Feds could outlaw large bank mergers

“The Department of Finance is considering legislative measures to prohibit the acquisition of control of a large bank by another large bank and their amalgamation, subject to prudential or financial stability exemptions,” the paper said.

The Bank Act defines large banks as those with at least $12 billion in equity. As such, the provision would not have applied to the proposed acquisition of Canadian Western Bank by National Bank of Canada, nor the recently completed acquisition of HSBC Bank Canada by Royal Bank of Canada.

As of Oct. 31, 2023, Canadian Western Bank’s equity was $4 billion. As of Dec. 31, 2023, HSBC Bank Canada’s equity was $7 billion. 

Federally regulated financial institutions (FRFIs) that wish to enter Canada, merge or change ownership must apply for ministerial approval. Finance is seeking feedback on whether and how FRFIs should hold public consultations as part of these applications.

Further, Finance wants to clarify that the minister can consider an applicant’s compliance with regulatory requirements, such as those related to anti-money laundering and taxation, in its assessment.

Banks that choose to close branches may also have to explain why publicly and facilitate account transfers to rival institutions. Among other things, Finance is seeking feedback as to whether banks should be required to share data about the closing branch — such as how its transaction volume compares to an average branch — as well as whether a bank must waive transfer fees when it closes a branch.

The paper also requested feedback on proposals related to consumer protection. Among them:

• Requiring banks to prevent or delay transactions believed to be fraudulent
• Requiring banks to allow consumers to disable banking functions to prevent fraud, such as wire transfers
• Introducing a maximum liability threshold for victims of unauthorized transactions
• Increasing the amounts available to customers immediately when cashing a cheque in person

Foreign interference, AI

Finance is also contemplating legislative reforms designed to beef up security for the financial sector.

“As the threat landscape changes and new risks emerge, the federal government is considering action to ensure that its tools keep pace to protect Canadians and the Canadian financial sector,” the paper said.

Earlier this year, the Office of the Superintendent of Financial Institutions (OSFI) adopted new guidance designed to improve safeguards against potential foreign interference in the domestic financial system — namely, foreign government efforts to manipulate or corrupt industry firms and personnel. That came in the wake of legislation that expanded both Finance and OSFI’s powers to deal with such threats.

Finance is now considering establishing a more formal structure to oversee national security risks to the financial sector that would co-ordinate consultations and facilitate information-sharing between regulators and government authorities with responsibilities in this area.

It’s also considering expanding OSFI’s authority to address security risks to the affairs of financial institutions — which may include a firm’s governance arrangements and relationships between financial institutions and their shareholders, directors and officers.

The paper is further considering reforms designed to enhance regulatory co-operation when it comes to federal authorities sharing information with the provinces and the industry on potential security threats.

“Enhancing the sharing of information could enable financial entities or financial sector regulators to better identify and implement proactive measures to address integrity and security risks and better meet regulatory and supervisory expectations,” the paper said.

Alongside measures designed to better guard against external threats, the paper also considers the need to address some of the risks posed by the growing adoption of artificial intelligence (AI) in the financial sector and possible threats to financial stability.

To that end, it’s seeking feedback on its work to enhance federal leadership and develop a federal strategy on the responsible use of AI.

As well, the paper contemplates other reforms that go beyond dealing with security issues — including measures designed to improve the predictability of regulation, both for industry and investors.

This could include publishing regulatory action impact statements; providing co-ordinated, periodic announcements on likely forthcoming regulatory actions; and developing a new forum for collaborating on international issues.

The paper states that creating a more predictable regulatory environment would make it easier for industry firms to plan for and adapt to regulatory reforms — while also making it easier to do business and providing more certainty for investors.

At the same time, the government is considering measures to protect competition and guard against conflicts of interest by potentially limiting or prohibiting “interlocking directorates.” Those exist when an employee or director of one firm also serves on the board of, or has other interests in, other companies within the same sector.

“Limiting interlocking directorates could encourage a broader range of individuals to serve as directors, bringing in diverse perspectives and expertise, and could support better governance of financial institutions,” the paper said.

The consultation also seeks feedback on revising the threshold for triggering public holding requirements for financial firms. Beyond a certain size, firms must have at least 35% of their voting shares publicly listed. That trigger point was last updated in 2007.

The government is also considering revisions to other statutory thresholds that apply to financial sector firms — including the limits on specialized financing activities and investment powers — and is seeking input on whether these thresholds should be moved out of legislation and into regulation.

Feedback on the consultation is due Sept. 11.

The paper is the third phase of the government’s review of the Bank Act, Insurance Companies Act, and Trust and Loan Companies Act.

Previous consultations addressed emerging risks to the financial sector, barriers to accessing bank services, competition issues and federal-provincial collaboration, among other things.