2020 was dominated by a single global event: the COVID-19 pandemic. Regulatory guidance and legislation affecting federally regulated financial institutions (FRFIs) in Canada were no exception. Governments and regulators grappled with a myriad of pandemic response measures to build FRFI resilience and improve the stability of the Canadian financial system and economy. The focus on COVID-19 somewhat delayed legislative and regulatory progress on other initiatives that were expected to continue apace in 2020, such as payment modernization, open banking and retail payment oversight initiatives.
These and other key legislative and regulatory developments are discussed here in our annual update.
PRUDENTIAL REGULATION AND GUIDANCE
The Office of the Superintendent of Financial Institutions (OSFI) continued updating its regulatory guidance in 2020 and published several new or revised guidelines, in addition to its pandemic response measures. These are discussed below.
COVID-19 Response Measures
OSFI initiated its pandemic response measures in March 2020. On March 13, 2020, OSFI lowered the domestic stability buffer applicable to Canada's six systemically important banks (DSIBs) from 2.25 per cent to 1 per cent. OSFI estimated that this added C$300 billion in additional lending capacity by DSIBs, and OSFI encouraged the banks to use this additional capacity to support Canadian businesses and households. OSFI also communicated its expectation that all FRFIs halt dividend increases (Dividend Restriction) and share buybacks until further notice from OSFI, and that the additional capital available due to the lowered domestic stability buffer not be used to increase distributions or undertake share buybacks. At this time, OSFI also suspended all policy development and consultations on new or revised guidance. For more information, please see our March 2020 Blakes Bulletin: OSFI Announces Immediate Measures in Response to COVID-19 and Market Conditions.
OSFI followed up its initial response by issuing sector-specific responses through letters to banks, trust and loan companies, insurers, and private pension plans on March 27, 2020. On the same date, OSFI also announced in a letter that it would adjust a number of its expectations and delay certain previously planned regulatory changes to reduce operational stress on regulated institutions. The industry letters contained what OSFI termed "a comprehensive suite of adjustments to existing capital and liquidity requirements that are not appropriate in the current extraordinary circumstances." On March 30, 2020, OSFI addressed the capital treatment of government programs to support COVID-19 efforts by issuing a letter of direction. The changes relevant to banks and federal insurers in these two OSFI announcements were summarized in our Blakes Bulletin: OSFI Announces Further Actions in Response to COVID-19.
In April 2020, OSFI continued developing its pandemic response measures. On April 4, 2020, the Basel Committee on Banking Supervision (Basel Committee) announced new measures aimed at alleviating the impact of COVID-19 on the global banking system, which OSFI welcomed. For further information, please see our April 2020 Blakes Bulletin: COVID-19: New Measures Announced in Respect of Basel Capital Framework.
On April 9, 2020, OSFI announced further measures and additional sector-specific guidance focused primarily on supporting lending in the pandemic environment and providing for certain regulatory filing extensions. Please see our April 2020 Blakes Bulletin: OSFI Announces Continued Regulatory Flexibility Measures in Response to COVID-19 for additional information. On April 16, 2020, OSFI published a suite of frequently asked questions (FAQs) addressing OSFI's pandemic response measures. The FAQs were updated frequently until September 2020.
On May 1, 2020, OSFI issued guidance in the form of an industry letter on the use of internal capital buffers by small and medium-sized banks (SMS Banks) and related capital management expectations during the pandemic. The industry letter clarifies that "measured declines" in capital ratios are acceptable in current circumstances for SMS Banks. The industry letter applies to banks that use the standardized approach for calculating credit risk and was accompanied by updates to OSFI's COVID-19 FAQs. Please see our May 2020 Blakes Bulletin: New OSFI Guidance on Use of Capital Buffers by Small and Medium-Sized Banks for further information.
On June 11, 2020, OSFI updated its COVID-19 FAQs to address the Dividend Restriction applicable to FRFIs and provide more detailed information about the application of the restriction. For more on this, please see our June 2020 Blakes Bulletin: OSFI Updates Its COVID-19 Guidance on Dividend Increase Restriction.
In a statement issued by the Superintendent released on July 13, 2020, OSFI signalled a gradual restart of OSFI's policy development work in the fall of 2020. On August 31, 2020, OSFI announced in a series of letters issued to industry that it would unwind certain of the temporary measures put in place at the beginning of the pandemic, including a gradual phaseout of the special capital treatment of loan and insurance premium payment deferrals that was provided to banks and insurers.
On December 12, 2020, OSFI announced that the domestic stability buffer would remain at one per cent of total risk-weighted assets, stating that "DSB reduction in March continues to be effective and appropriate given the current balance of vulnerabilities and risks in the environment." On December 14, 2020, OSFI confirmed in a letter to all FRFIs that since the financial effects of COVID-19 are yet to be fully realized, the Dividend Restriction remained appropriate. In the letter, OSFI also outlined the principles that guide the limited circumstances in which OSFI will consider exceptions for nonrecurring special or irregular dividends.
As announced in its March 2020 press release discussed above, OSFI's policy development activity was paused during the period in which it focused on its pandemic response. Nonetheless, OSFI issued several new and revised Guidelines in the beginning and end of 2020.
Proportionality for Small and Medium-Sized Banks
On January 17, 2020, OSFI released a consultative document on its initiative to advance proportionality for SMS Banks by tailoring applicable capital and liquidity requirements to the unique nature of these institutions. The consultative document consolidates stakeholder feedback OSFI received in response to its July 2019 discussion paper, Advancing Proportionality: Tailoring Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions.
New Branch Guideline
On October 27, 2020, OSFI launched a public consultation on new Draft Guideline E-4 – Foreign Entities Operating in Canada on a Branch Basis (Draft Guideline E-4). Draft Guideline E-4 sets out OSFI's updated expectations on the governance and supervision of foreign bank branches and foreign insurance company branches operating in Canada. Once adopted, Draft Guideline E-4 will replace two existing OSFI guidelines issued in 2005: Guideline E-4A: Role of the Chief Agent and Record Keeping Requirements, which applies to foreign insurance company branches in Canada and Guideline E-4B: Role of the Principal Officer and Record Keeping Requirements, which applies to foreign bank branches in Canada. OSFI expects to issue the final guidance in spring 2021. Please see our November 2020 Blakes Bulletin: New OSFI Guidance on Foreign Bank and Insurer Branches in Canada for further information on Draft Guideline E-4.
Technology Risks in the Financial Sector
On September 15, 2020, OSFI launched a public consultation with the publication of a discussion paper entitled Developing Financial Sector Resilience In A Digital World: Selected Themes In Technology And Related Risks. This discussion paper addressed themes related to the development of an understanding of technology risk and its relationship to operational risk and provides OSFI's perspective and guidance on those issues. For further information see our October 2020 Blakes Bulletin: Technology Risks and Resilience in the Financial Sector: OSFI Issues Digital Risks Discussion Paper.
On February 26, 2020, OSFI proposed to update the Guideline A – Life Insurance Capital Adequacy Test (LICAT) framework and published a draft 2020 version of the LICAT, which has since been removed from OSFI's website. This February 2020 draft included changes to address unwarranted volatility in interest rate risk requirements for participating businesses (IRR Volatility) in the LICAT methodology. The public consultation and finalization of the proposed updates were then paused while OSFI focused on pandemic response measures. In its April 9, 2020 letter addressing issues stemming from COVID-19, OSFI introduced a smoothing technique to mitigate possible IRR Volatility in the LICAT calculation. Subsequently, OSFI decided to retain this IRR Volatility smoothing technique until at least December 31, 2023, which was communicated in the FAQ applicable to insurers. OSFI then issued an Advisory effective January 1, 2021, which is meant to be interpreted together with the 2019 LICAT, that formalizes the IRR Volatility smoothing technique introduced in April 2020 and clarifies the capital treatment of certain participating insurance liabilities.
Large Exposure Guidance for P&C Insurers
On November 26, 2020, OSFI launched a public consultation on draft revised Guideline B-2 – Property and Casualty Large Insurance Exposures and Investment Concentration (Draft Guideline B-2, formerly titled "Investment Concentration Limits"). Draft Guideline B-2 incorporates comments from various stakeholders, following a June 2018 discussion paper on its reinsurance framework. It also reflects OSFI's work to revise its initial strategy to support increased counterparty risk exposure of federally regulated property and casualty (P&C) insurers, which is posed by the so-called "leveraged business model" of writing high-limit policies and ceding a large portion of the risks outside of Canada under those policies. Draft Guideline B-2 requires P&C insurers to be able to cover the maximum loss related to a single insurance exposure on any policy it issues, assuming the default of its largest unregistered reinsurer on that exposure, which is expressed as a percentage of total capital available. The current investment concentration requirements are unchanged. Comments on Draft Guideline B-2 are requested by March 18, 2021.
IFRS-17 Implementation Further Extended
On August 7, 2020, OSFI issued a letter providing an update on OSFI's activities with respect to International Financial Reporting Standard (IFRS) 17 Insurance Contracts. This letter explained the changes in significant dates for OSFI's IFRS 17 implementation project due to the pandemic-related pause in consultations and policy development. It also addressed the International Accounting Standards Board's (IASB) deferral of the IFRS 17 effective date to January 1, 2023. Further, OSFI expressed its intention to finalize its existing capital guidance for insurers, namely Guidelines A – the LICAT, Minimum Capital Test (MCT) and Mortgage Insurer Capital Adequacy Test (MICAT), in 2022 to align their implementation with the new IFRS 17 effective date.
On September 30, 2020, OSFI announced in an industry letter to insurers that the effective date for OSFI's implementation of IFRS 17 had also been deferred to January 1, 2023, following the adoption by the Canadian Accounting Standards Board of the IASB's deferral discussed above. Along with the industry letter, OSFI also revised its Advisories IFRS 17 Transition and Progress Report Requirements for Federally Regulated Insurers and Deferral of IFRS 9 Application for Federally Regulated Life Insurers to reflect the new implementation timeline.
LRCN Capital Ruling
OSFI issued a Capital Ruling for Limited Recourse Capital Notes (LRCNs) on July 15, 2020, which sets out OSFI's expectations for LCRN qualification as additional tier 1 capital instruments under OSFI's Capital Adequacy Requirements Guideline. Several Canadian banks issued LRCNs in 2020 in reliance on this OSFI capital ruling.
OSFI further advanced its initiatives focusing on the prudential aspects of climate change and climate-related risk in 2020. On November 16, 2020, the Bank of Canada and OSFI announced jointly the launch of a pilot project which uses climate risk scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy. In this pilot project, six FRFIs were selected to explore their potential risk exposures in response to a set of climate-change scenarios that are relevant to Canada. While not an assessment of the participant FRFIs, the exercise is intended to explore potential risk exposures of their balance sheets, which will be discussed in a report planned to be issued at the end of 2021.
On January 11, 2021, OSFI launched a three-month public consultation with the publication of its discussion paper Navigating Uncertainty in Climate Change: Promoting Preparedness and Resilience to Climate-Related Risks. Given that the risks posed by climate change are accelerating, OSFI aims to identify and categorize climate-related risks and explore ways that FRFIs could prepare for and build resilience to such risks. OSFI is also seeking feedback on how it can facilitate FRFIs' preparedness for and resilience to climate-related risks. Comments and submissions on the discussion paper should be submitted in accordance with the instructions on OSFI's website by April 12, 2021.
On March 11, 2020, OSFI issued a revised version of Guideline E-22 – Margin Requirements for Non-Centrally Cleared Derivatives. The revisions to Guideline E-22 introduced two changes: (i) a clarification of the treatment of securities issued by entities that receive capital support from the U.S. government, and (ii) the internationally agreed upon extension of the final implementation of the initial margin requirements by one year.
OSFI's Expectations for 2021
In connection with remarks made by Assistant Superintendent Ben Gully on OSFI's policy development plans on September 28, 2020, OSFI shared its Near-Term Plan of Prudential Policy for Federally Regulated Financial Institutions and Private Pension Plans, which included its guidance priorities for the first and second quarters of 2021. OSFI's priorities for this period include the following ongoing and upcoming initiatives applicable to banks and insurance companies:
|Stream||Applicable To||Guidance Initiative||Expected Timeframe|
|Risk Management Guidance for FRFIs||Banks
|Discussion paper on climate risk (see discussion above)||Q1 2021|
|Draft Guideline E-13 Compliance Management||Q1 2021|
|Final Guideline B-3 on reinsurance||Q2 2021|
|Capital and Accounting Guidance for FRFIs||Banks
|Discussion paper on the assurance of capital and liquidity returns||Q1 2021|
|Banks||Expected Credit Loss Accounting Framework for inclusion in OSFI's Capital Adequacy Requirements Guideline||Q4 2020 –
|Banks||Domestic implementation of the Basel III Reform Package, including Pillar 3 disclosure expectations||Q1 2021|
|Banks||Proportionality of requirements for small and medium-sized deposit-taking institutions||Q1 2021|
|Banks||Consultation document or update of guidance on unencumbered assets and pledging||Q2 2021|
|Insurance companies||Continuation of OSFI's IFRS 17
||Q2 2020 --
On December 18, 2020, current Superintendent of Financial Institutions Jeremy Rudin announced that he will conclude his seven-year term as Superintendent on June 28, 2021.
ANTI-MONEY LAUNDERING AND SANCTIONS
In May 2020, the Department of Finance published amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). These amended regulations supplemented the amendments to the PCMLTFA regulations, introduced in June 2019, and were in response to various recommendations and reports issued by the House of Commons Standing Committee on Finance, the Government of British Columbia, and the Financial Action Task Force. Key changes in the May 2020 amendments included:
- Refinements to the concepts of business relationship and ongoing monitoring
- Extended application of beneficial ownership and politically exposed person requirements to a broader range of reporting entities
- Additional recordkeeping requirements on money services businesses
For more information on the May 2020 amendments, please see our February 2020 Blakes Bulletin: Yet More Amendments to the PCMLTFA Regulations and our June 2020 Blakes Bulletin: Recent Developments: FINTRAC and the PCMLTFA.
Although most of the amendments to the regulations under the PCMLTFA are scheduled to come into force on June 1, 2021, some changes took effect on June 1, 2020. Most notably, reporting entities must now file suspicious transaction reports with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) "as soon as practicable after they have taken measures that enable them to establish that there are reasonable grounds to suspect that the transaction or attempted transaction is related to the commission of a money laundering offence or a terrorist activity financing offence". Previously, reporting entities were provided with a 30-day period within which to file suspicious transaction reports. In light of these legislative amendments, FINTRAC updated its guidance on suspicious transaction reporting (namely, What is a suspicious transaction report? and Reporting suspicious transactions to FINTRAC). The updated guidance expands the meaning of "measures" that enable a reporting entity to determine that it has reasonable grounds to suspect. FINTRAC also interprets the concept of "as soon as practicable" to mean that the reporting entity has completed the measures that have allowed it to reach the reasonable grounds to suspect threshold and, as such, the submission of a suspicious transaction report must be treated as a priority.
Another important legislative change that took effect on June 1, 2020, was the addition of "dealing in virtual currencies" as a service that triggers money services business registration requirements. In addition, foreign money services businesses must now be registered with FINTRAC. On its website, FINTRAC notes that a foreign money services business is a person or entity that is engaged in the business of providing at least one money services business service and that:(a) Does not have a place of business in Canada;
(b) Directs its services at persons or entities in Canada; and
(c) Provides these services to clients in Canada.
Although many of the compliance obligations associated with virtual currencies and foreign money services business do not come into force until June 1, 2021, businesses that engage in these activities must be registered with FINTRAC. Further, they must comply with the requirements that currently apply to them under the PCMLTFA and its associated regulations, such as the requirement to have a compliance program and to report certain transactions. In that regard, FINTRAC now allows reporting entities to provide virtual currency transaction information in suspicious transaction reports and large cash transaction reports. In December 2020, FINTRAC also released new suspicious transaction reporting guidance specifically relating to virtual currency transactions: Money laundering and terrorist financing indicators - Virtual currency transactions.
For more information on the amendments that came into force on June 1, 2020, and FINTRAC's updated suspicious transaction reporting guidance, please see our June 2020 Blakes Bulletin: Recent Developments: FINTRAC and the PCMLTFA.
COVID-19 Response Measures
FINTRAC has issued the following messages to reporting entities subject to the PCMLTFA throughout the COVID-19 pandemic:
- On March 25, 2020, FINTRAC issued a message acknowledging that some reporting entities may have difficulties meeting certain compliance obligations due to COVID-19. FINTRAC indicated that it would take these circumstances into consideration when assessing a reporting entity's compliance with its anti-money laundering obligations. FINTRAC also commented on suspicious transaction reporting and client identification requirements and noted that it would not be contacting reporting entities to initiate new examinations for the time being. For more information on FINTRAC's March 25, 2020 message to reporting entities, please see our March 2020 Blakes Bulletin: FINTRAC Issues COVID-19 Guidance to Reporting Entities.
- On April 23, 2020, FINTRAC issued another message to reporting entities to offer additional support through temporary flexibility measures in verifying the identity of an individual or an entity. FINTRAC also provided further guidance on its planned examination approach once COVID-19 normalizes and compliance activities resume.
- On July 27, 2020, FINTRAC updated its previously issued guidance to inform reporting entities that it would resume conducting desk examinations. FINTRAC noted that it would continue to be flexible and reasonable in assessing compliance with certain obligations and in response to requests for additional time in preparing necessary documentation related to examinations.
- On November 16, 2020, FINTRAC issued a notice to reporting entities regarding the implementation of the upcoming regulatory amendments that are scheduled to come into force on June 1, 2021. Although FINTRAC expects reporting entities to comply with the new amendments, FINTRAC indicated that it will exercise flexibility in assessing and enforcing the amendments with respect to recordkeeping and reporting obligations in respect of electronic funds transfers and large cash transactions.
- On January 22, 2021, FINTRAC issued a plan for its implementation of the incoming June 2021 amendments. The plan involves a staggered approach to the implementation of updated reporting obligations and the publication of updated guidance documents.
In July 2020, FINTRAC also issued a Special Bulletin on COVID-19: Trends in Money Laundering and Fraud to identify areas at increased risk of money laundering due to COVID-19. In particular, FINTRAC listed a number of characteristics related to COVID-19 that have been identified in suspicious transaction reports. FINTRAC also noted fraud trends that have emerged during the pandemic which involve an increased risk of cybercrime, and the sale of counterfeit testing kits and pharmaceuticals using virtual currencies.
New Directive on Iran
The Minister of Finance issued a Directive on Financial Transactions Associated with the Islamic Republic of Iran (the Directive), which came into force on July 25, 2020. The Directive was issued in response to a FATF statement in February 2020 expressing concerns regarding deficiencies in Iran's anti-money laundering and counter terrorism regime. The Directive requires banks, credit unions and domestic money services businesses to treat every financial transaction originating from or bound for Iran as a high risk transaction (regardless of the amount), verify the identity of any person or entity requesting or benefiting from such a transaction, apply enhanced customer due diligence measures, keep a record of any such transaction and report all such transactions to FINTRAC. For more information on the Directive, please see FINTRAC guidance related to the Ministerial Directive on Financial Transactions Associated with the Islamic Republic of Iran issues on July 25, 2020.
In December 2020, FINTRAC released an operational alert to assist reporting entities in recognizing financial transactions that may be related to the laundering of funds associated with child sexual exploitation (the Alert). The Alert lists indicators related to possible consumers, facilitators and producers of this material.
Risk Assessment Guidance
In January 2021, FINTRAC updated its Guidance on the risk-based approach to combatting money laundering and terrorist financing (now titled Risk assessment guidance) to include previous legislative amendments and those that are scheduled to come into force on June 1, 2021. On that date, the previous guidance and sector specific risk-based assessment workbooks (available here) will be removed from FINTRAC's website.
On June 1, 2020, the Government of Canada introduced amendments to several regulations made under the United Nations Act. Key changes include the addition of ISIL (Da'esh) as a sanctioned group, the repeal of the regulations respecting Eritrea, the addition and expansion of certain prohibitions concerning North Korea, and the introduction of a prohibition on acquiring any financial or related services from a designated person. For more information on the June 2020 amendments, please see our Blakes Bulletin: Amendments Introduced to Canadian Sanctions Legislation.
On September 29, 2020, the Government of Canada imposed sanctions under the Special Economic Measures Act (SEMA) against officials of the Government of Belarus, in connection with Belarusian presidential elections in August 2020 and subsequent public protests. In mid-October 2020, the Government of Canada added additional names to the list of sanctioned individuals under the new sanctions against Belarus. For more information on the new sanctions against Belarus, please see our October 2020 Blakes Bulletins: New Canadian Sanctions Against Belarus and Canada Imposes Additional Sanctions Against Belarusian Officials.
In January 2021, Global Affairs Canada and the Canadian Trade Commissioner Service issued an advisory to Canadian companies active abroad or with ties to Xinjiang, China (Advisory). The Advisory does not amend Canadian legislation but sets clear compliance expectations for Canadian businesses with respect to forced labour and human rights involving Xinjiang, including adoption of voluntary best practices. The Advisory will be relevant to many Canadian businesses, including financial institutions, institutional investors and others. For more information on the Advisory, please see our January 2021 Blakes Bulletin: Government of Canada Sets Compliance Expectations for Canadian Businesses Linked to Xinjiang, China.
For more information on Canadian sanctions, please see our Blakes Bulletin: A Primer on Canadian Sanctions Legislation.
Expanded FCAC Mandate and Powers
On December 13, 2018, Bill C-86, Budget Implementation Act, 2018, No. 2 (Bill C-86), received royal assent. Among other things, Bill C-86 amends the Bank Act to provide for a financial consumer protection framework (Framework) for banks and authorized foreign banks. Although the amendments relating to the Framework are not yet in force and the implementing regulations are not yet published, Bill C-86 also included provisions that expand the mandate and enhance the powers of the Financial Consumer Agency of Canada (FCAC). By order in council, these provisions came into force on April 30, 2020. Among other things, the FCAC is now required to make public the nature of a violation, the name of the person who committed it and the amount of the penalty imposed. The FCAC may also include the reasons for its decision, including the relevant facts, analysis and considerations that formed part of the decision. The amendments also increased the maximum penalty for a violation from C$500,000 to C$10 million. The list of criteria for determining the amount of a penalty was also expanded to include the duration of the violation and the ability of the person who committed the violation to pay the penalty. For more information on the FCAC's expanded mandate and powers, please see our May 2020 Blakes Bulletin: Enhanced Powers for the Financial Consumer Agency of Canada.
Guidelines for Adjudicative Process
In February 2020, the FCAC released its Guidelines for Adjudicative Process, which set out procedural guidelines that are applicable to proceedings commenced following the service of a notice of violation under the Financial Consumer Agency of Canada Act. The FCAC Secretariat will administer proceedings, which will be conducted through written submissions that are not published. Within 30 days of being served with a notice of violation, regulated entities have 30 days to either pay the proposed penalty or make representations. The FCAC Commissioner will then decide whether, on a balance of probabilities, the violation has been committed and whether to impose the penalty proposed in the notice of violation, a lesser penalty or no penalty at all. In proceedings where a violation of a consumer provision is alleged to have been committed prior to April 30, 2020, the FCAC Commissioner retains discretion to decide whether to make public the name of the regulated entity. The FCAC's Supervision Framework was also amended to reflect the new Guidelines.
On February 19, 2020, the FCAC released two industry reviews:
- Bank Complaint Handling Procedures: The FCAC generally found that banks' complaints handling processes are effective, accessible and timely for simple complaints that can be resolved at the first level. However, this finding did not hold true for more complex complaints that are escalated to higher levels. To address these deficiencies, the FCAC directed banks to design better complaints handling policies and procedures that are easier for consumers to use and provide more timely resolutions. The FCAC also directed banks to provide sufficient resources for handling complaints and monitoring and reviewing the effectiveness of complaints handling procedures.
- The Operations of External Complaints Bodies: The FCAC conducted a review of the operations of external complaints bodies and found some deficiencies involving factors such as timeliness, accessibility and effectiveness, although most of the requirements were met. In this regard, the FCAC planned to oversee a third-party evaluation of the external complaints bodies' operations in 2020.
On April 1, 2020, Compliance Bulletin B-8: Simultaneous Provisioning and Removal in Mobile Wallets of Co-badged Debit Cards (Compliance Bulletin B-8) became effective. Compliance Bulletin B-8 was originally published on December 19, 2019, to clarify requirements under the Code of Conduct for the Credit and Debit Card Industry in Canada (Code) as to how co-badged debit cards are provisioned and removed from mobile wallets or mobile devices.
On December 4, 2020, the FCAC amended Compliance Bulletin B-7: Role of payment card network operators in ensuring participant compliance with the Code of Conduct for the Credit and Debit Card Industry in Canada, which was originally released in 2018 (Compliance Bulletin B-7). Compliance Bulletin B-7 provides guidance with respect to the FCAC's Decision 126, released on May 15, 2017, and sets out the FCAC's expectations with respect to the obligations of payment card network operators. The FCAC expects all Code participants to have fully implemented Compliance Bulletin B-7 by January 1, 2021.
New FCAC Decisions
The FCAC issued four new decisions in 2020.
Decisions 135, 136 and 137 were all released on August 20, 2020, in relation to the requirements under the Cost of Borrowing Regulations. Decision 138 was released on December 3, 2020, in relation to the Negative Option Billing Regulations made under the Bank Act.
Mandatory Reporting Guide
In January 2021, the FCAC's Mandatory reporting guide for federally regulated financial institutions (the Guide) was amended to specify that Tier 2 regulated entities are no longer required to file nil reportable complaints aggregate reports. Tier 2 regulated entities are federally regulated financial institutions whose activities generally do not trigger the market conduct obligations that are overseen by the FCAC. This change was intended to reduce the administrative burdens associated with nil reporting. However, Tier 2 regulated entities are still required to report compliance issues if they arise. In their yearly examination questionnaires, Tier 2 regulated entities will also now be required to confirm that they have met all complaint requirements for that year.
The Guide also now incorporates Principles 6 and 7 of the Canadian Banking Association's (CBA) voluntary Code of Conduct for the Delivery of Banking Services to Seniors (Seniors Code):
- Principle 6 requires CBA member banks to consider market demographics and the needs of seniors during branch closures. The Guide now specifically requires banks that have committed to the Seniors Code to inform the FCAC of the measures they have planned to comply with Principle 6.
- Principle 7 requires CBA member banks to publish, at least annually, a report describing the steps they have taken to support each Principle in the Seniors Code and improve the delivery of banking services to seniors. Each bank must publish the report on its website within 135 days of the end of its financial year and submit a copy of the report to the FCAC. The FCAC will then make this information available to the public.
Although the Seniors Code was published in July 2019, many of its provisions were scheduled for implementation on January 1, 2021. For more information on the Seniors Code, please see our July 2019 Blakes Bulletin: Is CBA's New Voluntary Code of Conduct the Golden Rule for Banks Serving Canadians in Their Golden Years?
OPEN BANKING, PAYMENTS MODERNIZATION AND OTHER DEVELOPMENTS
Consumer-Directed Finance (formerly "Open Banking")
On January 31, 2020, the Advisory Committee on Open Banking (Committee), appointed by the Department of Finance in November 2018 to lead a two-phase consultation evaluating the merits of an open banking framework for Canada, released a report entitled Consumer-directed finance: the future of financial services (Report). The Report provides a summary of the Committee's findings and formal recommendations on the future of open banking in Canada; it also launches the second phase of the consultation process. The Report summarizes the Committee's extensive consultation process. The Committee ultimately concluded that "all participants in the financial services ecosystem—from established financial institutions, to fintechs, to other innovators and most importantly, consumers—stand to benefit from consumer-directed finance." Notably, as part of its recommendations, the Committee proposed replacing the term "open banking" with the term "consumer-directed finance." Please see our February 2020 Blakes Bulletin: Second Phase of Consultation on Open Banking in Canada Opens with a New Moniker: Consumer-Directed Finance for further information.
On August 5, 2020, Payments Canada announced the removal of the volume requirement for the direct participation by its member financial institutions in the Automated Clearing Settlement System (ACSS) retail payments system. This change is in response to proposals previously published on modernizing ACSS access, which is intended to allow a wider range of member financial institutions to participate directly in the ACSS.
Payments Canada launched a new public consultation on September 11, 2020, on its policy proposals for Canada's new real-time payments system, the Real-Time Rail (RTR), which is set to be introduced in 2022. The consultation paper outlines key RTR features and system attributes and sets out Payments Canada's RTR policy framework against a background of Payments Canada's public policy objectives and the RTR design.
On December 15, 2020, Payments Canada published an update on its payment modernization progress: Modernization Delivery Roadmap: December 2020 Update. In the update, Payments Canada reported an accelerated long-term transition to digital and contactless payments by Canadians as a result of COVID-19, which underscores the need for payments modernization in Canada. The update also provided information on the status of replacing Canada's Large Value Transfer System with Lynx, the new real time gross settlement system for Canada, which is set to be launched in 2021, and RTR, which is set to be launched in 2022.
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