Both the Canada Deposit Insurance Corporation and Finance Canada released consultation papers this fall asking for feedback from interested parties on ways to deal with the evolving financial services sector.
The two papers were released just four days apart but, oddly, “neither one of them refers to the other,” said Dawn Jetten, a partner in Blake, Cassels & Graydon’s financial services regulatory practice in Toronto. Jetten said that modernization is the reason behind both reviews. “They’re trying to address the increasing importance of electronic banking. These categories of deposits that are insured were created a long time ago.”
Indeed, updates appear overdue since Crown corporation CDIC’s last comprehensive review of the Deposit Insurance Information By-law was completed in 2006. According to Brad Evenson, Director, Communications and Public Affairs at CDIC, the corporation “undertakes comprehensive reviews of our by-laws from time to time to ensure they remain up-to-date and relevant.”
CDIC’s Deposit Insurance Information By-law
CDIC protects eligible deposits at its 80 member financial institutions up to a maximum of $100,000 per separately insured category in case of a failure. In its by-law consultation paper, CDIC proposed amendments that would modernize the DIIB. The proposed changes were grouped into two key themes: providing enhanced clear, simple and not misleading information to depositors; and ensuring all depositors receive useful information on deposit insurance at the appropriate time, prominently displayed across all distribution channels.
Under the first theme’s proposals, members would provide depositors with the CDIC brochure prior to entering into a deposit agreement instead of simply making it available. Feedback was also sought on the use of trade names by members and negative and positive representations about deposit product eligibility.
Proposals under the second key review theme included “ensuring all depositors receive useful information on deposit insurance at the appropriate time, prominently displayed across all distribution channels,” according to the paper. CDIC also looked for feedback on proposals “in relation to how member institutions can better ensure their clients are appropriately informed about CDIC deposit insurance protection, when seeking out members’ eligible deposit products through financial advisors or deposit brokers.”
The CDIC undertakes public awareness efforts through an annual advertising campaign, said Evenson, and requires its member institutions “to provide accurate information to depositors at the appropriate time. To this end, the DIIB consultation assessed a number of environmental considerations, including depositor expectations, distribution channels (including increased use of internet and mobile banking) as well as international best practices.”
After inviting feedback from stakeholders and the public, “we received important comments from the industry and other stakeholders that are currently being reviewed,” Evenson said, adding that the CDIC will work with its member institutions to finalize the proposals. “Proposed amendments to the by-law will be published in the Canada Gazette with additional opportunity for comments.”
Finance Canada’s Deposit Insurance Review
Meanwhile, Finance Canada has been seeking feedback on potential improvements to the deposit insurance framework. Its consultation paper, the Deposit Insurance Review, will help to determine whether the scope of the targeted products needs adjustments.
The country’s financial system was resilient during the 2008 financial crisis and modifications to the framework weren’t needed, according to the paper. But, “since the crisis, the global banking landscape has changed significantly, including the introduction of financial regulatory reforms aimed at reducing the probability of a future financial crisis.”
The Deposit Insurance Review sought views on potential enhancements to the framework, which fell into three broad categories:
Streamline deposit categories
The paper suggested eliminating mortgage tax accounts due to their declining use. As well, Finance Canada is considering adding two new deposit categories for Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs), which currently don’t receive the same coverage as other registered products. An alternative would be to amalgamate all registered products into one deposit category that has a higher limit.
Update the scope of eligible deposits
Since CDIC member institutions no longer issue travellers’ cheques, the paper suggests removing them as eligible deposits. It is also considering removing the current qualification that only deposits with terms of maturity under five years are eligible for coverage and asked whether there should be a maximum term.
Foreign currency deposits are currently ineligible for coverage but, since they are widely held by Canadians, the government is considering adding foreign currency as an eligible deposit. The paper asks whether only certain foreign currencies should be insured and if so, which ones. But Jetten believes it’s highly unlikely that foreign currency deposits will be insured since “the additional burden and the currency exchange burden on the government would be unreasonable.”
The consultation paper also considers the creation of temporary high-balance coverage. These could include large lump-sum payments such as those received from an inheritance, an insurance payout, a divorce settlement or the proceeds from the sale of private property.
Address the complexity of trusts
Trusts come in a variety of forms, including lawyers’ trust accounts, charitable trusts and RESPs. The government is looking at ways to address the complexity of trusts, particularly how to address brokered deposits and improve the disclosure of beneficiary information. The paper asks whether beneficiaries are aware of the consequences of their broker not providing beneficiary information and whether the reporting and recordkeeping requirements for professional trusts are clear.
New methods
Jetten pointed out that Finance Canada’s consultation paper doesn’t clarify one important issue—the fact that the deposit has to be received or held by a CDIC member institution “in the usual course of the deposit-taking business of the institution” in order to qualify as an eligible deposit, which is difficult to interpret under the current framework.
People will have to be careful with new methods of taking deposits, said Jetten. “Walking into the bank and giving your cash to the teller isn’t the ordinary course of their business and e-transferring from another bank into your account isn’t the ordinary course of the deposit-taking business. But as banks move into more innovative kinds of products and partnerships with different kinds of fintechs, the question will be is that something they took in the ordinary course of their deposit-taking business?”
Many lawyers’ corporate clients put down deposits for real estate or business purchases that will be invested in some type of a deposit instrument and they will want to know whether it’s insured, said Jetten. “As new methods of taking deposits evolve, people should always be asking the question of their bank, is this insured? Don’t just assume.”