Victoria Graham, Stephen D.A. Clark, Kashif Zaman
July 11, 2012
The Federal Government has just released new regulations in draft form which are intended to implement recent amendments to the Bank Act pursuant to which new or existing credit unions could come under the Bank Act and continue as federal credit unions, thereby retaining the essential characteristics of a credit union but at the same time gaining the benefits of being regulated by the Bank Act and therefore becoming more competitive with banks regulated by the Bank Act.
For a number of years, Canada has sought a way in which to encourage a “second tier” of banking in Canada – financial institutions that would focus more on consumer banking and stimulate competition in this space. A number of changes have been made in recent years to federal legislation, including the Bank Act and the Cooperative Credit Associations Act, that were intended to spur growth in this area. Examples of these changes include permitting commercially owned banks (which happened with the creation of new banks such President’s Choice Bank, Canadian Tire Bank, Bridgewater Bank, etc., a trend which has continued) and creating the concept of retail associations as a form of federal cooperative financial institution (which was not successful).
Credit unions still represent an opportunity for the Federal Government to achieve this goal but the core of the issue is that a framework is required that will enable credit unions to operate across provincial borders – something that is difficult at the moment because credit unions are provincially regulated.
Credit unions have been subject to significant competitive pressure over the last few years and one of the objectives of the Federal Government has been to create a framework which would allow a credit union to retain all of the attributes of still being a member owned credit union, but at the same time, being able to access the benefits of being under the Bank Act. Credit unions are creatures of provincial law, but those provincial laws have struggled to keep up with the ever-expanding concept of “financial services” and credit unions have argued that the powers of a bank are wider, thereby disadvantaging the credit union as a financial services competitor. As a result, some credit unions are unable to provide some of the financial services their customers seek because the service is not authorized by the governing provincial statute. In addition, technology is expensive and, to remain competitive, the credit unions have found that they must spend in order to compete and, again, meet the service levels in terms of technology demanded by their members. This means that the credit union must spend valuable resources, which is difficult in an age where scale matters in terms of costs. Finally, in view of the recent financial crisis, the whole supervisory framework is changing and there may be an attractiveness to credit unions to be part of the current and robust federal system of regulation.
All of these pressures have, according to the Federal Government, resulted in significant consolidation in the credit union sector, as there are now about half the number of credit unions as there were 10 years ago and currently the 10 largest credit unions now represent 41% of the credit union system. This consolidation is seen as continuing in view of the many pressures described above.
In 2010, the Federal Government enacted legislation aimed at providing a national framework for credit unions. While some might have expected that the amendments would have been made to the Cooperative Credit Associations Act, the legislation instead formed part of amendments to the Bank Act by defining a “federal credit union” as a bank that is organized and carries on business on a cooperative basis. A federal credit union could be a new “bank” incorporated as such under the Bank Act or be continued under the Bank Act from provincial jurisdiction. The rationale for implementing credit union proposals under the Bank Act was to reduce regulatory overlap and confer powers consistent with the other federally regulated financial institutions (banks, trust companies and insurance companies).
These amendments required complimentary regulations before being proclaimed in force. It is these draft regulations the Federal Government has just released for comment.
On July 7, 2012, the Federal Government published a series of proposed regulations to implement the legislative framework for federal credit unions. The comment period for these draft regulations ends on August 6, 2012.
The stated objective of the proposed regulations is to implement requirements necessary to operationalize the legislative provisions set out in the Bank Act pertaining to federal credit unions. The federal credit union framework is voluntary and, according to the Federal Government, was created in response to requests made by credit unions. The proposed regulations do not compel provincially regulated credit unions to become federally regulated.
The proposed regulations include consequential amendments to the Bank Act regulations to adapt the existing framework to allow for cooperative ownership, as well as a series of substantive regulations pertaining to demutualization, deposit insurance disclosure, the payments framework and disclosure to members on the issuance of investment shares. Below is a high level summary of the proposed regulations.
Prospectus (Federal Credit Unions) Regulations
The disclosure requirements in respect of issuances of securities are set out by the provinces, and the relevant Bank Act regulations for banks defer to provincial securities law prospectus requirements. The proposed prospectus regulations for credit unions would take a similar approach. However, if a credit union is eligible to issue securities on a prospectus-exempt basis, it would be required to provide a minimum level of disclosure to the buyers of its securities. For example, the proposed regulations would require the disclosure of the nature of the business of the credit union, a description of the security being issued, the risks associated with that security, including details of any securities ranking ahead of the security, as well as the capital structure of the credit union.
Regulations Amending the Canadian Payments Association Election of Directors Regulations
The proposed regulations would amend the existing Canadian Payments Association Election of Directors Regulations with respect to the process for the election of directors for the Canadian Payments Association (CPA) Board. The proposed regulations would require federal credit unions to vote and participate in the governance of the CPA as part of the Cooperatives class, rather than in the Bank class. This would maintain the current level of participation in the governance of the CPA by the credit unions.
The CPA has proposed technical amendments to its By-law No. 1 (General) which would require federal credit unions to participate in the governance of the CPA as part of the cooperatives class and to By-law No. 3 (Payment Items and Automated Clearing Settlement System) which would provide federal credit unions with the option of belonging to a group to facilitate the clearing of payment systems.
Disclosure on Continuance Regulations (Federal Credit Unions)
The proposed regulations specify the information that must be publicly disclosed to members and customers of the credit union and the process that must be followed to qualify the credit union to continue federally and be eligible for federal deposit insurance.
For example, the credit union must send a notice approved by the Superintendent of Financial Institutions in consultation with the Canada Deposit Insurance Corporation to the last known mailing address of every member of such credit union at least four weeks before the members vote on a special resolution authorizing the continuance application.
If a person applies to become a member of such credit union after such notice has been sent and before the earlier of the day on which the members vote against the special resolution or the day that the Minister of Finance issues letter patent continuing such credit union as a federal credit union, the credit union must provide the person applying to become a member with the notice at the time of application. Any such notice must include (a) the day on which provincial deposit insurance coverage for the credit union would end; (b) a description of the Canada Deposit Insurance Corporation coverage that would apply during the transitional period to the deposits of the credit union that is continued as a federal credit union; and (c) a description of the Canada Deposit Insurance Corporation coverage that would apply after the transitional period to the deposits of the credit union that is continued as a federal credit union and how it differs from the pre-continuance provincial deposit insurance coverage.
Federal Credit Union Conversion Regulations
In addition to permitting a provincial credit union to convert to a federal credit union, the 2010 amendments to the Bank Act allow a federal credit union to convert into a bank with common shares. The proposed regulations specify the process and disclosure required for such credit union to change its legal form from a company owned by members to one owned by shareholders. The proposed regulations contain a series of requirements that must be followed to ensure a fair demutualization process, such as ensuring members are treated equally, mandating a fairness opinion and an independent evaluation of the conversion proposal, as well as restricting management from benefiting unduly from the conversion transaction.
Guidelines Respecting Control in Fact for the Purpose of Section 377.2 of the Bank Act
Subsection 377.1(1) prohibits a person from acquiring “control” of a bank with equity of less than $12 billion without the approval of the Minister of Finance. The Bank Act contains a definition of “control” which includes both “legal control” and “de facto control”. The Bank Act provides authority to the Minister of Finance to issue guidelines as to what constitutes control including guidelines describing the policy objectives that the guidelines and the relevant provisions of the Bank Act are intended to achieve.
Such guidelines have been issued in respect of banks – the Guidelines Respecting Control in Fact for the Purpose of Subsection 377.1 of the Bank Act. Subsection 377.2 of the Bank Act is the corresponding prohibition on a person acquiring “control” of a federal credit union without the approval of the Minister of Finance. The package of regulations proposed includes a new guideline to be applied in the case of a federal credit union.
Regulations Amending Certain Regulations Made Under the Bank Act
The proposed regulations specify consequential amendments to existing Bank Act regulations to make them apply to federal credit unions. For example, amendments are proposed to the Related Party Transactions (Banks) Regulations, the Affiliated Persons (Banks) Regulations, the Regulatory Capital (Banks) Regulations, the Equity of a Bank or a Bank Holding Company Regulations, the Minority Investment (Bank Holding Companies) Regulations, the Minority Investment (Banks) Regulations, the Access to Basic Banking Services Regulations, the Civil Remedies (Banks and Bank Holding Companies) Regulations, the Going-Private Transaction (Banks and Bank Holding Companies) Regulations, and the Meetings and Proposals (Banks and Bank Holding Companies) Regulations to ensure federal credit unions are captured by the requirements set out in these Bank Act regulations.
Credit unions considering continuing as federal credit unions under the Bank Act will want experienced counsel to guide them through the implications of being governed by the Bank Act as well as on how the process will unfold. Osler has the leading practice in Canada in this area, having been involved in the establishment of more new financial institutions, including banks, in Canada than any other law firm. Please contact any of the authors of the article to discuss how we can assist you in analyzing the application of these proposed regulations to your credit union.