Thank you, Mr. Chair.
Part 6, division 16 of the budget implementation act amends a number of acts governing federal financial institutions, in order to adapt the legislative framework in response to the emergence of financial technology or fintech.
Fintech refers to both the innovative delivery of financial services through technology and a technology-focused firm that offers financial services or related products.
The further development of fintech can make the financial sector more efficient and useful for Canadians, as it has with such previous innovations as online banking and email money transfers.
In our consultations, stakeholders pointed out that the shifting expectations of customers with respect to products, services, and service channels put pressure on their business model.
I'd like to underline that a vast majority of stakeholders across the financial sector, from financial institutions, such as banks and insurers, to small and large fintechs, emphasize that adapting the federal framework was a core priority for their businesses and the financial services industry in Canada.
The statutes covering financial institutions are one of the more direct levers that the federal government has to foster innovation through setting a regulatory framework that is technology-neutral and less prescriptive in its approach.
Generally speaking, the framework governing the financial sector currently limits investments by federally regulated financial institutions, such as banks or insurers, to financial services. The difficulty concerns mixed business plans to provide financial and non-financial services through technological interfaces, because our laws currently do not provide for this model.
Take the example of a business called Square.
Square is a financial and merchant services aggregator and a mobile payment provider. While Square is clearly focused on the delivery of financial services, it is also harnessing its technology for food delivery services, as well as real-time GPS tracking.
Under the current legislation, a bank would not be permitted to invest in Square, owing to the fact that Square's business model includes both financial services and business lines that are not financial in nature.
The proposed amendments would extend the scope of activities related to financial services in which federal financial institutions may engage, to be consistent with an evolving market environment. This includes the ability of federal financial institutions to undertake, invest in, and refer to financial technology services. The proposed amendments would also provide the ability of federally regulated financial institutions to offer identification, authentication, and verification services.
While the proposed amendments provide greater flexibility for innovation, I remind the committee that this flexibility is bounded in the context of a world-leading regulatory system known for its prudence and balanced approach. Federal financial institutions are required to meet a comprehensive set of legislative and regulatory requirements and are subject to ongoing monitoring by federal financial sector agencies such as the Office of the Superintendent of Financial Institutions and the Financial Consumer Agency of Canada.
I would also highlight what the proposed legislation does not do. It does not change the government's long-standing policy framework wherein banks are limited in undertaking the business of insurance. While these amendments may have added, expanded, or clarified certain powers of banks, they do not override the existing blanket prohibition in the Bank Act, which prevents banks from undertaking the business of insurance unless explicitly permitted. The insurance business regulations also explicitly prohibit a bank from indirectly providing an insurance company, agent, or broker with any information respecting a customer of the bank in Canada. This prohibition on banks indirectly providing information would prevent banks from using their relationship with a third-party fintech to provide information to insurers.
Secondly, I would underline that this legislation must also be read in the context of Canada's existing federal and provincial privacy frameworks. Federally regulated financial institutions are, and remain, subject to the Personal Information Protection and Electronics Documents Act, PIPEDA, which sets out rules for all private sector organizations regarding the collection, use, and disclosure of personal information, including the requirement to obtain consumer consent. The proposed amendments for the committee have been developed against this overall policy framework that has served Canadians well, with well-trusted financial institutions and strong regulators.
I will now briefly outline the proposed amendments in the area of bank terminology. Part 6, division 16 of the budget implementation act amends the Bank Act in order to provide prudentially regulated financial institutions such as credit unions with the ability to use the terms “bank”, “banker”, and “banking”, subject to disclosure requirements. As you may know, the Bank Act currently limits the use of the words “bank”, “banker”, and “banking” to banks only. These terminology rules exist so that consumers know when they are dealing with a bank and when they are not. These rules also exist so that consumers understand which jurisdiction is responsible for the regulation of a given institution, including any applicable deposit insurance protections. The distinction is especially important in times of financial distress.
Through our consultations, we heard that the credit union industry is seeking greater flexibility to use the terms “bank”, “banker”, and “banking”. Such flexibility would help them better compete with banks to offer financial services to Canadians. The government recognizes that the credit union system is an important part of the Canadian economy and contributes to competition in financial services. As such, the proposed amendments would allow credit unions and other prudentially regulated deposit-taking institutions, such as trust and loan companies, the flexibility to use the terms “bank”, “banker”, and “banking” to describe their services. The proposed flexibility would be subject to certain disclosures regarding institutional identity and the applicable deposit insurance regime. As an example, provided that the required disclosures were made, a credit union would be permitted to refer to online “banking” services on its website or invite prospective clients to “bank” with them in their advertising materials.
Consistent with the current rules and international best practices, only banks would be able to use bank terminology in names and identifying marks. Other non-bank financial institutions, such as fintechs and payday loan companies, would continue to be restricted from using bank terms in all circumstances. The government is also proposing amendments to the Bank Act and the Office of the Superintendent of Financial Institutions Act that would provide the superintendent of financial institutions with better calibrated and more flexible tools to enforce the rules around bank terminology.
Lastly, technical amendments are also proposed that would clarify certain provisions relating to the use of bank terms.