Finance Committee on Nov. 5th, 2018

[The Chair, Liberal, Wayne Easter]

We'll call the meeting to order on the subject matter of the budget implementation act 2018, Bill C-86.

We jumped ahead and did division 4, because we thought it might take longer.

With us to deal with part 4, division 3, financial sector renewal, we have Mr. Dussault, Senior Director; Mr. Paradis-Béland, Senior Economist; and Mr. Fournier, Legislative Policy.

Welcome Mr. Dussault.

[Manuel Dussault, Senior Director, Framework Policy, Financial Sector Policy Branch, Department of Finance]

Thank you, Mr. Chair.

Our presentation will be on sub-division A of division 3 of part 4, which proposes four amendments to financial institutions legislation. The first two amendments are substantive but targeted, and the last two are corrections.

The first set of amendments, clause 130 to 134, would reduce unnecessary administrative burden for the Office of the Superintendent of Financial Institutions, and for financial institutions.

Superintendent approval is required for substantial investment in entities that engage in financial intermediation activities that expose them to market or credit risk, for example, a non-regulated lender. In practice, because OSFI's supervisory framework focuses on material risk, superintendent approval is granted as a matter of course when investments are relatively small.

The proposed amendments would exempt financial institutions from seeking superintendent approval when the value of a proposed investment relative to the value of the acquiring institution is below a materiality threshold, reflecting superintendent practice.

For large financial institutions, the threshold would be 1% for the acquisition of control and 0.5% for non-controlling substantial investments. Corresponding thresholds for small and mid-sized institutions would be twice as large. The objective of the lower threshold for large financial institutions is to ensure that sizeable investments made by large institutions remain subject to prudential approval by the superintendent.

The second set of amendments, clause 135 to 151, would allow financial institutions to indefinitely hold a substantial investment in the Canadian Business Growth Fund. The fund was established by Canada's largest financial institutions following a recommendation of the advisory council on economic growth.

The fund will make long-term, patient, minority investments in small and medium enterprises that have an established customer base and a compelling growth potential. The financial institutions statute generally prohibits financial institutions from acquiring substantial investment in commercial non-financial entities. The amendments would create an exception for this general prohibition.

The amendments would include a number or restrictions to ensure that this new flexibility is circumscribed.

First, to avoid crowding out capital from other sources, the amount of capital that each financial institution is authorized to invest will be limited to $200 million.

Second, to be consistent with existing venture capital rules and to maintain the commercial financial distinction, financial institutions will not be allowed to invest through the fund in regulated financial institutions and in entities that are primarily engaged in leasing or that are acting as insurance brokers or agents.

Finally, third, to ensure the fund remains focused on small and medium enterprises, the total exposure to a single business will be limited to $100 million. These restrictions are consistent with the fund's business plan.

The third set of proposed amendments, clause 152 to 154, would align the legislation with the policy intent of enabling financial institutions to provide information to customers or shareholders electronically. These amendments would make it explicit that consent can be provided electronically.

In conclusion, the purpose of the fourth amendment, which concerns clauses 155 and 156, is to correct an erroneous reference in the English version of the previous Budget Implementation Act from last fall.

Thank you. We will be happy to answer your questions or to provide further details on these proposals.

[The Chair, Liberal, Wayne Easter]

Okay. Does anyone have questions?

Go ahead, Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Mr. Dussault, for your definition of financial institutions, are you strictly talking about schedule I banks?

[Manuel Dussault]

We're talking about the financial institutions as Canadian regulated financial institutions.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Are there any other questions?

With regard to the consent on electronic signatures, are there any security issues around that? Given cybersecurity and all of the issues surrounding Internet electronic signatures, etc., have any concerns been raised regarding security around the points you mentioned under point three, in terms of electronic consent?

[Manuel Dussault]

This is really a clarification of the statute. The regulations already allow customers and shareholders to consent electronically, so we're clarifying the legislation to allow this.

I think we've looked at this. Banks have strong models of security. There's really nothing new here in these provisions.

[The Chair, Liberal, Wayne Easter]

Okay.

Mr. Julian.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you, Mr. Chair.

It says in here, “any notice related to that consent may be provided in electronic form”. What is the definition? Is it strictly related to email? What is the framework for the regulation around the electronic form?

[Manuel Dussault]

They have to agree on the form. The customer and the shareholder have to agree to the form of electronic consent. It could be through email, or it could be through other means, if they agree to the other means.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

It could be text messages as well?

[Manuel Dussault]

Yes.

[The Chair, Liberal, Wayne Easter]

With that, we'll bring up the second grouping under this part 4, division 3, if we could.

Thank you very much, gentlemen.

For amendments in subdivision B, under part 4, division 3, we have Mr. Rob Sample, who is the Director General, Capital Markets Division; Justin Brown, who is the Director, Financial Stability, Capital Markets; and Ms. Bourdeau, Senior Adviser, Capital Markets. Welcome.

The floor is yours. Go ahead, Justin.

[Justin Brown, Director, Financial Stability, Financial Sector Policy Branch, Department of Finance]

Thank you.

We're here for part 4, division 3, subdivisions B and C. Perhaps I'll start with subdivision B, give an overview of each type of amendment, and then pause for questions.

All of subdivision B relates to amendments to the Canada Deposit Insurance Corporation Act, or CDIC Act. There are three different types of amendments and they're covered under clauses 157 to 166. The first type of amendment relates to technical amendments, the second relates to set-off; and the third relates to CDIC's borrowing authority.

The government is proposing technical amendments to the CDIC Act to clarify ambiguous language and to ensure that the statute remains clear and reflects its underlying policy intent. There are a few different amendments under this section.

Clause 163 would clarify the provision of the calculation of insured deposits by limiting it to a calculation methodology approved for use for that premium year.

Clauses 157, 162 and 164 would repeal outdated references to the deposit insurance fund and accumulated net earnings, as these references reflect outdated accounting practices.

Clauses 165 and 166 would repeal amendments not in force relating to the minimum annual premium payable by CDIC member institutions.

Finally, clauses 159 to 160 would clarify rules for extended deposit insurance coverage following the amalgamation of two or more CDIC members, or the establishment of a federal credit union.

Also under subdivision B are changes related to set-off, and that would be clause number 161. The proposed amendments to the CDIC Act seek to specify that the liquidator of a CDIC member institution may not apply the law of set-off or compensation to a claim related to insured deposits. This amendment would protect the CDIC by ensuring that it can claim the full payment of insured deposits made to depositors.

Last, under subdivision B, in clause 158, the proposed amendment to the CDIC Act seeks to exempt borrowing by the CDIC under section 60.2 of the Financial Administration Act in the calculation of its borrowing limit. This amendment would support the government's ability to loan money to the CDIC in a timely manner to promote financial stability and efficiency.

[The Chair, Liberal, Wayne Easter]

Thank you.

Turning to committee members, we have Mr. Fragiskatos.

[Peter Fragiskatos, London North Centre, Lib.]

Thank you, Mr. Chair.

I have a question on the clarification of ambiguous language with respect to the CDIC Act. For example, what was the problem before and what's the remedy now?

[Yuki Bourdeau, Senior Advisor, Capital Markets Division, Financial Sector Policy Branch, Department of Finance]

For example, one of the amendments is to clarify that a CDIC member institution, when it's calculating its premiums for that year, has to use a calculation methodology that's approved by CDIC.

Previously the legislation said any calculation methodology approved by CDIC. Now we're clarifying that language so that it's any CDIC-approved calculation methodology for that premium year. One that was previously approved is no longer approved for that year, so they're not allowed to use that.

[Peter Fragiskatos]

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Julian.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Could you run through the practical impacts of clause 160, proposed subsection 13(1), where the deposits with amalgamating institutions are deemed as separate for a period of two years or, in the case of a term deposit, until the maturity of the term deposit?

With regard to those two separate deposits, how does that have an impact in terms of the limits around the insurance for the CDIC?

[Yuki Bourdeau]

The intention here was never to have deposit insurance at a higher level in perpetuity. What this is clarifying is with regard to when two institutions amalgamate. Let's say, for example, you have $100,000 in institution A and you have $100,000 in institution B. You would have $200,000 of deposit insurance coverage once those two institutions amalgamated into institution C.

This is to clarify that it is not forever. It's not in perpetuity. It's only for up to two years following the amalgamation of those two institutions.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Then what happens, in terms of the insurance?

[Yuki Bourdeau]

Then it would return to the normal rules of the deposit insurance framework. You would have $100,000 for institution C, one member institution.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you.