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On November 20, 2019, the Legislative Assembly of BritishColumbia passed the third reading of the newly introduced Bill 37,the Financial Institutions Amendment Act, 2019 (Bill 37),which received royal assent on November 28, 2019. The purpose ofBill 37 is to modernize the legislative framework, enhance consumerprotections and help maintain public confidence in BC'sfinancial institutions. Bill 37 makes significant changes in theoperations of credit unions, insurance companies and intermediariesand trust companies.
On November 1, 2019, certain Financial Services AuthorityAct provisions came into force, which gave the BC FinancialServices Authority (the BCFSA) powers over the FinancialInstitutions Act, Credit Union Incorporation Act,Insurance Act, Insurance (Captive Company) Act,Mortgage Brokers Act, and Pension Benefits StandardsAct. Essentially, the BCFSA has replaced the FinancialInstitutions Commission (FICOM) as the province's financialinstitution regulator. The changes in Bill 37 are a part of thisshift to the new regulator in British Columbia.
The BC financial services authority
A key aspect of the new legislation is that Bill 37 grants theBCFSA rule-making powers and establishes procedures for makingthose rules. This new rule-making power is important as offensesand penalties under the Financial Institutions Act havebeen extended to apply to contraventions of the rules establishedby the BCFSA, as well as an increase in fines.
Bill 37 grants rule-making powers to the BCFSA in many differentareas. Some of the key changes that Bill 37 makes to theFinancial Institutions Act allow the BCFSA to makeadditional rules surrounding those alterations. For example,financial institutions must comply with capital and liquidityrequirements prescribed by regulation, but must also comply withcapital and liquidity requirements set out in rules made by theBCFSA. The BCFSA can make rules respecting the adequacy of liquidassets and the capital base of financial institutions, which typesof assets and liabilities constitute the capital base, how thoseassets and liabilities are valued, as well as other rulesrespecting capital and liquidity. In addition, a credit union needsthe BCFSA's written consent before engaging in certainactivities if the amount of its capital base fails to meetprescribed requirements.
Bill 37 requires insurance companies and credit unions to adoptand comply with a code of market conduct. The BCFSA can make rulesrespecting these codes' form and content, as well as the mannerand time in which they need to be filed. Insurance companies mustadopt a code of market conduct, created by the BCFSA. Credit unionshave the opportunity to establish their own code of market conductby having their board of directors file it with the BCFSA. However,the BCFSA can require that amendments be made to the codes at anytime, or even force a code of market conduct on a credit union whodoes not adopt its own.
Financial institutions' committees who are appointed undersection 135 of the Financial Institutions Act are nowresponsible for monitoring and evaluating risks to the financialinstitution in addition to their existing duties. This includesmonitoring and evaluating risks that may be imposed by regulationsor under the new rule-making power of the BCFSA, and reportingthose risks to the directors of the financial institution.
After consulting a financial institution, the BCFSA maydesignate it as a domestic systemically important financialinstitution if the BCFSA believes that the failure of the financialinstitution could cause significant disruption to the financialsystem. The BCFSA may base its decision on one or more factors,which include the financial institution's interconnectednesswith other financial institutions, its substitutability by otherfinancial institution, its size, and its complexity in relation toits business, structure, and operations. The BCFSA may establishrequirements through its rule-making powers for these financialinstitutions and extraprovincial corporations that are designatedas such.
Some additional areas where the BCFSA may make rules respectingfinancial institutions and extraprovincial corporations includecorporate governance, market conduct, operational oversight andrisk management. The BCFSA may make rules regarding insuranceissued through electronic agents and respecting oversight byrestricted insurance agent licensees of their employees and agents.In addition, the BCFSA can adopt, in whole or in part, rules orguidelines of other financial services regulatory authorities alongwith any changes it considers appropriate. It can also make rulesregarding the methodology for deposit insurance assessments,funding requirements and corporate governance of reciprocalexchanges, and methods of determining certain amounts under theCredit Union Incorporation Act.
The good news for financial institutions is the BCFSA mustpublish any proposed rules or rule changes for public commentbefore they can be made, amended or repealed. This providesfinancial institutions with the ability to comment on any proposedrules or rule changes prior to their enactment. In addition, theminister must consent to any rules or changes, providing anotherlayer of checks and balances for stakeholders. If any of the rulesthat are implemented conflict with regulations, then theregulations will take precedence over the conflicting rule.
Additional powers of the BCFSA and others
In addition to granting the BCFSA rule-making powers, Bill 37grants additional powers to the BCFSA and others under theFinancial Institutions Act. For example, when performingan inspection to determine compliance with the FinancialInstitutions Act, the regulations, or the rules made by theBCFSA, the BCFSA, the superintendent, a special examiner, or aninvestigator may enter certain places of the financial institutionor its affiliates at any reasonable time. These places include thefinancial institution's or its affiliates' principal placeof business, their offices and any place where records are keptrelating to them, among others. If an investigation or hearing isheld under the Financial Institutions Act, the BCFSA, thesuperintendent, or the council may order their costs, in full or inpart, be paid by the financial institution even if no order is madepertaining to such investigation or hearing.
In addition, the BCFSA can enter into agreements with otherfinancial services regulatory authorities in Canada and theadministrator of a national database of market conduct. This wouldallow for the provision and exchange of information respecting themarket conduct practices of insurers.
The BCFSA can also prohibit the use of any document provided bya financial institution if, in the BCFSA's opinion, it isunfair, misleading or deceptive. FICOM was previously limited toexercising this power only in relation to certain forms ofcontract, but this expands the BCFSA's powers to apply to anydocument.
There are also restrictions on entering into certain types oftransactions. Under Bill 37, credit unions must not enter intocertain transactions without first receiving consent from theBCFSA. Where consent is required, the BCFSA must considerprescribed criteria when making its decision.
In the interest of public disclosure, Bill 37 allows the BCFSAto collect and publish certain information from financialinstitutions, which includes prescribed financial information,risk-related information, and information related tocomplaints.
Other important changes under Bill 37
Although the most significant changes in Bill 37 relate to thenew powers of the BCFSA, there are other changes to theFinancial Institutions Act and Credit UnionIncorporation Act that should be considered:
- A person cannot use a name that includes the words"trust", "trustee", "trustco","deposit", "loan", "assurance","insurer" or any other words in connection with thebusiness of a person in a way likely to give the false impressionthat the person is a trust or insurance company, or deceive ormislead people about the ability of the person to perform trust,deposit or insurance business;
- Credit unions can carry on business or identify themselves by aname other than their corporate names, subject to the Act andcertain regulations;
- Unincorporated associations are eligible to be members of acredit union only if their application is approved by thedirectors, a committee of the directors, or a nominee of thedirectors, and if the unincorporated association subscribes andpays for the minimum number of membership shares required under therules of the credit union;
- A new process allows for redeeming shares in a credit unionheld by the holder of an inactive deposit and treating those sharesas part of the inactive deposit;
- Financial institutions are required to post their financialstatements, auditor's report and other prescribed documents ontheir websites, as well as make paper copies of those documentsavailable at their branches and offices. At this time, it is notevident what other documents will be prescribed;
- Deposit insurance coverage is eliminated for certain depositsin a credit union. The insurance no longer applies to deposits madeby or on behalf of a savings institution or a subsidiary of asavings institution, or in which a savings institution orsubsidiary has a beneficial interest;
- Credit unions are required to establish procedures for dealingwith complaints. These procedures must be published on the creditunion's website and they must be provided in writing to anyperson who requests them;
- Extraprovincial corporations must file a report outlining itsfinancial affairs, market conduct and risk management practices andcorporate governance with the Superintendent of FinancialInstitutions. The Superintendent may specify the intervals in whichthese filings need to be made, which may be different forextraprovincial credit unions, extraprovincial corporations andextraprovincial trust corporations.
- Supervisory information and self-evaluative compliance auditdocuments are privileged information. Some of the privilegedinformation includes:
- Ratings assigned to the financial institution to assess itsfinancial condition or other similar ratings
- Information about any stage of intervention made by the BCFSAor superintendent;
- Reports made by or at the request of the BCFSA orSuperintendent as a result of an examination, audit, inspection orinvestigation of a financial institution made under this Act,including any related correspondence;and
- A document or component of a document that containsrecommendations, evaluative or analytical information prepared byor on behalf of a financial institution, the BCFSA, or theSuperintendent as a result of or in connection with aself-evaluative compliance audit. This is not an exhaustive listand there are certain limitations attached to the privilegedinformation that is not discussed here.
- The Lieutenant Governor in Council (Cabinet) has had itsregulation-making powers expanded. Now, the Cabinet can makeregulations prohibiting denial of insurance claims based oninnocent misrepresentation and omission.
Regulations and rules to come
There remains some uncertainty as to the extent many of thesechanges under Bill 37 will impact financial institutions, becausemuch of the detail is left to regulations and rules that have yetto be drafted or released. As regulations are passed and the BCFSApublishes its proposed rules, additional clarity will be providedto financial institutions on the extent that these changes willaffect how they are regulated in British Columbia.
The changes under Bill 37 come into force by regulation of theCabinet.
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