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Archived - Annex 6
An Effective and Efficient Legislative Framework for the Canadian Financial Services Sector

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A Consultation Document for the 2006 Review of Financial Institutions Legislation


The Government of Canada’s commitment to conducting regular reviews of the federal financial services regulatory framework has been key to promoting the efficiency and competitiveness of the sector. Legislation amending the financial institutions statutes must be brought into force by October 2006, as the sunset clauses in the Bank Act, Insurance Companies Act, Trust and Loan Companies Act and Cooperative Credit Associations Act provide for an automatic five-year review of the legislation. This is a practice that sets Canada apart from virtually every other country in the world, providing an important advantage to Canadian financial institutions relative to their foreign competitors.

This review will build on a sound base of existing legislation and recent reforms. The current legislative framework, which was the result of many years of hard work and thorough reflection, is working well. In 2001 Bill C-8 overhauled the federal financial services regulatory framework. We can build on that base by improving the framework so it meets its objectives as effectively and efficiently as possible.

This paper sets out broad directions for the legislative review. It also provides examples of potential initiatives to improve the current framework in order to stimulate debate, generate ideas and provide a starting point for discussions. We invite all financial sector stakeholders and Canadians to make their views known on these and other issues, so that the framework for this essential sector of our economy works as well as it can to the benefit of all Canadians.


The Budget 2005 announcement and this consultation document launch the process leading to the 2006 legislative review. The consultation period will run from now until June 1, 2005. Subject to the consent of submitting parties, comments received will be made available on the Department of Finance’s Web site.

During the summer of 2005, work will progress to complete the policy review, draft policy proposals and produce a white paper. The white paper will be released in the fall of 2005, after which the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce will have the opportunity to review it and provide comments. The drafting of the bill will be completed during the winter of 2005–06, and legislation will be introduced in the House of Commons in early 2006, with a view to having it come into force by the deadline of October 2006.


The financial services sector is one of the most important engines of economic growth in this country. It employs over half a million people and contributes over 6 per cent of Canada’s gross domestic product. The financial sector plays a crucial enabling role for the rest of the economy, channelling savings to productive investment and helping households and businesses insure against risks.

The Government of Canada is responsible for the oversight of the regulatory framework governing federally regulated financial institutions in Canada. As such, the Government plays an important role in the evolution of the Canadian financial services sector and its contribution to the Canadian economy.

In this review, the Government is considering making selective changes to the financial institutions’ statutes, aiming to achieve three principal goals:

The following sections set out illustrative examples of proposals under each of these three headings. These proposals reflect a number of issues the Department of Finance feels are worth exploring as we strive for a more efficient and stable financial system, although it is not intended that this be an exhaustive list.

Enhancing Interests of Consumers

The Government is committed to providing a fair and balanced framework that preserves the health and strength of the sector and, at the same time, allows its evolution to benefit all Canadians. To strike that balance, it is important to ensure that consumer rights are adequately protected. The following sets out examples of proposals to adjust the legislative framework to ensure that the Canadian financial services industry continues to benefit Canadian consumers.

Potential Initiatives

General Review of Disclosure Provisions

Consumers are best served in an environment where they have access to sufficient information to make educated choices. Financial institutions statutes emphasize disclosure to achieve the best possible service in the financial sector. These disclosure requirements must remain effective and evolve with consumers’ needs for information as the offer of new products and services evolves.

Federal financial institutions legislation and regulations contain numerous requirements for financial institutions to disclose important pieces of information to consumers when an institution and a consumer enter into a contract for a financial product or service. However, the current disclosure requirements may no longer be adequate, in light of evolving product offerings.

The Government is seeking views on the disclosure regime, particularly in the areas of investment-focused products, registered plans, deposit accounts and complaint-handling procedures.
Electronic Transactions

A growing share of Canada’s economic activity is being conducted electronically. While consumers continue to use cash and cheques, a significant proportion of payments are now conducted electronically through the use of pre-authorized debits, debit cards and credit cards. In addition, a large number of Canadians are taking advantage of the telephone and the Internet to conduct their financial affairs.

Currently, credit card associations have voluntarily agreed to adhere to a zero liability regime in the event of loss, while use of debit cards is governed by a voluntary code, the Canadian Code of Practice for Consumer Debit Card Services, which has been endorsed by the relevant industry associations and their members. Consumer organizations and other groups feel that, due to Canadians’ increasing use of a variety of electronic transactions, there may be a need to clarify responsibilities in the event of a financial loss in order to protect consumers.

The Government is seeking views on how best to address disclosure and assignment of liability for all forms of electronic transactions.
Residential Mortgages Exceeding 75 per cent of the Property Value

For more than 30 years, federal financial institutions legislation has prohibited the provision of residential mortgages exceeding 75 per cent of the value of the property. This statutory restriction on residential lending was intended to protect financial institutions from the risk of fluctuating property values. However, the requirement to have insurance in every case when a mortgage exceeds 75 per cent of the value of the property may have increased the cost of home ownership to some Canadians.

The Government is seeking views on providing more flexibility to residential mortgage lenders and homebuyers by removing the statutory restriction on residential mortgages exceeding 75 per cent of the value of the property.
Cheque Hold Periods

Currently, the Government requires banks to disclose in a written statement their policies with regard to the holding of cheques when a personal deposit account is opened, and to notify existing account holders of any changes to the cheque holding policy. However, consumers and other groups are of the view that many individuals face long hold periods for cheques that they deposit with banks, even when those cheques are drawn on another Canadian financial institution. It has been argued that these long hold periods force many individuals, and particularly lower-income individuals, to turn to alternative financial service providers (where they face higher interest costs and fees) to gain more rapid access to their funds to meet their daily needs.

The Government is seeking views on establishing a maximum period during which a bank could reasonably hold a cheque.

Increasing Legislative and Regulatory Efficiency

Strong and profitable financial institutions are vital to Canada’s economic success. It is the Government’s role to provide a legislative framework where dynamic and innovative financial institutions can grow, prosper and be competitive in the global marketplace, with due regard to the safety and soundness of the sector. This section sets out potential changes aimed at clarifying, simplifying and streamlining the framework.

Possible Initiatives

Foreign Bank Entry

Recent legislative reforms relating to foreign banks in Canada have sought to encourage entry into Canada as a means of fostering competition in the financial sector.

Yet, in an effort to facilitate entry through various structures, the legislative framework has evolved into a complex set of rules that are broad in scope. The scope and complexity of the framework may impose an unintended regulatory burden on foreign banks seeking entry and has implications for the resources required to administer it.

The Government is seeking views on the scope of the foreign bank entry framework, its core principles and how to simplify its mechanics.
Improvements to the Regulatory Approval Regime

An ongoing component of the legislative review process has been the improvement of the federal regulatory approval regime. While the success of Bill C-8 reforms is evident, there is still scope to further streamline what are thought of as "routine transactions."

The Government is seeking views on removing approval requirements for more routine transactions. The Minister of Finance would continue to oversee transactions that could raise issues of public policy.

Consolidation of the Trust and Loan Companies Act and Bank Act

Since 1992, a key element of federal legislative reform has been the promotion of a consistent policy framework across the four financial institutions statutes.

The highest degree of consistency in the policy framework exists between banks and federal trust and loan companies, which have parallel rules dealing with incorporation, capital structure, corporate governance, business powers, investments and self-dealing provisions. In light of the high degree of similarity between the Bank Act and the Trust and Loan Companies Act, the changes in Bill C-8 allowing closely held Canadian banks, and convergence in the financial sector, it becomes debatable whether two separate acts are necessary.

Accordingly, the Government is seeking views on consolidating the Bank Act and the federal Trust and Loan Companies Act.
Credit Unions and Caisses Populaires

Credit unions and caisses populaires continue to face the challenge of building on their advantage as locally rooted financial institutions. Bill C-8 provided additional structural flexibility to the financial cooperative sector, allowing them to organize their operations to fit their business needs. However, there may be room for further improvement in the federal statutes in areas such as membership requirements for associations.

The Government is seeking views on measures to improve the federal legislative and regulatory environment as it applies to credit unions and caisses populaires.
Marine Insurance

The current regime in the Insurance Companies Act does not fully extend to insurers that solely offer marine insurance policies. Requiring an order from the Office of the Superintendent of Financial Institutions to offer this insurance would allow the regulator to track and monitor insurance companies incorporated for the sole purpose of insuring risk in the class of marine insurance and supervise their prudential soundness.

The Government is seeking views on changes to the regulatory regime for all domestic and foreign companies that exclusively insure risk in the class of marine insurance.

Adapting the Framework to New Developments

Although the existing framework is comprehensive and balanced, it is important to make sure that it remains current and up-to-date with events and developments in the global environment. Below are possible proposals for adapting the framework.

Possible Initiatives

Canadian Payments Systems and Cheque Imaging

Currently, paper cheques are physically transported throughout Canada as part of Canada’s cheque clearing process. While cheque imaging would not change how consumers use cheques, it would help modernize and improve the efficiency of Canada’s cheque clearing process. In addition, electronic processing could reduce cheque hold times, decrease the time it takes to trace cheques and re-create statements, and lead to the development of new products and services.

In addition, the Government is considering changes to the Canadian Payments Act to improve the Canadian Payment Association’s governance and operation.

The Government is seeking views on allowing financial institutions to electronically process cheque images in place of paper cheques and on ways to improve the Canadian payments system’s operation and efficiency.
Commercial Investment Power

In previous rounds of legislative reform, the investment powers of financial institutions have gradually been broadened to allow them to provide a wide range of financial services and to own most types of financial services entities. These reforms have also gradually expanded the ability of financial institutions to invest in commercial entities and undertake commercial activities. For example, banks were permitted to invest in real estate and real estate brokerage entities in 1991, and more recently were given expanded investment power in information technology activities, both areas being integral to the operation of banking networks.

However, despite this progressive relaxation of restrictions on commercial investments, financial institutions are still quite limited in their ability to own commercial entities and undertake commercial activities.

The Government is seeking views on expanding the power of financial institutions to invest in commercial entities and undertake commercial activities, subject to the appropriate policy and prudential safeguards.
Special Security Regime

The Bank Act special security regime, a secured lending regime available only to the chartered banks, has been in existence in one form or another since the 1890s. Both federal and provincial governments legislate in the area of security provided for loans. With recent improvements in provincial/ territorial regimes, there appear to be increasing questions about the utility of maintaining a federal regime under the Bank Act.

The Law Commission of Canada recently prepared a report, Modernizing Canada’s Secured Transactions Law: The Bank Act Security Provisions, which discusses problems caused by the Bank Act security provisions. The report also sets out reform options.

Pursuant to the recommendations of the Law Commission of Canada on the special securities provisions in the Bank Act, the Government is seeking views on these and other potential options.

Next Steps

Written comments regarding any element of this paper are invited and should be forwarded by June 1, 2005, to:

Gerry Salembier
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
L’Esplanade Laurier
20th Floor, East Tower
140 O’Connor Street
Ottawa, Canada
K1A 0G5

You can also email your comments to

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

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