Annual Review of Federal Financial Institution Legislation | Blake, Cassels & Graydon LLP


In 2018, monetary establishments in Canada witnessed yet one more 12 months of important enlargement in laws and regulatory steerage impacting their operations.

Key developments in 2018 included the conclusion of the statutory assessment of federal monetary sector laws, the introduction of a brand new federal client safety framework, a brand new wave of proposed amendments to the anti-money laundering laws, finalization of the bail-in framework, revisions to OSFI’s company governance steerage, and progress on Canada’s cost modernization initiative.

These and different key legislative and regulatory developments are mentioned in our annual replace.

Review of Federal Financial-Sector Legislation
Prudential Regulation and Guidance
Consumer Protection
Anti-Money Laundering and Sanctions
Open Banking, Payments Modernization & Other Developments

REVIEW OF FEDERAL FINANCIAL-SECTOR LEGISLATION

In 2018, the federal authorities accomplished the legislative assessment of federal monetary establishments laws, following public consultations. A quantity of legislative amendments have been launched by the Budget Implementation Act, 2018, No. 1, which acquired royal assent on June 21, 2018, and the Budget Implementation Act, 2018, No. 2, which acquired royal assent on December 13, 2018.  The key amendments included the next:

New Consumer Framework

The federal authorities launched the long-awaited monetary client safety framework (Framework) for banks and licensed international banks. The Framework, which has not but been proclaimed into pressure, is primarily set out in a brand new Part XII.2 of the Bank Act, with new whistleblowing provisions set out in a brand new Part XVI.1. The Framework is meant to be complete, however no point out is made of federal exclusivity, signalling that, for now, the federal government needs to keep away from overt reference to the constitutional query within the laws. While the Framework is offered as a consolidation of current necessities, only a few provisions that exist at the moment are untouched. The spectrum of revisions ranges from minor drafting modifications, together with some efforts to modernize, to drafting modifications that considerably increase the scope of the availability because it exists at the moment. In addition, there are various brand-new provisions with probably far-reaching implications. We await the discharge of the implementing rules with the intention to correctly assess the scope of the modifications to the patron provisions of the Bank Act. Certain modifications are additionally made to the Federal Consumer Agency of Canada Act (FCAC Act), which would require the Commissioner to call the one who dedicated a violation and prescribes stronger penalties. For extra details about the Framework, please see our November 2018 Blakes Bulletin: A New Federal Financial Consumer Protection Framework.

Broadened Scope of Permitted Activities

One of the extra important modifications to the federal monetary establishments laws was to broaden, albeit incrementally, the enterprise powers of federally regulated monetary establishments (FRFIs). The laws permits FRFIs to hold on sure actions past the core actions of banking, monetary providers or insurance coverage. The current further powers embody partaking in data transmission and administration, in addition to sure expertise actions, however topic to byzantine restrictions, necessities and approvals. The new amendments broaden the scope of the present further powers in order that FRFIs could (a) gather, manipulate and transmit data typically, with out the present limits on the kind of data that may be collected, manipulated or transmitted, and (b) develop, design, manufacture, promote and in any other case take care of expertise if doing so pertains to one other permitted exercise or the availability of monetary providers by one other entity. The ministerial approval requirement in reference to these actions has additionally been eliminated, which is able to permit FRFIs extra freedom and adaptability when partaking with expertise. The amendments additionally added a brand new energy for FRFIs to have interaction in “any activity that relates to the provision of financial services” by the FRFI or any of its associates. This open grant of energy is a serious departure from the extra prescriptive, and restrictive, strategy adopted within the current federal monetary establishments laws. Among different issues, the brand new energy may probably permit FRFIs to market the expertise and processes they’ve developed to non-financial entities, opening new sources of income for FRFIs and permitting them to compete extra successfully with fintechs.

Expanded Networking Power

The amendments additionally revised the present networking provisions within the federal monetary establishments laws to expressly permit FRFIs to enter into preparations with “any person” in respect of carrying on sure actions or offering sure providers, and to refer individuals to “another person” with out limitation. These modifications will permit FRFIs and different entities (together with fintechs) to work collectively and mutually refer prospects, which can assist foster higher collaboration within the monetary expertise area.

Broadened Investment Powers

Under the present laws, FRFIs are permitted to make a considerable funding in different monetary establishments or entities whose enterprise is proscribed to sure listed actions or combos of listed actions, in some instances, topic to an approval requirement. If the entity through which a FRFI needs to invest carries on some other actions, the funding could also be prohibited or restricted by the specialised financing or momentary funding guidelines. In the previous, this has restricted the power of FRFIs to invest in fintechs and different entities exterior of the monetary providers business. The amendments allow FRFIs to invest in an entity if a majority of the entity’s enterprise consists of monetary providers actions of the kind that the investor FRFI could interact in (not together with the extra powers mentioned above). What is taken into account a “majority” can be prescribed by regulation. Although maybe not as open as some FRFIs could have wished, these amendments will tremendously increase the funding choices of FRFIs, notably within the fintech area the place many entities develop expertise that’s of potential worth to FRFIs — in addition to expertise that’s unrelated to monetary providers —which beforehand disqualified such entities from funding by FRFIs. The amendments additionally introduce de minimis thresholds exempting sure permitted investments by FRFIs from approval necessities.

We notice that every of the expanded and new powers famous above is topic to restrictions that could be imposed by rules that aren’t but obtainable.

Insurance Company Investments in Infrastructure Entities

The amendments additionally introduce infrastructure entities as a permitted funding for federally regulated life insurers, topic to numerous situations which are to be prescribed by regulation. Notwithstanding this new energy, not a lot is prone to change in life firm participation in infrastructure investments except the punitive capital regime that exists at the moment for such investments can also be liberalized.

Deposit Insurance Framework

Amendments are additionally made to the Canada Deposit Insurance Corporation Act (CDIC Act). Specifically, the provisions referring to deposits made in belief are amended to permit for accounts to be designated as skilled trustee accounts, if the depositor attests that they’re an expert trustee and gives specified contact data. The deposits of every beneficiary underneath such an account would obtain separate protection of as much as C$100,000 if the skilled trustee maintains up-to-date information itemizing the present identify and handle of every beneficiary and the quantity or proportion curiosity of every beneficiary. The amendments additionally permit nominee brokers to make deposits on behalf of one other particular person whereas defending that particular person’s confidentiality. In addition, two new eligible deposit classes have been added for Registered Education Savings Plans and Registered Disability Savings Plans to make sure that every product is roofed as much as the C$100,000 restrict.

For extra data on these legislative amendments, please see our April 2018 Blakes Bulletin: Financial Sector Legislative Reform Continues.

PRUDENTIAL REGULATION AND GUIDANCE

The Office of the Superintendent of Financial Institutions (OSFI) continued updating its regulatory steerage in 2018 and printed a substantial quantity of new or revised tips, that are mentioned under.

Corporate Governance Guideline

On September 18, 2018, OSFI issued the ultimate model of its Corporate Governance Guideline  (Revised CG Guideline). The Revised CG Guideline follows Superintendent Jeremy Rudin’s announcement in June 2016, that OSFI meant to streamline and simplify the governance steerage for FRFIs. The Revised CG Guideline gives a clearer delineation of board and senior administration obligations, removes some of the extra prescriptive parts of the earlier CG Guideline, and consolidates expectations referring to board obligations which are at present set out in OSFI’s capital and risk-management tips into the Revised CG Guideline. For extra data, please see our September 2018 Blakes Bulletin: A Look Inside OSFI’s New Corporate Governance Guideline.

Bail-in and TLAC Requirements

On March 26, 2018, the federal authorities launched the ultimate model of the bail-in rules underneath the CDIC Act and the Bank Act (Bail-in Regulations), which took impact on September 23, 2018. The Canadian bail-in framework was first launched in June 2016 via amendments to the CDIC Act. Under these amendments, the Canada Deposit Insurance Corporation (CDIC), Canada’s financial institution decision authority, was granted the ability to transform the desired liabilities and shares of a distressed Canadian home systemically vital financial institution (D-SIB) into the widespread shares of the D-SIB or one of its associates (Bail-In Conversion) with the intention to recapitalize the D-SIB. The Bail-in Regulations now specify the categories of liabilities and shares that may be topic to Bail-In Conversion energy. Specifically, a debt obligation of a D-SIB is topic to a Bail-In Conversion if it meets all the next standards:

  • The debt obligation is issued by the D-SIB after September 23, 2018. Debt obligations issued earlier than this date should not topic to Bail-In Conversion except they’re amended after that date to extend the principal quantity or to increase the time period
  • The debt obligation has a time period to maturity of greater than 400 days or is perpetual (particular guidelines apply in respect of debt obligations with imbedded choices)
  • The debt obligation is unsecured on the time of issuance. If the debt obligation is partly secured on the time of issuance, the unsecured portion can be topic to Bail-In Conversion.
  • The debt obligation has been assigned a CUSIP quantity, ISIN, or different comparable designation that identifies a particular safety to facilitate its buying and selling and settlement.

Subordinated liabilities and most popular shares of a D-SIB may also be topic to Bail-In Conversion, however provided that they don’t qualify as non-viability contingency capital (NVCC) devices underneath OSFI’s Capital Adequacy Requirements (CAR) Guideline. Structured notes (with some exceptions), lined bonds and eligible monetary contracts, and sure different devices are exempted from Bail-In Conversion. Under the ultimate model of the Bail-in Regulations, D-SIBs are prohibited from promoting or in any other case selling a bail-in eligible safety as a deposit to a purchaser in Canada.

Concurrently with the adoption of the Bail-In Regulations, OSFI finalized its associated Total Loss Absorbing Capacity (TLAC) capital commonplace for D-SIBs by issuing the the ultimate variations of the TLAC Guideline and the revised CAR Guideline on April 18, 2018. D-SIBs are anticipated to satisfy their TLAC necessities by November 1, 2021. 

On May 28, 2018, OSFI additionally issued the ultimate variations of its tips on TLAC Disclosure Requirements and Capital Disclosure Requirements. D-SIBs are anticipated to implement TLAC disclosures commencing with the quarterly reporting interval ending on January 31, 2019, and may present quarterly disclosures concurrently the publication of their monetary statements. OSFI notes that Canadian D-SIBs are anticipated to have public disclosure practices which are among the many greatest of their worldwide friends.

On August 21, 2018, OSFI issued orders formally designating Canada’s six largest banks as D-SIBs underneath the Bank Act. OSFI additionally issued orders to every D-SIB setting the minimal TLAC ratio at 21.5 per cent of risk-weighted belongings and the minimal TLAC leverage ratio at 6.75 per cent. The orders are efficient November 1, 2021.

Introduction of Net Stable Funding Ratio

On December 19, 2018, OSFI issued  a draft model of the Net Stable Funding Ratio (NSFR) necessities underneath Chapter 3 of the Liquidity Adequacy Requirements (LAR) Guideline, with a goal implementation date of January 1, 2020. The NSFR requires banks to keep up a steady funding profile in relation to their on- and off-balance sheet actions, with an intention to scale back the chance that disruptions to the financial institution’s common sources of funding will erode its liquidity place and enhance the chance of failure. The NSFR limits overreliance on short-term wholesale funding and is a key liquidity adequacy measure, along with the liquidity protection ratio. Comments on the proposed revisions to the LAR Guideline are due by February 1, 2019.

Basel Capital Reforms and Updates to Bank Capital Guidelines

Following the endorsement by the oversight physique for the Basel Committee on Banking Supervision (Basel Committee) of the ultimate chapter of Basel III reforms, on January 12, 2018, OSFI launched a letter asserting that it’s going to replace the present capital ground for Canadian banks utilizing superior approaches for credit score threat as a transitional measure earlier than the brand new output ground proposed by the Basel Committee is applied (starting in 2022). For OSFI’s observations on the brand new Basel reforms, see additionally Assistant Superintendent Carolyn Rogers’ remarks from January 9, 2018. OSFI’s present capital ground is predicated on the Basel I capital accord and can now get replaced by a extra risk-sensitive capital ground primarily based on the Basel II framework. Specifically, banks utilizing superior approaches for credit score threat can be required to make sure that the risk-weighted belongings generated by inside fashions aren’t any decrease than 75 per cent of the risk-weighted belongings calculated underneath the Basel II standardized strategy.

On October 30, 2018, OSFI launched the revised variations of the Leverage Requirements (LR) Guideline and the CAR Guideline. The revisions to the LR Guideline and the CAR Guideline mirror the incorporation of the Standardized Approach to Counterparty Credit Risk for calculating derivatives exposures, changing the Current Exposure Method. The LR Guideline and the CAR Guideline have been additionally revised to replace the therapy of securitized belongings. In addition, the CAR Guideline now clarifies the capital therapy for right-of-use belongings ensuing from the adoption of International Financial Reporting Standard (IFRS) 16. The revised LR Guideline and CAR Guideline are efficient Q1 2019.

On November 20, 2018, OSFI launched the ultimate model of the Leverage Ratio Disclosure Requirements Guideline. The revisions accompany the modifications to the LR Guideline and the CAR Guideline, and incorporate a brand new line to seize the therapy of securitized belongings that meet the operational necessities for recognition of important threat switch. Consistent with the LR Guideline and the CAR Guideline, the revisions can be applied Q1 2019.

Revised Large Exposure Limit Guideline for D-SIBs

On December 13, 2018, OSFI launched Draft Guideline B-2: Large Exposure Limits (Draft Guideline B-2) for public session. The authentic Guideline B-2 was printed in 1994 and establishes limits for a financial institution’s publicity to a single counterparty measured as a proportion of capital. The proposed modifications incorporate the Basel Committee’s commonplace on massive publicity threat administration, as said in Supervisory Framework for Measuring and Controlling Large Exposures. The proposed modifications embody transferring the eligible capital base from Total capital to Tier 1 capital, introducing tighter limits for exposures to systemically vital banks, and offering for the popularity of eligible credit score threat mitigation methods. Comments on Draft Guideline B-2 are due by February 1, 2019. The new Draft Guideline B-2 applies solely in respect of D-SIBs. OSFI has not but printed a revised model of Guideline B-2 for different FRFIs.

Reinsurance Framework Review

On June 21, 2018, OSFI launched for public session a Discussion Paper on Reinsurance Framework as half of its assessment of the reinsurance framework for federally regulated insurers. The dialogue paper describes the present reinsurance framework and descriptions areas of proposed change. Key proposals within the dialogue paper intention to handle dangers related to massive exposures and focus, notably for direct writers of property and casualty insurance coverage. The dialogue paper consists of different proposed modifications to the reinsurance framework that may have an effect on all federally regulated insurers. These proposals embody enhancements to OSFI’s steerage on sound reinsurance practices and procedures, and modifications to the administration of the statutory requirement to acquire the Superintendent’s approval to reinsure with an unregistered reinsurer. The modifications are aimed toward addressing OSFI’s two key findings of the assessment, particularly that: (a) dangers related to massive exposures and focus of reinsurance counterparties have to be higher managed, and (b) changes to the capital framework for reinsurance are warranted.

Updates to Insurance Capital Guidelines

On March 29, 2018, OSFI issued the ultimate model of the Life Insurance Capital Adequacy Test (LICAT) Public Disclosure Requirements (PDR) Guideline. The LICAT PDR Guideline outlines 5 rules upon which OSFI’s expectations are primarily based: disclosures ought to be (i) clear, (ii) significant to customers, (iii) constant over time, (iv) comparable throughout life insurers, and (v) accompanied by qualitative narrative.

On August 9, 2018, OSFI issued the Mortgage Insurer Capital Adequacy Test (MICAT), a brand new capital guideline for mortgage insurers. The MICAT outlines the framework that OSFI will use to evaluate whether or not a mortgage insurance coverage firm maintains ample capital. The MICAT is a consolidation of OSFI’s prior capital necessities for mortgage insurers and took impact as of January 1, 2019.

On October 10, 2018, OSFI issued the up to date model of the LICAT Guideline after a public session course of. Later, in November 2018, OSFI printed the 2019 Minimum Capital Test for Federally Regulated Property and Casualty Insurance Companies Guideline. The revisions mirror the implementation of IFRS 16 and the findings of OSFI’s Discussion Paper on Reinsurance Framework.

OSFI Advisory on IFRS 17

On May 4, 2018, OSFI launched an advisory on IFRS 17 Transition and Progress Report Requirements in response to the discharge of IFRS 17 Insurance Contracts Standard by the International Accounting Standards Board. IFRS 17 replaces IFRS Four and is efficient for annual durations starting on or after January 1, 2021. Among different issues, the advisory notes that after reviewing a number of components, OSFI has decided that federally regulated insurers shouldn’t undertake IFRS 17 earlier than its efficient date of January 1, 2021.

Revised Asset Securitization Guideline for Insurers

On November 26, 2018, OSFI issued the ultimate model of  its revised Guideline B-5: Asset Securitization (Guideline B-5) for federally regulated insurers. The revised Guideline B-5 took impact on January 1, 2019 and largely aligns the regulatory framework for the securitization actions of insurers with the operational and qualitative necessities relevant to the securitization actions of banks, as at present mirrored in Chapter 7 of OSFI’s CAR Guideline. Guideline B-5 units out OSFI’s common expectations with respect to securitization transactions by federally regulated insurers and dietary supplements OSFI’s insurance coverage capital tips for insurers by specifying the capital therapy for securitization exposures. For extra data, please see our October 2018 Blakes Bulletin: OSFI Issues Updated Securitization Framework for Insurers.

Interest Rate Risk Management

On October 5, 2018, OSFI issued for public remark a revised draft of Guideline B-12: Interest Rate Risk Management (Guideline B-12). Guideline B-12 was first launched in 2005. The revised Guideline B-12 implements Basel Committee steerage associated to the framework for Interest Rate Risk within the Banking Book. OSFI intends to implement the revised Guideline B-12 on January 1, 2020.

Use of Bank Words

Effective June 21, 2018, the Budget Implementation Act, 2018, No. 1 amended the Bank Act provisions limiting the use of the phrases “bank,” “banker” and “banking” (Bank Words). The amendments permit prudentially regulated provincial deposit-taking establishments (comparable to credit score unions) and belief and mortgage firms to make use of the Bank Words to point or describe their enterprise, together with their services or products or the means by which any of these services or products could also be obtained, topic to sure situations.

Following the Bank Act amendments, on August 14, 2018, OSFI issued a discover reinstating its June 2017 advisory, which set out OSFI’s interpretation and administration of the restrictions on the use of the Bank Words. OSFI now expects compliance with the Bank Words restrictions by (a) August 31, 2019, for domains and knowledge contained on web sites, different digital media and in print supplies, and (b) August 31, 2020, for data contained on bodily signage. For extra data, please see our September 2018 Blakes Bulletin: Update on the Use of the Words “Bank”, “Banker” and “Banking” by Non-Banks.  

Updated OSFI Transaction Instructions

In August 2018, OSFI up to date its transaction directions for purchase or redemption of shares or membership shares and reduction of stated capital.

OSFI additionally launched a revised model of its Guide to Intervention for Federally Regulated Property and Casualty Insurance Companies in March 2018.

CONSUMER PROTECTION

As famous above, one of the important thing legislative developments of 2018 was the introduction of the long-awaited federal monetary client safety framework. This was preceded by the Financial Consumer Agency of Canada’s (FCAC) report on Canadian banks’ retail gross sales practices, the introduction of the brand new supervision framework, and sure different developments, that are mentioned under.

Report on Canadian Banks’ Retail Sales Practices

On March 20, 2018, the FCAC printed a report on its assessment of Canadian banks’ retail gross sales practices (Sales Practices Report). The Sales Practices Report targeted on retail banking gross sales practices undertaken by Canada’s six largest banks to establish and consider dangers to customers. The Sales Practices Report discovered that workers in retail banking are inspired to promote services and that rewards are primarily based on gross sales success. Although the potential for misselling is elevated in such environments, the FCAC finally concluded that there was no widespread misselling in Canada. For extra details about the FCAC’s findings, please see our March 2018 Blakes Bulletin: FCAC Concludes No Widespread Mis-Selling by the “Big Six” Banks.

Report on Best Practices in Financial Consumer Protection

On May 14, 2018, the FCAC printed its Report on Best Practices in Financial Consumer Protection (Best Practices Report). The Best Practices Report was the end result of the federal authorities’s request that the FCAC undertake a assessment of the authorized panorama’s underlying monetary client safety regimes on the federal, provincial and worldwide stage, and preceded the introduction of the brand new client framework underneath the Bank Act, mentioned under. The Best Practices Report identifies 11 suggestions for a powerful monetary client safety framework knowledgeable the introduction of the brand new monetary client safety framework. For extra data, please see our May 2018 Blakes Bulletin: FCAC Report Identifies 11 Best Practices in Financial Consumer Protection.

New Supervision Framework

On October 1, 2018, the FCAC printed the ultimate model of its Supervision Framework, which got here into impact on that date. The Supervision Framework stays comparatively unchanged from the earlier drafts, printed in April 2017. However, the FCAC made some key modifications to its strategies of enforcement. Despite the discharge of the Supervision Framework, a last model of the Publishing Principles for FCAC Decisions has but to be printed. These rules will make clear how the FCAC will publish details about notices of violation, notices of resolution and notices of non-compliance. For extra data, please see our October 2018 Blakes Bulletin: Final Financial Consumer Agency of Canada Supervision Framework in Effect.

New Compliance Bulletin B-7

In September 2018, the FCAC issued Compliance Bulletin B-7, Role of cost card community operators in guaranteeing participant compliance with the Code of Conduct for the Credit and Debit Card Industry in Canada (FCAC Bulletin). The FCAC Bulletin gives steerage with respect to the FCAC’s Decision #126 (May 15, 2017) and units out the FCAC’s expectations with respect to the obligations of cost card community operators (PCNOs). Specifically, the FCAC Bulletin expects PCNOs to:

  1. Adopt a proactive compliance strategy which incorporates establishing and implementing management measures and instruments to stop, monitor, and implement
  2. Ensure their contributors adjust to the Code of Conduct for the Credit and Debit Card Industry in Canada by implementing the measures and instruments referred to in paragraph (1)
  3. Ensure that mechanisms are in place to motion FCAC requests, Guidance and Compliance Bulletins, in a well timed method
  4. Demonstrate, upon request, how the expectations in paragraphs (1), (2) and (3) are being met.

New FCAC Decisions

The FCAC issued 4 selections in 2018:

  1. Decision #129 (February 8, 2018): Released in relation to a financial institution that didn’t disclose all costs required by the Disclosure of Charges (Banks) Regulations. After introducing a brand new system, the financial institution charged some of its prospects charges that have been inconsistent with the data disclosed. Commercial prospects have been additionally overcharged consequently of billing errors.
  2. Decision #130 (April 4, 2018): Released in relation to a financial institution that failed to offer correct disclosure statements respecting the prepayment of new and renewed mortgage agreements, in accordance with the Cost of Borrowing (Banks) Regulations.
  3. Decision #131 (August 15, 2018): Released in relation to mortgage renewal documentation offered by a financial institution that disclosed the mortgage cost frequency as “accelerated” when it was not, opposite to the Cost of Borrowing (Banks) Regulations.
  4. Decision #132 (November 29, 2018): Released in relation to a financial institution that didn’t appropriately disclose the price of borrowing in relation to sure credit score merchandise, as set out within the Cost of Borrowing (Banks) Regulations. The components to calculate curiosity payable that was offered to prospects generated incorrect outcomes and was completely different from the components truly used to calculate the curiosity charged.

ANTI-MONEY LAUNDERING AND SANCTIONS

There have been important developments in 2018 impacting Canada’s anti-money laundering and anti-terrorist financing (AML/ATF) regime, together with proposed amendments to the rules underneath the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and main dialogue papers launched by the Department of Finance and House of Commons Standing Committee on Finance. These and different developments impacting the PCMLTFA and sanctions laws are mentioned under.

Department of Finance Discussion Paper

On February 7, 2018, the Department of Finance launched a discussion paper reviewing Canada’s AML/ATF regime in reference to Parliament’s five-year legislative assessment of the PCMLTFA. The dialogue paper units out coverage concerns for potential amendments to the PCMLTFA. The extra important of these measures think about subjecting new strains of enterprise to the AML/ATF framework, comparable to privately-owned automated teller machines (ATMs), armoured automobiles, high-value items sellers, and finance, lease and factoring firms. The dialogue paper additionally proposes amendments to the necessities referring to politically uncovered individuals, helpful possession, and potential AML/ATF data sharing between authorities businesses and the personal sector. For extra data concerning the dialogue paper, please see our February 2018 Blakes Bulletin: Department of Finance Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime.

Politically Exposed Persons

On May 11, 2018, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) printed its Frequently Asked Questions in relation to Politically Exposed Persons in Canada and Heads of International Organizations (FAQ). The FAQ addresses sure questions referring to the definitions of politically uncovered individuals underneath the PCMLTFA.

Proposed Amending Regulations

On June 9, 2018, the Department of Finance launched long-awaited proposed amendments to the PCMLTFA rules. Highlights of the proposed amendments embody the rules of digital currencies, companies offering international cash providers and pre-paid merchandise. In addition, the life insurance coverage sector is proposed to grow to be topic to the identical necessities as different monetary entities in respect of any mortgage or pre-paid merchandise that they provide. While the identification verification necessities are much less burdensome underneath the proposed rules, the recordkeeping necessities have expanded significantly, particularly for digital funds transfers. It is anticipated {that a} last model of the amending rules can be launched later in 2019. For an in depth assessment of the proposed amendments, please see our June 2018 Blakes Bulletin: The Good, the Bad and the Ugly: Revised Regulations to PCMLTFA.

Standing Committee on Finance Report

In November 2018, the House of Commons Standing Committee on Finance launched its report, Confronting Money Laundering and Terrorist Financing: Moving Canada Forward (Standing Committee Report). The Standing Committee Report makes 32 suggestions on proposed modifications and additions to the Canadian AML/ATF regime. The suggestions outlined within the Standing Committee Report relate to numerous features of the PCMLTFA, together with the necessities respecting helpful possession and politically uncovered individuals, and AML regulation in varied industries, comparable to white label ATM providers and armoured automobiles, actual property, luxurious items, casinos and cryptocurrency. For extra data, please see our November 2018 Blakes Bulletin: Confronting Money Laundering and Terrorist Financing: Canada Considers Vast Changes to AML Regime.

Beneficial Ownership

On May 1, 2018, FINTRAC up to date its steerage on Beneficial Ownership Requirements to handle business suggestions concerning the challenges of independently confirming the accuracy of helpful possession data. Previously, FINTRAC took the place that, whereas varied means may very well be used to acquire helpful possession data, solely official documentation may very well be relied on to substantiate the accuracy of the data obtained. In recognition of the truth that such official documentation doesn’t exist most often, this steerage has now been up to date to mirror FINTRAC’s amended place that, as soon as the helpful possession data is obtained, varied affordable measures could also be used to substantiate the accuracy of helpful possession data, together with reliance on certification.

In this respect, we additionally notice that the Budget Implementation Act, 2018, No. 2 amended the Canada Business Corporations Act (CBCA) to enhance the helpful possession recordkeeping necessities for enterprise firms. In explicit, underneath the amendments, a CBCA company is required to keep up a register of people with important management of the company. The amendments, which, amongst different issues, are meant to help monetary establishments to adjust to their helpful possession willpower necessities underneath the PCMLTFA, are set to come back into pressure in June 2019. For extra data, please see our November 2018 Blakes Bulletin: Beneficial Ownership: New Developments.

Assessment on Terrorist Activity Financing

On December 13, 2018 FINTRAC printed its Terrorist Financing Assessment: 2018 (Assessment), which gives an evaluation of the terrorist exercise financing dangers offered by varied international locations. The Assessment outlines monetary and geographic indicators to help companies in figuring out and reporting suspected terrorist exercise financing.

Suspicious Transaction Requirements

On January 21, 2019, FINTRAC up to date its business steerage in respect of suspicious transaction reporting by releasing three new steerage paperwork on Transaction reporting requirements, Reporting suspicious transactions to FINTRAC and What is a suspicious transaction report?. For extra data, please see our January 2019 Blakes Bulletin: New Guidance from FINTRAC: Expanding Suspicious Transaction Requirements.

Sanctions

On January 11, 2018, the federal government amended the rules underneath the United Nations Act in respect of North Korea. The amended regulations proceed to impose asset freeze, screening and reporting obligations in respect of designated individuals. They additionally add a brand new prohibition in opposition to forming, sustaining or working a three way partnership or a cooperative entity with North Korea or with any particular person in North Korea, and add new items topic to the prohibitions in opposition to the sale or buy of sure items to or from North Korea, amongst different amendments.

On May 16, 2018, the federal government printed amended regulations underneath the United Nations Act and the Special Economic Measures Act in respect of Libya.

On May 30, 2018, the federal government amended regulations underneath the Special Economic Measures Act in respect of Venezuela to incorporate further listed individuals.

On June 25, 2018, the federal government amended the regulations underneath the Special Economic Measures Act in respect of Myanmar (previously Burma) to incorporate further designated individuals.

On October 10, 2018, new regulations underneath the United Nations Act applied the United Nations Security Council’s resolutions on Mali, which embody asset freeze, screening and reporting obligations in respect of designated individuals.

On November 29, 2018, Canada’s Minister of Foreign Affairs introduced sanctions in opposition to 17 Saudi Arabian nationals. The people have been designated within the regulations made underneath the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law). The designations goal Saudi Arabian nationals who’re, within the authorities’s view, linked to the homicide of journalist Jamal Khashoggi.

For extra details about amendments to sanctions laws, please see our December 2018 Blakes Bulletin: Canada Imposes Sanctions Against Saudi Arabian Nationals and Blakes Bulletin: Primer on Canadian Sanctions Legislation.

OPEN BANKING, PAYMENTS MODERNIZATION & OTHER DEVELOPMENTS

Open Banking

In early 2019, the Department of Finance requested enter from the general public and different stakeholders on its consultation paper titled A Review into the Merits of Open Banking. The session paper discusses the idea of open banking and descriptions the related dangers and advantages. The session paper is an element of the primary part of a two-phase assessment of open banking led by the Advisory Committee on Open Banking, established in September 2018. The federal authorities first introduced its intention to check open banking in February 2018 in its Budget 2018. For extra data, please see our January 2019 Blakes Bulletin: Canada Seeks Input on Open Banking Framework.

Payments Modernization

On February 23, 2018, Payments Canada accomplished its session on the proposed cost modernization venture. The proposed Modernization Target State (Target State) contemplates the next modifications to Canada’s core funds clearing and settlement techniques:

  • Payments Canada proposes to interchange the present Large Value Transfer System (LVTS), Canada’s high-value cost system that facilitates real-time funds with transaction finality, with a brand new system (Lynx). Lynx can be structured to be higher aligned with the Bank of Canada’s risk-management requirements for systemically vital cost techniques.
  • A brand new Settlement Optimization Engine (SOE) will ultimately substitute the present Automated Clearing Settlement System, Canada’s core retail cost system and can be structured to be higher aligned with the Bank of Canada’s threat administration requirements for distinguished cost techniques.
  • Payments Canada additionally proposes to introduce a brand new real-time rail for instant retail funds. Payment service suppliers that aren’t prudentially regulated monetary establishments (PSPs) could have direct entry to the real-time rail underneath the Target State.

The Target State session was adopted by the publication of a consultation paper by the Department of Finance on the assessment of the Canadian Payments Act. The session paper thought of in higher element the proposal to permit PSPs to take part within the new real-time rail and SOE. Specifically, the session paper proposed to create a brand new class of affiliate membership that may be open to PSPs and would supply eligibility for affiliate members to take part in change and settlement of cost gadgets on the real-time rail. The session paper notes that higher entry to the real-time rail (and maybe the SOE) could also be facilitated by the proposed retail funds oversight framework, which might topic PSPs to principles-based oversight, together with safety and risk-management practices.

Currently, PSPs are typically unregulated, besides in restricted circumstances. PSPs regulated underneath the retail funds oversight framework could be eligible to use for affiliate membership. Like present members, affiliate members wouldn’t mechanically be capable to change, clear or settle funds instantly on Payments Canada’s techniques. Associate members must meet further system-specific necessities earlier than getting access to the real-time rail. To settle instantly via the real-time rail, affiliate members must meet necessities set by the Bank of Canada to acquire a settlement account. The session paper additionally states that affiliate members wouldn’t be eligible to take part in systemically vital techniques such because the LVTS and, sooner or later, Lynx; nonetheless, affiliate member entry to the SOE is taken into account. Specifically, consideration is being given as to whether affiliate members ought to be eligible to instantly or not directly change digital cost gadgets on the SOE change community. Associate members wouldn’t be eligible to settle gadgets exchanged on the SOE, however must have a settlement member achieve this for them. For extra data on the session by the Department of Finance, please see our June 2018 Blakes Bulletin: Further Consultation on Payments Canada – And More to Come.

On December 19, 2018, Payments Canada printed a Modernization Delivery Roadmap 2018 Update (Roadmap) as a follow-up to the Target State. The Roadmap gives revised timelines for the implementation of the modernization initiative.

Resolution Framework for Clearing and Settlement Systems

The Budget Implementation Act, 2018, No. 1 launched a decision framework for systemically vital or distinguished clearing and settlement techniques which are designated by the Bank of Canada underneath the Payments Clearing and Settlement Act (PCSA). The decision framework will apply solely to these designated techniques whose clearing home is in Canada (Canadian Designated Systems). Under these amendments, which haven’t but been proclaimed into pressure, the Bank of Canada will act because the decision authority for all Canadian Designated Systems and should develop and preserve a decision plan for every such system. The Bank of Canada could declare a Canadian Designated System non-viable if it concludes that the Canadian Designated System has ceased, or is about to stop to be viable, and the Canadian Designated System can’t restore its viability by itself initiative. A declaration of non-viability imposes a keep in respect of all contracts with the Canadian Designated System’s clearing home or central counterparty, topic to sure exceptions for eligible monetary contracts. Upon declaration of non-viability, the Bank of Canada could also be appointed as receiver of the Canadian Designated System, or the shares of such system’s clearing home (apart from Payments Canada) could also be vested within the Bank of Canada. The Bank of Canada may have broad powers in respect of a non-viable Canadian Designated System and will switch its belongings to, and prepare for the belief of its liabilities by, a bridge clearing home designated by the Bank of Canada or different third events. Other amendments to the PCSA embody making oversight data in respect of designated clearing and settlement techniques confidential, much like the confidentiality necessities for supervisory data referring to FRFIs. The scope of the oversight data that may be topic to this non-disclosure requirement can be set out in rules, which haven’t been printed but.

Canada-United States-Mexico Agreement

On September 30, 2018, Canada, the United States and Mexico signed the Canada-United-States-Mexico Agreement (CUSMA) – often known as the United States-Mexico-Canada Agreement (USMCA) within the U.S. – which is meant to interchange the North American Free Trade Agreement. The CUSMA addresses a number of digital commerce points, together with information localization. Once ratified, Article 17.20 of the CUSMA would require modifications to Canadian laws that at present requires FRFIs to keep up specified information in Canada. The CUSMA is anticipated to take impact on January 1, 2020, though Article 17.20 is not going to take impact for an additional 12 months to permit time for the federal authorities to amend home laws accordingly. For extra data, please see our October 2018 Blakes Bulletin: USMCA to Remove “in Canada” Record-Keeping Requirements for Financial Institution Sectors.



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