broadening the potential suppliers of lease financing will support the availability of financing and, in the medium term, contribute to a competitive and well-functioning financial system.   

2. Lease Financing Landscape

Use of Financial Leasing

Lease financing1 represents an important form of financing for consumers and businesses.  In a lease, the consumer (lessee) acquires the property for the term of the lease, while the financer (lessor) retains the ownership of the property throughout the period of the lease.

As a financing option, leasing has been important for Canadian consumers and businesses. In recent years, vehicle leasing has accounted for on average one-third of vehicle sales in Canada, and as much as half of vehicle sales in some years.  Tighter credit conditions resulted in leasing falling to about 20% of vehicle sales in late 2008.  Consumers and businesses are currently finding it difficult to obtain lease and loan financing at a reasonable price, as many lease and finance companies have pulled back or stopped offering loans and leases.  

Providers of Lease Financing 

Providers of financial leases fall into four categories.  Captive finance companies of the automakers are the most common provider in the auto sector, where they account for about 90 per cent of leases in the sector.  Second, independent finance companies offer loan and lease financing for a variety of machinery, equipment, vehicles and other property.  Third, retailers and auto dealers may directly offer leasing to customers, financing these leases through capital or credit facilities with banks and other lenders.  Fourth, provincially regulated financial institutions can offer leases for certain types of equipment, automobile and household property.

All of these providers have been affected by the turmoil in financial markets, which has severely restricted the availability of funding for their activities.  The asset-backed securities market has traditionally provided much of the funding for auto leasing companies. On a flow basis, auto-related asset-backed securitization in Canada has fallen from $17.1 billion in 2007 to $8.2 billion in 2008. 

The current regulatory framework allows federally regulated financial institutions to offer financial leasing of personal property, except for light vehicles2 and personal household property.  At the same time, federally regulated financial institutions provide an increasingly important source of other forms of financing for consumers and businesses.  They provide a wide range of financial services, including consumer and commercial lending. 

At issue in these consultations is whether federally regulated financial institutions could and would provide a stable source of lease financing for consumers and businesses.  It is important to note that the current framework does not support federally-regulated financial institutions engaging in leasing activities other than financial leasing, and this consultation process does not anticipate a change to the restriction on operational leasing.

3. Market Participants' Views

Market participants have been consulted on the issue of lease financing in the past in the context of the 1998 Task Force on the Future of the Canadian Financial Services Sector, as well as other financial sector policy reviews undertaken by the Department of Finance.  Market participants had identified prudential and policy concerns.  Such concerns range from regulated financial institutions engaging in the retailing of vehicles, to the prudential risk associated with the residual value of vehicles and household property at the end of the lease.  These concerns would need to be fully addressed as the priority will remain the stability of the overall financial system. 

4. Consultation Questions

The Department of Finance would welcome comments from market participants on this important policy issue, in particular responses to the following questions:

  1. How do you view the role and prospects of lease financing of vehicles in the coming years? 
  2. Are the existing restrictions on regulated financial institutions with regard to lease financing appropriate in the future financing environment?  If not, how should these restrictions be amended to support broad access to financing in a stable framework?
  3. If federally regulated financial institutions were allowed to provide lease financing, would you expect these entities to participate in leasing?  Do you believe such participation would result in a significant increase in the availability of lease financing?  
  4. Does financial leasing of vehicles and personal household property pose risks to financial institutions?  If so, how can those risks be managed?

1 Lease financing is distinguished from operational leasing.  Lease financing involves the lessor providing only the financing aspect of the transaction, and no additional services.  Operational leases include some services beyond just the financing, such as combined retailing and financing, and maintenance. 

2 i.e., motor vehicles weighing less than 21 tonnes.