Mixed bag in feds’ proposed Bill S-5

However, in a positive move for the financial services industry, the government is also proposing to give Canadian banks and insurers greater flexibility in issuing shares to foreign banks controlled by foreign governments.

The amendments in Bill S-5 are part of the government’s mandatory five-year review of the Bank Act, the Co-operative Credit Associations Act, the Insurance Companies Act and the Trust and Loan Companies Act, all of which must be renewed by April 20, 2012. Various financial services industry groups are reviewing Bill S-5 and will be offering their responses in the new year.

Although this review is being widely regarded as one that is more focused on technical matters rather than proposing transformative change, it nevertheless features a number of key proposals — especially those addressing the greater international strategic focus of Canadian banks and insurers.

Under current legislation, foreign-bank subsidiaries of Canadian banks are exempt from the definition of “foreign bank”; thus, Canadian foreign-bank subsidiaries are not subject to the same restrictions placed on foreign-owned banks operating in Canada. But under the proposed rules, financial services institutions will be able to use foreign operations to engage only in activities that are permitted for foreign banks in Canada.

Says an official with the De-partment of Finance: “These measures will ensure that Canadian financial [services] institutions cannot use their foreign subsidiaries to re-enter Canada to engage in prohibited activities indirectly.”

This change, however, could be a source of unnecessary frustration for customers of Canadian banks, suggests Blair Keefe, a lawyer with Torys LLP in Toronto who specializes in regulatory issues relating to financial services institutions, in a summary of the proposed changes: “With the increasing globalization of the economy and the mobility of our population, many Canadians have found it necessary to have a bank account in a foreign jurisdiction. The convenience and safety of establishing such an account from Canada with a long-term trusted banking institution in Canada has been very helpful.”

This proposed amendment would limit the ability of Canadian banks’ foreign subsidiaries to assist their customers, Keefe suggests.

As well, under the proposed changes, the minister of finance will have the right to approve any significant foreign acquisition contemplated by a medium or large Canadian financial services firm in which the foreign acquisition would increase the firm’s total consolidated assets by 10% or more. Currently, proposed foreign acquisitions are approved solely by the Office of the Superintendent of Financial Institutions, which evaluates the acquisition from a prudential standpoint.

The proposed change appears to address the government’s concern that Canadian financial services firms not expose themselves to undue risks — especially in light of continued volatility in the global financial services market.

“The financial crisis has highlighted additional risk factors that extend beyond that of prudential oversight,” says an official with the Department of Finance. “It has become increasingly important to evaluate the overall size of financial [services] institutions, their global linkages and the impact these factors may have on the financial system.”

Finally, under the proposed changes, federal financial services institutions will be given greater flexibility to issue shares to foreign banks and certain other financial institutions controlled by foreign governments. This change could, for example, allow a foreign financial services institution owned by a foreign government to acquire a non-controlling interest in a Canadian financial services institution.

“Sovereign wealth funds, which are foreign financial institutions that are government-owned, will be allowed to invest on the same basis as other investors,” says Michael King, assistant professor of finance with the Richard Ivey School of Business at the University of Western Ontario in London, Ont. “Having a long-term, buy-and-hold investor of this type is very positive.”

The financial services system review also features several other proposed changes, many of them highly technical in nature, to accomplish such goals as enhancing the ability of Canada Deposit Insurance Corp. to protect insured depositors and strengthening the supervisory powers of the Financial Consumer Agency of Canada.

One key proposal affecting insurers would be a change in the priority status of segregated fund policies in situations in which an insurer has become insolvent. Under current legislation, once seg fund policyholders have been paid out of the assets held in a separate account by the insurer to back that fund, those policyholders would rank alongside ordinary creditors in having a claim for any deficiency in the amount owed to them. But with the proposed change to the Winding Up and Restructuring Act, any additional claim that seg fund policyholders would have in an insolvency situation would rank ahead of claims made by ordinary creditors but behind those of other insurance policyholders.

“We favour this change because it moves things closer to our view that seg fund policyholders should be treated the same as other insurance policyholders,” says Frank Zinatelli, vice president and general counsel with Toronto-based Canadian Life and Health Insurance Association Inc.

The government launched its review of the financial services industry legislation in September 2010, indicating that it would concentrate on technical issues affecting financial services firms.

The financial services industry has reacted fairly positively to the proposed changes, and all groups say they will work with the government on the amendments. IE