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Banking and Financial Institutions Regulatory Law

This past year has been a comparatively quiet period for developments in the regulation of Canada 's financial services sector. So it seems appropriate to take a retrospective look at two quite different regulatory stories from the past few years—the fate of bank mergers and the emergence of the Financial Consumer Agency of Canada (the "FCAC") as an important consumer protection body.

As outlined below, the long quest for federal approval of mergers between large Canadian banks (and, more recently, between banks and insurance companies) is likely to continue unrewarded for some time. From a regulatory perspective, little appears to have changed since the first bank merger announcements were made in early 1998.

The FCAC, in contrast, seems poised to capture a great deal of legal attention in the next few years. Although its activities to date have been somewhat limited, the financial institutions and others who deal with it are beginning to sense the emergence of a regulatory heavyweight. The FCAC's close (and sometimes dogged) attention to their business practices is quickly becoming a fact of life for banks and other players in the Canadian financial services market.

Bank Mergers: The Past and Future

On January 23, 1998, Royal Bank of Canada and Bank of Montreal, two of Canada 's largest banks, announced their intention to merge. At that point, the merged institution would have been one of the top ten banks in North America ranked by market capitalization, and among the top 25 in the world. This was followed on April 17, 1998 by a similar merger announcement from two smaller members of Canada 's "Big Five"—Canadian Imperial Bank of Commerce and The Toronto-Dominion Bank. What then appeared to be the start of a wave of consolidation in the Canadian banking industry has since proved to be something of a damp squib. The RBC-BMO and CIBC-TD mergers were quickly derailed by the federal government and, a few not-so-secret alliances since then notwithstanding, there seems to be little prospect of any occurring in the near future.

When Finance Minister Paul Martin formally rejected the RBC-BMO and CIBC-TD mergers in December of 1998, he was able to claim plausibly that the applications were premature. Just two years earlier, in December of 1996, Martin had commissioned a blue-ribbon Task Force on the Future of the Canadian Financial Services Sector to conduct a sweeping review of federal financial services regulation in Canada.

In September of 1998, the Task Force released a lengthy and detailed report entitled "Change Challenge Opportunity." It contained 124 recommendations clustered around four main themes: (i) enhancing competition and competitiveness, (ii) empowering consumers, (iii) Canadians' expectations and corporate conduct, and (iv) improving the regulatory framework. (A detailed overview of the Task Force Report is contained in the 1999 edition of this Lexpert® publication.) The Task Force steered clear of commenting directly on the RBC-BMO and CIBC-TD merger proposals, but the wisdom of permitting mergers among large banks was carefully considered in the report.

On this, the Task Force recommended that the federal government abandon its informal "big shall not buy big" policy and proposed that merger transactions be evaluated on their individual merits. More particularly, the Task Force proposed the implementation of a public review process involving the Competition Bureau (with respect to competition matters), the Office of the Superintendent of Financial Institutions (with respect to prudential matters), the Canadian public (with respect to "the public interest") and the Minister of Finance (with respect to the federal government's interpretation of "the public interest"). Although lukewarm on the actual need for bank mergers, the Task Force Report concluded that if a proposed merger met competition and prudential standards, it should be approved unless there were overriding public interest concerns.

A second report—this time commenting directly on the two proposed mergers—was delivered to Paul Martin on November 4, 1998. Prepared by a hastily assembled "Task Force of Liberal Backbenchers" and signed by 55 Liberal Members of Parliament and Senators, it concluded that "there is no evidence that the mergers are necessary under present circumstances, nor would they be beneficial….There is considerable evidence that, under present circumstances, they would be detrimental to the public interest." Looking back, this report has proven to be quite an accurate indicator of the enthusiasm of successive Liberal governments for permitting large bank mergers.

The Task Force Report formed the basis of the 1999 Department of Finance White Paper entitled "Reforming Canada's Financial Services Sector: A Framework for the Future." Thereafter, many of the recommendations of the Task Force Report and the White Paper were included in Bill C-38, which contained a massive update of the Bank Act and other federal financial institutions legislation.

Introduced in June of 2000, Bill C-38 died on the order paper as a federal election was called for the Fall of that year. It was subsequently reintroduced by the re-elected Liberal government as Bill C-8 in February of 2001 and enacted without significant changes on June 14, 2001, as the Financial Consumer Agency of Canada Act. The actual coming into force of most provisions of the Act was delayed until the publication of the first major tranche of companion regulations on October 24, 2001.

The tabling of Bill C-8 on February 7, 2001 was accompanied by the issuance of a government press release that contained, as a two-page annex to a brief summary of the legislation, the federal government's long-awaited Merger Review Guidelines for large banks (those having more than $5 billion in equity).

The Guidelines themselves turned out to be almost vanishingly short—just over 800 words in total—and describe a three-stage public review process little different from that outlined in the 1998 Task Force Report.

The first stage of this process commences with the submission of a written application for permission to merge. The application is to be accompanied by a comprehensive Public Interest Impact Assessment ("PIIA") prepared by the applicants. Among other things, the Guidelines require the applicants to address the rather toxic issues of job losses, branch closures and access to credit for small and medium-sized businesses. Initial reviews of the merger application and the PIIA are then carried out by the Competition Bureau, OSFI, the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce, with the latter two bodies expected to hold public hearings on the merger application. The results of these various reviews are then communicated to the Minister of Finance for the second stage of the process, which the Guidelines describe as follows: "Using the reports of the Competition Bureau, OSFI, the Finance Committee and the Senate Committee as inputs, the Minister of Finance will render a decision on whether the public interest, prudential and competition concerns are capable of being addressed. If not, the transaction will be denied and the process stopped at this stage." The third stage, if ever reached, consists of negotiations on any steps required by the Competition Bureau, OSFI and the Minister of Finance to remedy specific problems created by the proposed merger.

Rather predictably, the issuance of the Merger Review Guidelines did not stimulate a new round of bank merger announcements. Instead, they produced a sustained barrage of criticism from banks and other interested parties, who concluded that the "public interest" was still code for the perceived "political interest" of the Liberal government. The lightning rod for complaint was the fact that, although the Guidelines purported to create an objective and transparent review process, the final decision would still be made by the Minister of Finance on an ill-defined and malleable "public interest" basis. Very little appeared to have changed since 1998.

In the meantime, the long-simmering rivalry between Paul Martin and then Prime Minister Jean Chrétien had exploded into open conflict in the spring of 2002, ending with Martin's departure from the Cabinet in June of 2002. He was replaced as Finance Minister by John Manley, a Chrétien loyalist and formerly the Minister of Industry.

In late October of 2002, in response to continuing pressure from the banks and others to give substance to the "public interest" test set out in the Guidelines, Manley punted the issue to the House of Commons Standing Committee on Finance and the Senate Standing Committee on Banking, Trade and Commerce. His letter to the committees made oblique reference to the concerns expressed by the banks and thereafter suggested that "it would be most helpful if your Committees would provide us with views on the major considerations that should apply in determining the public interest."

The Senate Standing Committee gave its reply, entitled "Competition in the Public Interest: Large Bank Mergers in Canada," in December of 2002. Expressing what appears to be some impatience, the Committee recommended that "…the Minister permit, as being in the public interest, a merger that has been approved by—and meets conditions set out by—the Competition Bureau and the Office of the Superintendent of Financial Institutions, unless there are compelling reasons to believe otherwise." It also recommended removing all parliamentary committees (including itself) from the merger review process.

The House of Commons Standing Committee responded in March of 2003 in a 68-page report entitled "Large Bank Mergers in Canada : Safeguarding the Public Interest for Canadians and Canadian Businesses." This report, despite its length, did little or nothing to clarify the meaning of "public interest" other than to add a few items to the laundry list of concerns to be addressed by the merger proponents in their Public Interest Impact Assessments. Its general unhelpfulness (to the banks, at least) is well-captured in the report's conclusion, which states that "[t]he committee believes that the onus is on the merger applicants to make their case that a merger by them would be in the public interest. Ultimately, they bear the burden of proof in that regard." The report also includes separate supplementary opinions from the Bloc Québecois (which asks for hard evidence that mergers would be economically beneficial), the New Democratic Party (which denies that bank mergers could ever be beneficial) and the Progressive Conservative Party (which suggests that it would be beneficial if the merger approval process were less political).

On June 23, 2003, the federal government issued a lengthy written Response to the two parliamentary committee reports. After duly thanking the committees for mulling over the issue for six months, the Response simply added a few "public interest" criteria to those already contained in the Merger Review Guidelines and then posed several additional questions for the committees to ponder, including the issue of whether "cross-pillar" mergers between big banks and big insurance companies should be permitted.

The Response explicitly rejected the Standing Senate Committee's view that the Minister of Finance should approve, absent any extraordinary considerations, any merger application that had already passed muster with the Competition Bureau and OSFI: "The government believes that there is a need for a broad public interest review of any bank merger proposal that goes beyond the OSFI and Competition Bureau reviews, and that the Minister of Finance…is the appropriate person to review the full range of relevant issues, weigh the benefits and costs of a merger proposal and make a final decision."

The final portion of the Response, called "Next Steps," established a comment period ending December 31, 2003, and committed the federal government to reviewing comments and issuing revised merger review guidelines by June 30, 2004. It also set out a further three-month transition period commencing July 1, 2004, during which the federal government would not accept or consider merger proposals among large financial institutions

In December of 2003, following the long-anticipated elevation of Paul Martin to the prime ministership, John Manley was replaced by Ralph Goodale as Minister of Finance. Shortly after taking over his new portfolio, Goodale pledged to release the revised merger review guidelines on schedule in June 2004. Once again, however, a federal election call intervened to cause further delay. Held on June 28, 2004, the election produced a Liberal minority government, with strong showings by the Progressive Conservative Party, the Bloc Québecois and the New Democratic Party.

By August of 2004, the guidelines had still not been released and the Minister was refusing to set a new deadline (citing the preoccupation of his department with federal-provincial negotiations on health care funding). Goodale also declined to say whether the guidelines would deal with the issue of cross-pillar mergers. In late October of 2004, he suggested that the guidelines might be ready by Christmas, but many observers have now concluded that the Liberals will try to defer the release of the guidelines until they can be conveniently buried in the Bank Act review process that is scheduled to begin in 2006. If the federal government then waits until that consultative process is concluded, new merger review guidelines might not emerge until sometime in 2008—a decade after the banks attempted to force the pace with their 1998 merger announcements.

Since December of 1998, many observers have said that the federal government will never approve of mergers between large Canadian financial institutions. Citing the "populist instincts" of the Liberals and other left-of-center parties, they conclude that accommodating the desires of Bay Street won't happen if there is any price to be paid on the hustings.

For the present, this conclusion is probably correct. Based on the pattern of developments since 1998, there is nothing to suggest that the new merger review guidelines, once ultimately released, will provide the clear roadmap that prospective merger proponents do actually need. Moreover, the enthusiasm for mergers among Canada 's large financial institutions has tended to wax and wane. In 1998, for example, Scotiabank was bitterly opposed to mergers among its competitors. Today, it appears to be the most enthusiastic supporter of mergers. In contrast, CIBC has recently stated that it has no interest in pursuing a merger. Clearly, there is no united front among the big banks in support of mergers, and few sustained efforts have been made since 1998 to sell the Canadian public on the idea.

That said, there is no denying that massive consolidation among leading financial institutions is occurring in the United States and elsewhere. Not too far in the future, these external developments may kindle a sudden desire on the part of the federal government to create a national financial champion or two. Then, unlike now, all bets will be off.

FCAC: The Early Years

One of the four main themes of the 1998 Task Force Report was "empowering consumers." In emphasizing this, the Task Force agreed with many consumer groups that the existing structure of federal consumer protection laws and institutions did not do enough to level the playing field between federally-regulated financial institutions and the consumers of their products and services.

The concern expressed by the Task Force with improving federal consumer protection efforts was also reflected in the 1999 White Paper and ultimately resulted, in October of 2001, in the creation of a new federal consumer watchdog agency—the Financial Consumer Agency of Canada. The FCAC brought together under one roof regulatory functions that had previously been scattered across a number of federal departments. In broad terms, its mandate was to enforce the consumer-oriented provisions of federal financial institutions statutes, to monitor the financial services industry's self-regulatory initiatives, to promote financial consumer awareness and to respond to financial consumer complaints and inquiries.

Three years after its creation, the FCAC is still a relatively small organization. It has fewer than 50 full-time employees and will consume a modest budget of $7.6 million for the 2004-2005 fiscal year. Funding for the FCAC now comes entirely from assessments on the financial institutions that it regulates. Approximately 90% of this amount is paid by banks, which reflects the fact that the banking sector has been the primary focus of the FCAC's activities.

The FCAC's basic tasks are twofold. On the one hand, it is responsible for supervising federal financial institutions—banks, federally incorporated or registered insurance companies, trust and loan companies and co-operative credit associations—to ensure that they comply with their obligations under federal financial consumer protection laws and their own self-imposed codes of conduct. On the other hand, the FCAC is entrusted with educating financial consumers as to their rights and obligations under these same laws. To accomplish these related but quite different tasks, the FCAC is organized into a Compliance and Industry Relations Branch and a Consumer Education and Public Affairs Branch.

The Compliance Branch of the FCAC is concerned with investigating and enforcing compliance with specific consumer protection provisions of the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act, the Co-operative Credit Associations Act and the Financial Consumer Agency of Canada Act, as well as a number of self-regulatory codes put in place by the financial services industry. Investigations by Compliance Branch staff are initiated both by consumer complaints and by active surveillance of the Canadian financial services marketplace.

The Compliance Branch employs a variety of investigative methods. It conducts compliance audits on financial institutions, actively scrutinizes financial institution Web sites and printed materials (particularly those relating to credit card products), sends "mystery shoppers" to bank branches to make inquiries on such matters as service charges and interest rates, and commissions studies by consumer groups and other third parties.

While most instances of non-compliance have to date been resolved by negotiation between FCAC staff and the subject financial institution, the FCAC Commissioner does have the statutory power to issue "notices of violation" to offending financial institutions and to impose monetary penalties of up to $100,000. In imposing such penalties, the Commissioner may take into account the degree of intention or negligence on the part of the financial institution, the harm done to consumers as a result of the violation and the financial institution's record of previous offences. The Commissioner may also publicize information on the nature and gravity of the offence and the identity of the offender. To date, the statistics published by the FCAC indicate that the large number of investigations commenced by Compliance Branch staff have resulted in the imposition of relatively few severe penalties.

Beginning in the Fall of 2003, the FCAC added a database of the Commissioner's "final decisions" to its Web site ( Recently reported decisions include a letter of reprimand issued to a bank for denying a line of credit to a consumer because the consumer obtained a mortgage at another institution (tied selling), a letter of reprimand issued to a bank for failing to accurately disclose the cost of borrowing on a loan product, a $50,000 penalty levied against a bank for failing to disclose the annual interest rate on a credit card application form (apparently under appeal) and a letter of reprimand issued to a bank for failing to adhere to the statutory (public consultation) procedure for branch closures.

For the 2004-2005 period, the Compliance Branch has announced that it will focus its efforts on ensuring that financial institutions are complying with the Access to Basic Banking Services Regulation published under the Bank Act. Among other things, this regulation prohibits financial institutions from imposing a service charge for cashing government of Canada cheques (of less than $1,500) and prohibits banks from refusing (in most circumstances) to open a basic personal deposit account for a person who is unemployed or who has been bankrupt. The Compliance Branch also intends to audit documentation used by financial institutions to ensure that it contains satisfactory plain-language disclosure of interest rates, charges and other important product features.

The Education Branch of the FCAC is primarily concerned with publishing information that will aid consumers in making informed decisions about financial products and services. The Education Branch currently publishes two consumer guides, Credit Cards and You and the Consumer's Guide to Basic Banking. The former helps consumers to compare the features and costs associated with different types of credit cards and provides plain-language translations of the often complex terminology in typical credit card agreements. The latter is an annual publication that focuses on the choices a consumer faces when examining different banking packages and options. The Education Branch also publishes a variety of other materials that deal with the consumer "hot buttons"—including access to low-cost personal bank accounts, free cashing of government of Canada cheques and participation in the branch closure review process—that were specifically addressed in the 2001 amendments to the Bank Act and other federal financial institutions statutes.

The Education Branch has announced that its efforts in 2004-2005 will be focused on increasing consumer awareness of the Access to Basic Banking Services Regulation and consumers' rights with respect to basic banking services.


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