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Credit Union Central of Canada Submission in Response to Finance Canada's Review of Financial Sector Legislation:
Credit Union Central of Canada
Federal Financial Institutions Legislation
Cooperative Credit Associations Act
2006 Legislative Review
Table of Contents
The purpose of this submission is to provide the views of the Canadian credit union system, through Credit Union Central of Canada, in anticipation of the 2006 policy review of federal financial institutions legislation. Credit Union Central of Canada is the national trade association of the Canadian credit union system representing Canada's nine provincial credit union Centrals and, through them, 560 Canadian credit unions.
This submission is presented in three parts. Part One of the submission discusses the current state of the credit union system in Canada and the forces of change that are influencing the future development of credit unions and the credit union system as a whole. The purpose of Part One is to set the context for the policy discussion and legislative proposals that follow.
Part Two of the submission outlines some significant policy issues of concern to the credit union system. The discussion of these issues establishes a link between the forces of change described in Part One and some of the legislative proposals discussed later in the submission. This Part of the submission draws attention to the federal government's opportunity, through the 2006 revision process, to make changes to governing legislation that will enhance the operating environment for the credit union system and help to maintain a fair competitive balance between credit unions and the large commercial banks..
Part Three of the submission focuses on the principal legislative changes that Canadian Central is seeking in the 2006 legislative review of the Cooperative Credit Associations Act (referred to frequently in this submission as the "CCA Act"). Some of these changes are directly related to the policy issues discussed in Part Two. Other proposed changes are more technical in nature but nevertheless warrant attention in the upcoming review. We acknowledge that, in light of the recent introduction of Bill C-57 in the House of Commons, some of the governance-related issues discussed in this submission overlap with issues in that Bill. We have nevertheless retained our comments in this submission and will be reviewing Bill C-57 in light of these comments.
Because federal financial institutions legislation is reviewed on a five-year basis, we are conscious of the fact that, in contemplating changes for the CCA Act in 2006, the credit union system needs to think ahead to its evolution leading up to the year 2011. It is necessary, therefore, to have a clear view of current competitive conditions and to project these forward for several years. It is important not to be complacent or to assume that what exists today will always exist. Canadians have seen, in recent years, one segment of the Canadian financial services industry – trust companies – virtually disappear as an independent alternative supplier of financial services to Canadians. Credit unions are growing in membership and assets and are strongly positioned in Canada's financial services market. Nevertheless, the policy proposals set out in this submission derive from a sense of vigilance aimed at preserving the important role that credit unions play as autonomous, community-based and democratic financial institutions in Canada. Canadian credit unions are very aware of the significant and ongoing competitive threat posed by the large, well-capitalized Canadian commercial banks.
An important theme in this submission is dynamic nature of changes currently underway in the Canadian credit union system and the position of the credit union system in an intensely competitive financial services market. The credit union system has to date found ways to adapt in order to maintain a competitive position in a national market dominated by the commercial banks. However, the change in this market threatens to place credit unions at a competitive disadvantage and, in so doing, weaken the distinctive and community-based type of service that credit unions provide to nearly five million Canadians from coast to coast. An underlying objective of the submission is to demonstrate that the credit union system in Canada needs broader operating flexibility in its legislative environment in order to be able to pursue and implement adaptive strategies to contend with current and future competitive challenges. The federal government has an important role to play in providing this operating flexibility.
Part One: The Credit Union System in Transition
The credit union system in Canada is currently in the midst of a period of great change that affects its structure, composition, core services and governance. There is no other segment of the Canadian financial services industry that is undergoing comparable change. The banking industry has maintained its existing structure pending resolution of policy issues relating to bank mergers. Trust companies have virtually disappeared as an independent segment of the financial services sector. Some insurance companies have undergone significant changes as a result of demutualization, but this activity has largely come to an end. Despite occasional merger activity in the insurance and securities industries, the credit union system has emerged as currently the most dynamic segment of the Canadian financial services industry. It is difficult to say for how long this period of dynamic change will continue. We do know that the credit union system is a system in transition. There are two dimensions to this transition, these being (i) consolidation and (ii) diversification.
1. Consolidation in the Credit Union System
The most apparent change in the credit union system is the consolidation of the system through the merger of credit unions into larger credit union entities. At the time of Bill C-8 in 2001, the Canadian credit union system was comprised of approximately 670 credit unions holding $62 billion in assets. Today, there are 560 credit unions holding $78.7 billion in assets. The consolidation has proceeded at a steady pace, with the number of credit unions decreasing in each quarter since 2001. The number of locations has also slightly decreased during this period, from 1834 locations to 1788 locations. Membership in the credit union system has nevertheless increased from 4.5 million members in 2001 to 4.6 million members in 2004 along with the increase in asset size. Consequently, despite the reduction in the number of credit unions since 2001, the credit union system has experienced consistent albeit not dramatic growth. In the face of strong competition from domestic Canadian banks, credit unions have successfully managed to maintain a solid market position in the Canadian financial services sector.
Some of the implications of this consolidation trend have a bearing on the relationships that exist amongst the three tiers that comprise the credit union system. Consolidation means that, in some jurisdictions, a small number of credit unions may own a large proportion of credit union assets held in the province. In the case of British Columbia, for instance, the two largest credit unions represent 50% of total system assets. The six largest credit unions represent over two-thirds of system assets. A similar pattern is developing in other provincial jurisdictions. This market restructuring presents a challenge for provincial Centrals in determining how best to serve the needs of their larger credit union members as well as their smaller members. Increasingly, provincial Centrals and, through them, Canadian Central, must plan their future activities keeping in mind that there is ever greater diversity amongst their members in terms of their size, business objectives, and access to human and other resources.
The consolidation trend also has implications for the traditional geographical scope of the operations of credit unions. There is likely to be a point at which consolidation objectives will begin to put pressure on the jurisdiction-bound activities of credit unions. A large credit union, for instance, might decide at some point that its best business opportunities lie outside of its province of incorporation. Were it to do so, it would find that the regulatory framework for extending its business activities across provincial boundaries is largely lacking. Nor is there a readily accessible co-operative organizational vehicle under federal law that would accommodate a credit union's cross-border strategy. Although, in 2005, few credit unions seem to be planning for cross-border expansion, this could change dramatically between now and 2011. Consequently, to the extent that this issue can be addressed in federal legislation, the 2006 financial legislative review is the single most important opportunity to do so.
2. Diversification in the Credit Union System
One of the objectives underlying the growth and consolidation of credit unions is the desire for greater diversification. Diversification is important for business and risk management reasons. A credit union that is situated in one local community and one local market is vulnerable if the local economy suffers economic hardship. The credit union is less vulnerable if it is able to expand its business over a number of communities with differing local economies and differing product needs. In so doing, it diversifies its sources of revenue and areas of potential risk.
There are two aspects to diversification - product diversification and geographic diversification. One of the competitive strengths of the large commercial banks is their ability to diversify their sources of revenue and potential risk over a very large geographical area and a broad range of products. Credit unions are able to replicate this diversification, but only to a limited extent. Since credit unions operate within provincial boundaries, they are not able to individually achieve diversification on a national basis. One of the functions of provincial Centrals and Canadian Central is to compensate for this limited diversification by operating pooling mechanisms to provide liquidity support from other credit unions on a provincial and a national basis in the event that local circumstances place one or more credit unions in extreme financial difficulty.
Product diversification poses particular challenges in the credit union system. The pace of product development, to a large extent, is set by consumer demands and expectations. These are invariably technology-based products that are expensive to launch and maintain. Provincial Centrals, through their efforts, can assist and support credit unions in various product initiatives. Nevertheless, the large amount of resources required for a credit union to keep current in its product offerings is another factor that leads credit unions to pursue consolidation as a competitive strategy through mergers of credit unions and joint ventures involving provincial Centrals.
As credit unions grow in size, it is foreseeable that they will become interested in business opportunities that may exist outside their provinces of incorporation. As has been noted, it is an assumption of this submission that credit unions will increasingly be interested in pursuing cross-border activities. It is for these reasons that many credit unions seek merger opportunities in order to build larger and more diversified balance sheets.
3. Drivers of Change in the Credit Union System
The dynamic transformation that is underway in the credit union system is being driven by a number of forces. These can be grouped into the following categories of changes at work in the credit union system.
1. Member/Customer Expectations: Credit unions must respond to demands from their members for increased services at competitive prices. These heightened expectations derive from several sources. Member/customers are more sophisticated and have greater access to information and media commentary comparing the various services offerings of financial institutions. Members are more mobile and expect that they should be able to access financial services from wherever they are situated. Member/customers are also demanding of fairness and ethical conduct on the part of their financial services provider.
Customer expectations are a strong force behind increased government regulation in the form of consumer protection regulation. These regulations shape product design and can affect product pricing. Cost of borrowing disclosure legislation, for instance, deals not only with disclosure, but also regulates the calculation of interest rates and the charging of some fees. Governments consistently portray their objectives in financial services regulation as serving consumer interests. It is anticipated that consumer regulation will have a growing influence on market conduct and product development in credit unions.
2. Competition: Credit unions compete in an intense competitive environment comprised of banks, insurance companies, securities firms, and a range of less regulated entities such as mortgage and deposit brokers and payday lenders. The strongest competition comes from their traditional rivals – the chartered banks. The large chartered banks are formidable competitors because they can mobilize vast capital resources through their access to public financial markets and can achieve scale economies in their operations. It is difficult for credit unions to compete against scale and robust capital. For a period of time, the retail financial services market fell out of fashion with the large domestic banks and credit unions benefited from their lack of attention. Now, however, domestic Canadian banks have turned their attention back to the retail financial services market in the wake of turbulent experience in corporate and international markets.
Competition also comes in the form of less regulated financial services providers. These providers are able to focus their efforts on the most lucrative niches in the financial services market and provide their services at relatively low cost, partly because they do not face the same regulatory restrictions and costs as fully regulated financial institutions such as credit unions. Mortgage brokers, for instance, have been able to capture a significant share of the mortgage market for this reason.
Credit unions are adapting to this new level of competition. Consolidation through mergers is one response. Another response is through administrative arrangements merging back office support services such as internal audit, human resources, facilities management and other services.
3. Demographics: The changing demographic composition of the Canadian financial services market is an important driver of change for financial institutions. This change is manifested in two general trends. The first of these is the aging of the population. As the bulge of the "baby boomer" generation moves towards retirement age, the range of services offered by financial institutions to their customers must adapt as well. Financial planning services, for instance, become more important as do insurance-related products such as annuities. A second trend is the increased presence of new Canadians in all population categories, especially amongst young people. Credit unions, being community-focused financial institutions, face an important challenge in attracting younger members, especially those from new Canadian and immigrant communities, and fulfilling their particular needs for financial services.
4. Information Technology: The financial services business is a technology business. This is nowhere better demonstrated than in the Canadian banking industry. Technology has moved from the back offices to the front lines. Electronic channels are increasingly important as the preferred delivery channel for financial services. Financial transactions undertaken by customers are increasingly electronic. A consequence is that information technology has widely expanded the range of customer choice. Customers can now meet almost all of their financial services needs by telephone, by ATM, and by the Internet.
Electronic payment networks have also become central to the financial services industry. The importance of networks, and of networks communicating with networks, is ever increasing. The credit union system needs to be part of these networks in order to be able to provide a full range of services to their members. It is much easier, however, for a payments network to link together a few large organizations, such as commercial banks, than it is to link up than 560 autonomous entities comprising the credit union system. The need to reconcile the drive for standardization in network development with the autonomous nature of the credit union system is a key challenge for the credit union system as national and international payments networks continue to develop and expand.
5. Financial Institutions Regulation: Financial institutions regulation is a driver of change because financial institutions are required to adopt the changes mandated by new regulations. Some of these new regulations impose compliance costs on financial institutions. Larger financial institutions are able to spread compliance costs over a broader base of operations and customers. Credit unions are less able to do so because of their relatively small size. The cost and administrative impact of increased financial regulation is a matter of concern to credit unions.
6. Globalization: Globalization is readily apparent as a market trend with important implications for commercial banks. However, globalization is also a trend that affects credit unions. Credit union members are increasingly international in their scope of activities and corresponding financial services needs. A member, for instance, may have family abroad to whom they wish to send funds. The member may have a small or medium sized business enterprise engaged in an import or export business. Or the member may be traveling or living outside Canada for a period of time and need access to their Canadian financial services provider.
Globalization compels credit unions to look to their product offerings to ensure they can meet the international financial services needs of their members, either directly or through facilities provided by their provincial Central.
4. The Credit Union Difference
As compared to the large banks, there is a distinct credit union difference that helps credit unions to maintain their competitive position. Credit unions are value-based organizations that are guided by well-recognized co-operative principles. Credit unions are autonomous, community-oriented and democratic in governance structure. While earnings are important to credit unions in order to meet capital and other requirements and provide a return of funds to their members, the co-operative principles which guide credit unions lead them to focus their activities on the needs of their member-owners and their communities. For example, in recent years, the credit union system has managed the purchase of 77 bank branches, most of which are situated in communities where a bank has determined that its operations were unprofitable or unattractive.
There is a natural tension that arises between the business forces represented by the drivers of change noted above, and the values that lie at the core of the credit union difference. The forces of change lead in the direction of standardization and large-scale consolidation. The values of the credit union system, however, allow for small and medium-scale consolidation while maintaining local autonomy. There is a strong conviction in the credit union system that it is possible to preserve and build upon the credit union difference in the current competitive conditions. Nevertheless, favourable federal legislation that strengthens the ability of the credit union system would be a valuable support for this effort.
5. Credit Unions are the Growing Alternative
The customer experience for a member of a credit union is noticeably different from the corresponding experience of a bank customer. Whereas a customer of a bank is a consumer without an ownership stake in the financial institution, the customer of a credit union is an owner/member of the financial institution with a voice and a vote that is equal to each of the other owner/members in setting the future direction of the credit union.
If it were not for credit unions, the Canadian deposit-taking financial services market would be quite homogenous. Canada does not have the same range of financial institutions as, for instance, exists in the United States, with its state banks, community banks, federal and state credit unions along with the larger and better known money-center banking institutions. The differentiation that credit unions bring to the financial services market can serve important purposes. For example, a significant distinguishing feature of credit unions is that, being community-based, they reinvest the deposits of their member-owners back into their communities.
The credit union system stands as a distinct alternative to the banking system and this alternative is growing in terms of membership and asset size. Although the pace of growth in the credit union system is moderate (with many credit unions experiencing strong growth in their particular markets), the fact that growth has been consistent over the past few years is in itself an achievement in the face of formidable competition from much larger and better resourced commercial banks. A policy choice for the federal government as it develops financial sector policy is whether it wishes to foster the maintenance of this alternative. The 2006 legislative review is an occasion to exercise this choice.
Part Two: Significant Policy Issues
The following are several significant policy issues that relate to a number of the legislative proposals set out in Part III of this submission. As a preliminary matter, it is necessary to acknowledge that the federal government has a limited role in the regulation of the credit union system. Credit unions are provincially regulated and, from a constitutional standpoint, fall under exclusive provincial legislative jurisdiction. The federal government regulates the system at the level of Canadian Central as well as those provincial Centrals that choose to be governed by Part XVI of the CCA Act and any retail association established under the Act. (Concentra Financial Services Association, established in January, 2005, is the first retail association incorporated under the CCA Act.)
In any policy discussion involving the competitive position of the credit union system, it is necessary to keep in mind the relatively small size of the credit union system relative to Canada's banking system. In the discussion which follows, our concern is directed at achieving a competitive balance between a successful credit union system and a relatively much larger banking system so as to help preserve the credit union system as a distinctive service provider in the Canadian financial services market.
We have not, in this submission, addressed the issue of a co-operative bank model for Canada. This issue attracted some attention at the time of the previous review in 2001. There continues to be interest in the credit union system in a co-operative bank model as a longer term structural option for credit unions. For the purpose of the 2006 review, however, we have chosen to focus on the entities currently provided for in the CCA Act - the "association" and "retail association" entities - as the principal structural options currently available to credit unions under federal law and to improve the access by credit unions to these structural options.
1. Retail Association
Bill C-8, which implemented the previous legislative review in 2001, introduced the concept of a "retail association" into the Cooperative Credit Associations Act. Through the medium of a "retail association", the CCA Act permits an association to provide services on a national basis and to provide services outside of the traditional field of membership. This field of membership is set out in section 375 of the CCA Act and consists generally of cooperative entities and their affiliates.
At the time that Bill C-8 was enacted, the precise definition of a "retail association" was left to the regulations to determine. There nevertheless was an assumption at the time that the term "retail" in "retail association" was a descriptive term. In other words, an association classed as a "retail association" would be one that dealt in traditional retail markets generally with individual customers interested in products such as personal loans, mortgages, mutual funds and GICs. This view seemed to be borne out by the inclusion of consumer protection provisions in the Cooperative Credit Associations Act that are similar to corresponding provisions in the Bank Act, and the application of these provisions directly to retail associations.
Given this assumption, the regulation that was eventually enacted defining a "retail association" came as a surprise. This very short regulation essentially stated that any activity by a retail association outside the field of membership described in section 375 of the CCA Act constituted the association as a "retail association" subject to the full range of provisions in the Act that apply to retail associations. The nature of the activity outside the field of membership - whether retail, commercial, or corporate in nature - was not relevant to the characterization of the association as a retail association. Canadian Central objected to this regulation at the time, but was not successful in persuading the federal government to limit a "retail association" to a retail focus.
The rationale for the regulation defining "retail association" seems to be linked to the "level playing field" concept. There is a view that cooperative credit societies benefit from less regulation when they provide services to entities within the field of membership defined in the CCA Act. Once the association begins to offer services to customers outside the field of membership, this view holds that the association should be subject to the same level of regulation as other financial institutions (i.e. the large banks) competing in that market. Canadian Central considers that considerations of "competitive balance" are preferable to "level playing field" as a basis for setting policy as between the credit union system and the Canadian banking system. The size differential is simply too great to allow for easy comparisons of the ability of credit unions and banks to compete against one another on a hypothetical level playing field.
Canadian Central believes that the 2006 review is an opportunity to revisit the concept of a retail association and to enhance this organizational vehicle as an option within the credit union system. The establishment of only one retail association in the period since C-8 was enacted indicates that there are barriers to the establishment of a retail association that limit its availability as an option. It is not clear, for instance, why a minimum of ten credit unions situated in more than one province is necessary to establish a retail association. This virtually prevents the possibility of a group of credit unions coming together to form a retail association because ten is simply too large a number for the degree of co-operative activity required to do so.
Canadian Central sees real potential for "retail associations" and "associations" incorporated under the CCA Act to serve as forms of co-operative organization for use by credit unions and provincial Centrals seeking new ways to provide financial services to their members and to the financial services market. However, in order to do so, we believe that the "retail association" and "association" models require further development. In particular, it is important to make the "retail association" entity more accessible for credit unions and provincial Centrals that wish to use it. In addition, as discussed in the following section of this submission, the "association" model should be broadened to permit greater scope for its use in wholesale financial services activity.
2. Business Powers of Associations
We have noted above the difficulties posed by the federal government's approach to the "retail association" entity in the CCA Act. We have also noted that dynamic changes in the credit union system pose new challenges for provincial Centrals. Provincial Centrals are essentially engaged in a wholesale business. They provide services to financial services providers. In some cases, they may also provide services to large governmental or corporate entities.
Canadian Central believes that there should be increased scope for an "association" incorporated under the CCA Act to operate in wholesale and commercial markets not traditionally served by credit unions. A consequence of such a change would be to make the "association" model under the CCA Act a more attractive option for provincial Centrals with an interest in merging some of their operations into a separate entity. Serving these markets through an "association" entity has the potential to enable Centrals to make better use of existing facilities for the benefit of their members, for example by offering support services to commercial enterprises and developing wholesale business opportunities for syndication to credit unions.
There is currently not enough of a distinction in the CCA Act between the business powers of an "association" and the business powers of a "retail association". In many instances, an association that wishes to provide services to an entity that is not a co-operative organization would have to become a retail association under the Act, even though the services and the prospective recipient of the services are not retail in nature. Canadian Central is of the view that the powers of "associations" and "retail associations" should be more clearly defined in the CCA Act by (i) increasing the business powers of associations and (ii) clarifying that retail associations are associations that engage in financial services which are commonly understood to be retail financial services (e.g. deposits from and loans to individuals; small business loans below a specified threshold etc.).
Most of the business powers of associations are currently set out in sections 375 and 376 of the CCA Act. These provisions indicate that an association can provide in a wide variety of financial services to cooperative organizations. An association can also provide some services to other non-cooperative organizations (e.g. accept deposits from governments; make loans to entities that are not members of the organization). However, in general, the services that an association can provide to organizations that are not co-operative organizations are quite limited.
Canadian Central believes that the list of services that associations can provide to non-cooperative entities should be expanded. For instance, an association should be able to provide technology services such as processing to utilities and other large corporate entities. It should also be possible for an association to build a broader business relationship with an entity that receives a loan from the association without having to become a retail association.
In our view, an "association" that engages in wholesale financial services activity should not be required to become subject to supervision by the Financial Consumers Agency of Canada and obtain membership in the Canada Deposit Insurance Corporation. We do not think that the merits of this proposal for a more empowered "association" should be judged on the basis of whether it creates a level playing field with the banks. However, it is relevant to note that federal legislation does recognize the establishment of "wholesale" banks that are not subject from CDIC regulation. The CCA Act does not provide for a comparable entity for the credit union system.
3. Related Party Rules
The related party rules have their origins in the financial institution failures of the 1980s. The insolvency of these institutions was attributed to self-dealing between individuals in a position of influence in the financial institutions and the financial institution itself. This lead to the introduction of complex related party rules into the Bank Act and subsequently into the statutes governing other federally and provincially regulated financial institutions. It did not help in this area that these rules often differed in important respects as between the regulating jurisdictions, especially at the provincial level.
The related party regulations are complex, and there has been consideration in related party regulation in recent years to try to find ways of simplifying them. Because of the close relationships that are characteristic of the credit union system, related party transactions can be problematic. The CCA Act addresses this issue in the related party rules that apply to "associations" by excluding members from the range of related parties. This seems reasonable since one would not expect that a customer of a bank would be considered to be a related party of the bank. This approach does not apply in the case of "retail associations", where a member may be considered to be a related party of the association. This could vastly complicate the management of related party issues for the retail association if it has a large number of members. However, the federal government's recently enacted "Related Party of a Retail Association" regulation will make the situation much more manageable for retail associations.
Canadian Central believes that the 2006 legislative review provides a useful opportunity to review the area of related party regulation and, in particular, to consider whether there are approaches to related party regulation that would meet government objectives in a less burdensome manner.
A challenge for the credit union system is to reconcile larger more efficient business units with co-operative governance. This can be addressed through electronic voting and mail-in balloting. The credit union difference, and the credit union advantage, is the community-oriented, member based, democratic focus of credit unions. There is no reason that the growth in membership size of a credit union should impair the member-centricity of the credit union. Indeed, with the proper tools at hand, a large credit union can achieve a high level of democratic participation from its members relative to many smaller credit unions. The tools needed are various forms of distance participation as participants in meetings and voters.
The Canada Business Corporations Act was recently amended to allow for expanded participation in corporate meetings through electronic means. Since the corporate provisions of the CCA Act mirror many of those in the CBCA, we would expect that the federal government will give full consideration to incorporating these into the federal financial institutions statutes, including the CCA Act. We would also suggest that mail-in balloting be included to this list of options. In addition, there are important issues in relation to directors' due diligence defences and directors' liability that are addressed later in this submission.
The foregoing policy issues can be summarized in the following questions:
- Should the 2006 legislation reduce barriers to the establishment of retail associations to make this organizational option more accessible for credit unions? Canadian Central responds – Yes.
- Should the 2006 legislation provide additional business powers to "associations" so that associations can provide a range of wholesale financial services services to large Canadian corporate, commercial, and governmental entities? Canadian Central responds – Yes.
- Should the 2006 legislation serve as an occasion to review the related party rules with a view to simplifying the application of these rules and reducing their complexity? Canadian Central responds – Yes.
- Should the 2006 legislation introduce new means of democratic participation in association meetings and voting so as to permit an association member to fully participate in the democratic processes of the association? Canadian Central responds – Yes.
Some of these policy issues are addressed in the next Part of this submission through specific legislative proposals.
Part Three: Legislative Proposals
A. Cooperative Credit Associations Act
The foregoing discussion was intended to set the context for the legislative proposals which follow. These proposals are addressed in the order in which the corresponding section numbers appear in the CCA Act. This means that policy-related proposals are mixed in with suggested changes that are more technical.
1. Restrictions on Incorporation of Retail Associations
The CCA Act restricts the ability of credit union entities to form a federally regulated cooperative credit association. In the case of credit unions, the Act requires at least ten credit unions incorporated in at least two jurisdictions to be eligible to apply to incorporate an association under the CCA Act. It is understandable that the federal government would require credit unions in more than one province to comprise a national retail association in order to avoid a conflict with a provincial government's jurisdiction to incorporate credit unions. But the policy reason for requiring a minimum of ten credit unions for form a retail association is unclear in light of current circumstances in the credit union system.
The ten credit union limitation on retail association formation is a significant restriction on the ability of credit unions to join together to form a federal association since co-ordination of such an initiative amongst ten credit unions would be very difficult. It is not surprising that there are no examples of credit unions joining together for this purpose. The functionality of the provision changes quite significantly if the minimum number of credit unions eligible to form an association or retail association under the CCA Act is reduced from ten to a lesser number of credit unions. Such a change would open the possibility of new structural arrangements for credit unions that are interested in working together on building a cross-border business.
If this were to occur, some other implications of federal jurisdiction and cross-border operations would need to be assessed. A federally-incorporated retail association, for instance, is subject to the regulatory oversight of the Financial Consumers Agency of Canada and the Office for the Superintendent of Financial Institutions and is CDIC-insured. Nevertheless, it would be important to maintain the credit unions that might form a retail association in provincial liquidity pools. This will keep in place existing liquidity arrangements that have proven to be effective in supporting the financial integrity and stability of the credit union system and gaining credit union participation in the Canadian payments system.
: Section 24 of the CCA Act should be amended to reduce the number of individual credit unions needed to establish an association under the CCA Act to a number less than the current ten required. (Canadian Central supports maintaining the requirement that the eligible credit unions be situated in at least two provincial jurisdictions.) Canadian Central does not have a precise number to recommend at this time. We would, nevertheless appreciate an opportunity to enter into a discussion with the federal government aimed at mutually determining a minimum number of credit unions, based on policy considerations, so as to help establish the "association" and "retail association" as more accessible organizational options for credit unions
2. Continuance - Share Conversion (Section 31.1)
The CCA Act permits a corporation incorporated under the Canada Business Corporations Act or any other Act of Parliament to apply to the Minister of Finance for letters patent continuing the corporation as an "association" under the CCA Act. In so doing, the corporation moves from being an organization with a share ownership structure to becoming an organization with a membership ownership structure.
The Act is silent about the consequences of continuance for common shares of a continued corporation. To provide necessary clarification, there is need for a CCA Act provision that explicitly recognizes that common shares of a shareholder owned company, upon continuance under the CCA Act, can convert automatically into membership shares of the CCA Act association unless the association provides otherwise. This will help to ensure a smooth transition from a company's shareholder structure to the membership structure of the CCA Act association. The federal Canada Cooperatives Act currently includes such a provision.
Canadian Central recommends that a provision similar to s. 285(11) of the Canada Cooperatives Act be included in the CCA Act. This provision states that when a body corporate is continued as a cooperative "its common shares are deemed to be membership shares to which are attached the rights privileges and restrictions set out in this Act and the articles." Canadian Central proposes that this deeming provision, in the context of the Cooperative Credit Associations Act, be subject to an ability of an association to stipulate otherwise where, subject to regulatory approval, the association chooses to make some other arrangement regarding share conversion.
3. Continuance - Order to Commence Business (Section 56)
Section 56 of the CCA Act states that an association shall not commence business until the Superintendent has, by order, approved the commencement and carrying on of business by the association. Ordinarily, the issuance of the Superintendent's order to commence business is a matter of administrative discretion. However, section 56(3) of the CCA Act states that where letters patent amalgamating and continuing two or more bodies corporate as an association under the CCA Act are issued, the Superintendent shall make an order approving the commencement and carrying on of business by the association. This ensures that, in the case of an amalgamation, the amalgamated entity continues in operation without interruption.
Under a continuation, this same rule should apply as the continued organization needs to be ensured that it will be permitted to continue as a going concern business. It would be highly disruptive for a continued association if it were not to receive approval to commence business at the same point in time that it was continued under the CCA Act.
Canadian Central recommends that section 56(3) of the CCA Act be amended to provide, in addition to amalgamations, that the Superintendent shall make an order approving the commencement and carrying on of business when a corporation is continued under the CCA Act.
4. Membership Shares – Prescribed Minimum (Section 67)
Section 67(1) of the CCA Act states that "members shall hold the minimum number of membership shares prescribed by the by-laws." The consequence of this provision is that it is cumbersome to adjust minimum membership shareholder thresholds since any such change would need membership approval at a special meeting or annual general meeting of members. This affects the ability of an association's board to respond quickly to situations that may arise such as a need for capital infusion from members in an emergency situation. In circumstances where an association seeks a rating from a rating agency, a limit as set out in section 67(1) on the board's ability to raise capital in an emergency situation could be looked upon unfavourably by the rating agency and could adversely affect the association's rating. The CCA Act should permit the members, through by-law, to delegate to the Board the ability to set the minimum membership shareholder limits.
Canadian Central recommends that section 67(1) of the CCA Act be amended to allow for members of an association to establish by-laws that have the effect of permitting the Board of an association to prescribe a minimum number of membership shares that members must hold.
5. Membership Shares – Classes of Shares (Section 67)
Section 67 of the CCA Act seems to allow for only one class of shares to be characterized as "membership shares". Subsection 67(3) somewhat confuses the terminology used in the section when it states that "no association shall designate a class of its shares as "membership shares" or any variation thereof". Nevertheless, the CCA Act, in subsection 67(2) sets out the rights that adhere to membership shares (right to receive dividends; right to receive remaining property on dissolution) and, in section 70, permits an association to provide for one or more classes of shares that differ from membership shares. Section 72 states that a resolution establishing a class of shares created pursuant to section 70 may confer only one vote for each share.
The effect of section 67 is to establish a comparatively rigid framework for membership and shareholder capital in the CCA Act that discourages creative approaches to capital structure for the purposes of building stronger associations. As an example, it appears that, under the CCA Act, only the holders of membership shares have the right to receive the remaining property of the association on dissolution. The corresponding provision of the Canada Cooperatives Act provides more flexibility by allowing this limitation to be varied in the articles of the cooperative (see section 118(2).
Section 67 should, in particular, allow for the establishment of different classes of membership shares. This could be important, for example, in the event that there is a merger of provincial Centrals. The ability to establish separate classes of membership shares would allow for differentiation between the claims of membership classes representing each of the merging centrals to the residual value of the merged entity.
Canadian Central recommends that section 67 of the CCA Act be reviewed and clarified and that, in particular, the provision be amended to permit an association to have the flexibility to establish more than one class of membership share for its members.
6. Electronic Meetings (Section 143)
The CCA Act currently allows for electronic meetings of directors (s. 189), but does not allow for electronic membership meetings. In this regard, the CCA Act now lags behind the Canada Business Corporations Act, which was amended in 2001 to allow for electronic shareholder meetings. Given the democratic principles that constitute core values in the governance of cooperative organizations, the enabling of electronic participation at member meetings is of special importance in associations that have members in various locations across Canada. Electronic participation would likely allow for a greater level of participation by members at the membership meetings of the association.
Canadian Central recommends that provisions similar to subsections 132(4) and 132(5) of the CBCA be added to the CCA Act. These provisions provide as follows:
- Participation in meeting by electronic means: "Unless the by-laws otherwise provide, any person entitled to attend a meeting of shareholders may participate in the meeting ....by means of a telephonic, electronic, or other communication facility that permits all participants to communicate adequately with each other during the meeting, if the corporation makes available such a communication."
- Meeting held by electronic means: "If the directors or the shareholders of a corporation call a meeting of shareholders pursuant to this Act, those directors or shareholders, as the case may be, may determine that the meeting shall be held ..... entirely by means of telephonic, electronic, or other communication facility that permits all participants to communicate adequately with each other during the meeting, if the by-laws so provide."
7. Voting – Electronic, Mail-in (Section 160)
Section 160 of the CCA Act currently allows for voting at membership and shareholder meetings by a show of hands or by ballot. As in the case of membership meetings noted above, the Canada Business Corporations Act has been amended to allow for electronic participation in meetings, including voting. Electronic participation in meetings requires electronic voting as well. Otherwise, the member is deprived of a principal ownership right and the electronic participation is substantively nothing but an observer status.
Mail-in balloting is similar to electronic voting in that it is a means of involving members who are unable for any reason to attend a meeting of members. Mail-in balloting enhances the participation of members in the democratic processes of a cooperative and is a feature of many provincial credit union statutes. Mail-in balloting would be a useful addition to the voting options in the CCA Act, along with electronic voting.
Canadian Central recommends that provisions similar to sections 141(3) and 141(4) of the CBCA be added to the CCA Act. These provisions provide that "any person participating in a meeting of shareholders" where the corporation has allowed electronic participation may vote "by means of the telephonic, electronic or other communication facility that the corporation has made available for that purpose."
Canadian Central also recommends that section 160 of the CCA Act allow for a mail-in balloting procedure in membership meetings under the CCA Act. We would be pleased to assist in designing this mail-in balloting procedure based on credit union experience with provincial mail-in balloting rules.
8. Director Defences (Section 215)
Many of the corporate governance provisions in the CCA Act are modeled on the provisions of the Canada Business Corporations Act which, as noted above, was extensively amended in 2001. We anticipate, therefore, that a number of the changes to the CBCA will find their way into the CCA Act as part of the 2006 legislative review. One provision, in particular, is of interest to Canadian Central for inclusion in the CCA Act. Section 123(4) of the CBCA now sets out a "reasonableness diligence" defence for directors who, relative to their statutory duty of care, exercise "the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances...". Canadian Central believes that the availability of this defence encourages diligent conduct on the part of directors and should be included in the CCA Act.
Canadian Central recommends that a reasonable diligence defence for directors, similar to the one set out in section 215 of the CBCA, be included in the CBCA.
9. Distribution of Annual Statement (Section 295)
Section 295 of the CCA Act requires that an association shall, not later than twenty-one days prior to the date of each annual meeting, send to each member and shareholder at their recorded address a copy of the annual financial statements, which are usually included in an annual report. It is apparent that the provision contemplates only hard copy delivery of this report. A member or shareholder who is concerned to minimize paper burden can waive the right to receive the report.
Section 295 seems out of date in the Internet age. Posting a document to the Internet has now become an accepted form of distribution. The federal government itself is a frequent user of Internet posting as a distribution mechanism. Annual reports are costly to produce and distribute. Now that email and the Internet have become mainstream communication methods for businesses and individuals, it should be permissible, in our view, to meet the requirements of section 295 with an Internet posting of the annual report, preceded by an email notification to each member and shareholder informing them of the posting and its Internet location.
Canadian Central recommends that section 295 of the CCA Act be amended to permit an association to enact a by-law that would authorize the association to send its annual statement to members by posting it to an accessible Internet location. It would be a requirement that the by-law provide shareholders with the option to (i) continue receiving the statement in hard copy format or (ii) waive the right to receive it. However, it would be permitted to stipulate in the by-law whether the option of receiving the annual statement through an Internet posting is an "opt-in" (i.e. only members selecting this option receive it) or an "opt-out" option (i.e. the member receives the electronic posting unless the member chooses another option).
10. Retail Association (Section 375.1; Section 2 - definitions)
Canadian Central's comments and recommendations relating to "retail associations" and "associations" were outlined earlier in this submission. The following discussion focuses on the need for a change to the definition of "retail association" to accommodate the earlier recommendations.
The important concept of a "retail association" was included in the Cooperative Credit Associations Act by Bill C-8 as a means of adding flexibility to the types of association that can be incorporated under the Act. The term is defined by regulation. The significance of a "retail association" is twofold. Firstly, the Act states that only a "retail association" can exercise several retail-oriented business powers listed in the Act (e.g. only an association that is a "retail association" can engage in portfolio management" under the CCA Act; s. 376(1)(i)). Secondly, only associations that are "retail associations" are subject to the consumer protection provisions in the Act as well as oversight by the Financial Consumers Agency of Canada.
The federal government has enacted a regulation defining "retail association" that is too broad and will impede restructuring initiatives. The regulation fails to distinguish between a "retail" association that provides services to individual non-credit union members, as provided for by section 375.1 of the Act, and an association that provides wholesale and corporate financial services to corporations, governments etc.that are not credit union members. The consequence is that an association that restricts its activities outside its field of membership to non-retail financial services activities is nevertheless treated as a consumer lending institution subject to consumer disclosure and other related provisions of the CCA Act.
Canadian Central recommends that the definition of "retail association", currently set out in a regulation made under the CCA Act, should be repealed. Instead, a narrower definition of "retail association" should be included in the definitions section of the CCA Act. In addition, the Act should provide for expanded business powers to "associations" to allow them to provide a broader range of financial services to large non-consumer entities without the need for prior regulatory approval.
11. Technology Services (Section 376(1)(g))
Technology services have become a significant aspect of the business operations of the Centrals and this service has the capability to be developed into a key aspect of Central operations for clients outside of the immediate credit union family. Section 376(1)(g) is quite restrictive in terms of Central business powers in the area of technology services (i.e. Ministerial approval is required and the services may be provided only to entities in the credit union/co-operative sector unless it is a retail association).
Canadian Central recommends that the CCA Act be amended to increase the ability of associations to engage in technology services. In particular, the need for Ministerial approval should be removed from the provision and associations should be provided with some scope to offer technology services to sophisticated customers such as utilities, Crown corporations, and large commercial entities.
12. Deposits and CDIC Membership (Section 378.1)
Section 378.1 requires a retail association to be a member of CDIC if it accepts deposits. There is no provision in the CCA Act comparable to the procedure available under the Canada Deposit Insurance Act whereby a bank engaged in deposit- taking over $150,000 can be exempted from CDIC membership . This omission will cause difficulties for an association that is not intending to engage in retail deposit taking activities.
Although it was originally contemplated when the retail association concept was put in place in the CCA Act that these associations would operate like a bank, the vehicle will also lend itself to various other activities such as credit card operations, data processing activities or other types of services activities. There is a need in the CCA Act to provide more flexibility in the types of association that may be established under the Act, especially with respect to CDIC coverage.
Canadian Central recommends that section 378.1 be amended to provide that "retail" associations that accept only large deposits are not required to become members of CDIC.
13. Account Disclosure (Section 385.05)
Section 385.05 and the following sections provide for extensive disclosure requirements relating to accounts at associations. In some instances, the rules pertain to personal deposit accounts and retail deposit accounts. In other instances, the rules apply generally to all accounts. The public policy rationale for account disclosure is directed at consumer protection where consumers are more likely to be unsophisticated in purchasing financial services. It is difficult to discern a similar rationale that would mandate consumer-like disclosure in connection with the accounts of sophisticated commercial entities. Instead, Centrals would be burdened by needless disclosure requirements with resulting costs and inconvenience.
Canadian Central recommends that the disclosure requirements applicable to customer accounts under the CCA Act be limited to retail customers and other consumers and removed in the case of commercial entities.
14. Insurance Powers; Auto Leasing (Section 381)
The extent to which federally-regulated financial institutions should be permitted to engage in an insurance business and auto leasing business has been a matter of lengthy debate in previous federal legislative reviews. It is not our intent to review the arguments in favour of broader powers for retail financial institutions in these areas as these arguments are well known and much discussed. We do, however, in this submission wish to signal our interest in this matter since we expect that it will again become an issue in the 2006 federal legislative review.
Canadian Central is supportive of granting broader insurance powers and auto leasing powers to associations and retail associations under the CCA Act. In particular, we support legislative changes that would permit the in-branch distribution of insurance products and auto leasing options for consumers.
15. Association Group; Service Companies
(Sections 386(2), 390(2)(c))
The definition of "an association's group" in section 386(2) and the related structure of section 390(2)(c) which permits a Central to own a service company providing services to other Centrals, other financial institutions, and related companies is unnecessarily complex and restrictive. The establishment of service organizations is an area where the credit union system can be strengthened through additional operational flexibility.
A Central should be able to invest with other Centrals without undue restrictions in order to jointly provide services that they would otherwise be permitted to provide on their own.
An example of a needless restriction is found in the introductory paragraph of 390(2c). This provision would appear to require that the Centrals already be engaged in providing a service before investing in an entity that provides the service. We cannot see the reason for this precondition provided the service is one that the Centrals could perform.
Canadian Central recommends that the policy objectives of sections 386(2) and 390(2)(c) be clarified and considered in terms of their relevance to current market conditions. The provisions should be revised to provide associations with effective means to establish service corporations to serve the needs of these associations. In particular, the federal government should issue a regulation defining a "group" as currently authorized by the Act to allow for the formation of service companies with sufficient scope for their activities to meet the needs of credit unions and the credit union system.
16. Commercial Loan Limit (Sections 398 and 399)
The CCA Act limits the aggregate amount of commercial loans made by an association to a maximum of 5% of the total assets of the association (s.399). An association with more than $25 million in regulatory capital may exceed the 5% limit with the approval of the Superintendent of Financial InstitutÃ¬ons. The term "commercial loan" is defined in the Act (s. 386) and includes authority for the Governor in Council to make regulations exempting some loans from the definition.
A consequence of the commercial loan limit is that it restricts the scope for innovation within the Canadian credit union system. This occurs because the aggregate limit on commercial loans will limit the ability of entities in the Canadian credit union system to establish associations to pursue commercial lending objectives (e.g. a "retail association" to serve the SME market).
We appreciate that, if eventually there is more differentiation in the types of "association" that are established under the CCA Act, it may be necessary to develop more elaborate rules governing commercial loans. For some entities governed by this provision - e.g. provincial Centrals with a liquidity mandate - the existing commercial loan limits may be appropriate. For other "associations" and "retail associations", a more flexible commercial loan limit, or removal of the loan limit, has the potential to permit greater operating flexibility for the entity while limiting risk to an acceptable level.
Canadian Central proposes that there be a review of the commercial loan limit set out in the CCA Act. We do not suggest that the limit be removed in its entirety for all entities governed by the CCA Act. We do suggest however that there should be more flexibility in the application of the loan limit to allow for expanded commercial lending activity in the credit union system. One option for consideration, for instance, would be to eliminate the commercial loan limit for "retail associations" and "associations" with regulatory capital exceeding a specified amount and instead extend to the association the application of OSFI's risk-based capital rules based on the BIS capital adequacy guidelines.
If the "retail association" in the CCA Act is to be a vehicle for credit unions to obtain national powers, they should not be more restricted than their competitors in their capacity to build a loan portfolio. This capacity can be important to the ability of credit unions to further develop the SME market. For retail associations, the BIS rules and the general regulatory oversight will ensure prudent operations without the need for a hard limit on commercial loans.
17. Related Party Transactions (Section 410)
The related party rules in Part XII of the CCA Act place restrictions on transactions that take place between an association and related parties of the association. An association is required to scrutinize every related party transaction in order to determine whether the transaction is permitted under the Act and whether approval of the conduct review committee is required before the transaction is completed.
Section 410 of the CCA Act states that a person is a related party of an association where the person is a person, other than a member, who has a significant interest in a class of shares of the association. A "member" of an association is therefore not a related party of the association. This seems reasonable since a member of an association is analogous to a customer of a bank. A bank customer is not ordinarily considered to be a related party of the bank.
This rule does not apply in the case of retail associations. Retail associations are governed by a separate related party rule.
As noted earlier in this submission, Canadian Central is interested in discussing means of reducing the burden of related party regulations. We appreciate that the federal government has recently enacted the Related Party of a Retail Association regulation. Although Canadian Central has indicated some support for this regulation, we question whether both the 10% governance rule and the 10% significant investment rule set out in the draft regulation as being criteria of "related parties" are necessary.
18. Holding Body Corporate of Retail Association
Subsection 411(5) of the CCA Act provides that a holding body corporate of a retail association is related to that retail association. This places significant limitations on the ability of the credit union system to forward plan its corporate structures in the supply of services. What this means is that if entities in the credit union system were to set up a holding association or a holding corporation to hold downstream financial services providers, the retail association is a related party of its parent.
Subsection 411(5) is contrary to the rule applicable to other financial institutions. Subsection 487(4) of the Bank Act, for instance, states that "a holding body corporate of a bank is not a related party of the bank if the holding body corporate is a Canadian financial institution ....".
Canadian Central recommends that subsection 411(5) be deleted from the CCA Act.
19. Investments (Section 474(2)
In relation to Part XVI ("Central Cooperative Credit Societies") of the CCA Act, the limitation in section 474 (2) which applies Part X ("Investments") of the Act to Centrals may have the effect of not allowing a Central to exercise some provincially granted subsidiary investment powers. The general principle of Part XVI, also stated in section 474(2), is that provincial powers override limitations that would otherwise be imposed on provincial Centrals under the CCA Act. In our view, establishing the entire Part X of the Act as an exception to this general principle is too broad an approach to this exception. In keeping with the fact that the credit union system is primarily governed under provincial regulation, we suggest that provincial rules should be the main point of reference on investment powers. This will not create opportunities for Centrals to make imprudent investments because provincial regulators are attentive to prudential matters and have prudential objectives in mind when developing provincial rules. In addition, for some Centrals that are rated, rating agencies serve as another level of oversight to deter imprudent investments.
Canadian Central recommends that the reference to Part X of the CCA Act should be removed from section 474(2). To the extent that there are particular investment powers of concern to the federal government, these should be specifically identified in Part XVI of the CCA Act as exceptions to the general rule that the provincially-conferred powers of provincial credit union Centrals are predominant.
20. Loans to Credit Unions (s. 475(1))
The CCA Act limits the aggregate amount of commercial loans made by an association to a maximum of 5% of the total assets of the association (s.399). An association with more than $25 million in regulatory capital may exceed the 5% limit with the approval of the Superintendent of Financial Institutions. The term "commercial loan" is defined in the Act (s. 386) and includes authority for the Governor in Council to make regulations exempting some loans from the definition. The CCA Act also states that a loan between a Central and a credit union member of the Central is not a "commercial loan" (s. 475(1)).
The "commercial loan" exclusion noted above is necessary in order to ensure that loans which a Central might make to a member credit union for liquidity purposes are not blocked by the commercial loan limit. However, since the provision only applies to Centrals, it would not apply to another type of CCA Act "association" which, under a reorganization, may have assumed some of the Central's financing functions. Consequently, a financing entity might engage in the same type of lending activity (i.e. liquidity loans) with a member as a Central, but the loan from the financing entity would be classed as a "commercial loan" and might be impeded by the commercial loan limit because the financing entity is not a Central.
Canadian Central recommends that section 475(1) of the CCA Act be broadened to encompass within the "commercial loan" exception loans to credit unions by financing entities established under the CCA Act that are affiliated with a Central. This will provide scope for restructurings within the credit union system where loans to credit unions may be made by central financial entities that are not Centrals.
B. Bank Act
Canadian Central suggests the following amendments to the Bank Act for consideration.
1. Bank Act Security (Section 427)
Section 427 security for bank loans has its antecedents in the Bank Act dating back almost a century. At the time, and for many years thereafter, the ability of banks to secure their loans on agriculture products, forest products and other forms of property described in the provision was an important means of directing bank financing into the agricultural and natural resources economy. In the past twenty-five years, all provinces have enacted a more modern form of secured lending framework in legislation variously described as personal property security statutes. This is the legislation that is used by lenders for registration of the vast majority of secured loans in Canada with the banks being the most frequent users.
In this context, section 427 Bank Act security has been marginalized. It exists from a substantive standpoint only to give banks an occasional advantage over other secured lenders (who do not have access to Bank Act security). From a procedural standpoint, the continued existence of Bank Act security creates unnecessary costs in lending transactions as a result of searches that need to be completed in a separate registry to determine whether there is a registered Bank Act security interest that might affect the loan transaction in question.
The Law Reform Commission recently recommended that Bank Act section 427 security be abolished. Canadian Central supports the recommendation of the Law Reform Commission of Canada and proposes that the recommendation be implemented in the 2006 legislative review of federal financial institutions legislation.
C. Other Issues
1. Cheque Hold Periods
The federal government's February 23 Discussion Paper for the 2006 legislative review indicates that the government is seeking views on whether there should be a maximum period established for holds on cheques by "banks". We presume that any such hold period would be applied generally to financial institutions that participate in the Canadian payments system.
The subject of cheque holds is a complicated matter. There are a number of reasons that might prompt a financial institution to place a hold on a cheque and the time period of the hold will vary according to the circumstances. As a general matter, cheque holds are put in place for prudential reasons. For a financial institution to provide immediate credit for a cheque before it clears is to assume credit risk in relation to the cheque and the customer. In most instances, it is reasonable for the financial institution to take on this risk. In some cases, it would be imprudent for the financial institution to do so.
Canadian financial institutions, through the CPA, are currently involved in a project to develop truncation and electronic cheque presentment in Canada. One of the benefits of this development is that it will reduce the time it takes for dishonoured items to be returned to the negotiating financial institution. The replacement of the paper-based exchange of items with electronic presentment will speed up the clearing process, in particular for cheques that are deposited in one province and drawn on a branch domiciled in another. Electronic presentment combined with the electronic return of dishonoured items will result in a shorter timeframe for institutions to know that a cheque they have accepted will not be dishonoured for common reasons such as NSF or account closed.
It is the position of Canadian Central that, when fully implemented, the CPA's Truncation and Electronic Cheque Presentment project will allow all financial institutions to reduce the length of holds on funds from cheque deposits. The application and length of maximum hold periods should only be determined after CPA rules governing the cheque clearing process have been defined and the truncation process fully established throughout the financial services industry.
2. Residential Mortgages
For over thirty years the Bank Act has required lenders to purchase insurance for residential mortgages that exceed 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. In 2004, approximately 500,000 mortgages or 50 per cent of all new mortgages were insured.
The federal government has expressed concern that 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. Thus, 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.
: To date, the federal government has not issued a detailed discussion paper dealing with this issue thus making it difficult to evaluate this proposal in depth. It is unclear why the government is concerned that this policy framework is leading to an increased cost of home ownership for some purchasers. Nonetheless, Canadian Central welcomes this opportunity to enter into a discussion with the federal government and other stakeholders about the relative merits of removing this statutory restriction.
Canadian Central recommends that the federal government outline in further detail the basis for bringing forward this proposal at this time. The credit union system will need to evaluate the possible impacts of this proposal on the mortgage market and consider them in the context of the changing capital requirements that may occur as a result of adopting the new approaches to capital adequacy found in the Basel II proposals.
Part Four – Concluding Remarks
In this submission, Canadian Central has advanced a number of suggestions for changes to the CCA Act (and the Bank Act) for consideration in the federal review of financial institutions legislation scheduled for 2006. Some of the proposed changes are technical in nature, and a number of them arise from policy considerations. The first part of this submission has been devoted to providing the context for these policy considerations.
In summary, the key points intended to be communicated by this submission are the following:
- The Canadian credit union system is currently undergoing dynamic change characterized by consolidation of credit unions and increased geographic and product diversification;
- The drivers of change in the financial services markets require adaptive behaviour on the part of credit unions and credit unions are adapting;
- The credit union system offers a growing alternative to Canadian consumers as locally autonomous, democratic financial institutions with a commitment to serve the communities in which they are located; Canadian credit unions have successful in leveraging these values to maintain a good market position in Canada in the face of strong competition from much larger commercial banks;
- An important policy choice for the federal government is to determine whether it sees as one of its objectives in the 2006 legislative review the making of the kind of changes to the Cooperative Credit Associations Act that will help the credit union system to maintain its core values while continuing to compete effectively against the Canadian banks; for this purpose, we suggest that policy makers should be concerned to maintain and enhance a fair competitive balance as between the relatively small but dynamic Canadian credit union system and the large and powerful Canadian banking system;
- The federal government can provide assistance to the credit union system in the 2006 legislative review by, among other things, (i) reducing the barriers to the establishment of retail associations, (ii) providing more business powers to "associations" established under the CCA Act, (iii) facilitating electronic governance to enable an association or a credit union owned retail association to exercise cooperative governance over a large geographical area and (iv) making the other changes to the CCA Act proposed in this submission.
We appreciate that this marks the beginning of a process of dialogue between representatives of the credit union system and government officials that will culminate in legislation amending federal financial institutions statutes. As Credit Union Central of Canada continues to examine the CCA Act, as part of the legislative review process, there may be other changes that we will want to propose at a later date. The proposals in this submission are intended to start the discussion from the perspective of the credit union system leading up to 2006. We look forward to participating in this important review.