Ottawa, June 6, 2005
Archived - New Legislation Modernizes Corporate Governance for Financial Institutions
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Minister of Finance Ralph Goodale announced today that the Government is introducing legislation to modernize the corporate governance framework for Canada's federally regulated financial institutions.
"Financial institutions such as banks, insurance companies and cooperative credit associations all play a key role in Canada's economy," Minister Goodale said. "Therefore, it is important that Canadian financial institutions have the most modern and up-to-date governance tools available."
The introduction of this legislation fulfills a commitment made in Budget 2005. It will bring the governance standards for financial institutions up to the levels adopted in 2001 for other federally incorporated companies and update certain governance standards that are unique to financial institutions.
The new legislation will amend the governance elements of the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act, and the Cooperative Credit Associations Act.
A backgrounder outlining the technical elements of this legislation is attached and can be viewed on the Department of Finance website.
For further information, media may contact:
Office of the Minister of Finance
Public Affairs and Operations Division
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Federal financial institutions statutes (the Bank Act, Insurance Companies Act, Trust and Loan Companies Act, Cooperative Credit Associations Act, and related legislation) set out the governance rules for federally incorporated financial institutions. These governance rules underpin the effective functioning of these institutions and set out such things as the rules relating to rights of shareholders, policyholders and members, the role of directors, auditors and other advisors, and the rules relating to the preparation, review, and disclosure of financial information.
The governance framework set out in the financial institutions statutes uses the Canada Business Corporations Act (CBCA) as a reference point. Changes made to the CBCA are normally implemented in the statutes as appropriate for financial institutions. In 2001, the Government undertook a comprehensive reform and modernization of the CBCA (as well as the Canada Cooperatives Act) in Bill S-11. The Act to Amend Certain Acts in Relation to Financial Institutions provides financial institutions with the same modern governance tools by updating their governance framework generally along the lines of the changes made to the CBCAin 2001 and updates certain governance standards that are unique to financial institutions.
The measures in the new legislation fall into five broad categories, adapted to each particular type of financial institution.
Clarifying the Role of Directors
An effective board of directors is key to protecting the best interests of a financial institution. The financial institutions statutes recognize the importance of the board by setting out the standards, qualifications and duties expected of directors of financial institutions.
The new legislation clarifies the role of directors in carrying out their important functions, for example, by explicitly allowing for a due diligence defence and clarifying the conflict of interest rules.
Enhancing the Rights of Shareholders
The revised statutes set out the rights of shareholders to participate in the major decisions of a financial institution in which they have an interest. For shareholders to exercise these rights, they must have timely access to corporate information and be able to vote, in person or by proxy, at shareholder meetings.
The new legislation enhances the ability of shareholders to exercise their rights by, for example, permitting electronic participation in meetings and allowing shareholders greater freedom to communicate without triggering the proxy rules.
Modernizing Governance Practices
Given the importance of good governance to the well-being of a financial institution, the governance framework needs to be kept up-to-date with best practices in this area.
The new legislation facilitates electronic communication with shareholders and the regulator, adds a going-private framework to the federal statutes, and enables insider reporting, proxy and prospectus rules to be harmonized with the rules applied by provincial regulatory authorities.
Strengthening the Governance Elements of the Regulatory Framework
Unlike ordinary business corporations, federal financial institutions are regulated by the Office of the Superintendent of Financial Institutions, which oversees the safety and soundness of federally regulated financial institutions.
The new legislation strengthens a number of governance elements of the regulatory framework, including improving the flow of information to the regulator.
It also harmonizes various governance standards within and across the financial institutions statutes. For example, the legislation expands the eligibility of medium-sized insurers and trust and loan companies to apply for an exemption from the requirement that they float 35 per cent of their voting shares on a stock exchange, which would bring it in line with the same exemption rules that apply to banks. This would allow a broader range of companies to apply for an exemption from the public float requirement.
Increasing Disclosure in Respect of Participating and Adjustable Life Insurance Policies
The policyholder governance framework in the Insurance Companies Act reflects the unique interests and role of policyholders in the corporate governance of insurance companies.
The new legislation contains a limited number of proposed changes to the framework. These would work to increase disclosure in respect of participating and adjustable policies. The details would be set out in regulations, which would be developed in consultation with stakeholders.