On October 29, 2018, the Federal Government introduced Bill C-86, Budget Implementation Act, 2018, No. 2 which contains the most sweeping consumer protection provisions ever proposed for Canadian banks. The three main areas dealt with in Bill C-86 are:
- in the consumer protection space, enhanced requirements related to consumer protection and the sales practices of banks, including the requirement for a bank to establish a new committee of the Board of Directors to be responsible for consumer provisions; and the expansion and consolidation of a number of the consumer protection provisions of the Bank Act into one new section;
- amend certain provisions of the Bank Act in the areas of corporate governance, business practices, public reporting, disclosure of information and access to basic banking services; and
- make a number of tweaks to certain provisions of the Bank Act dealing with the investment powers permitted to banks, privileged information made available to OSFI and electronic consent.
Background to Bill C-86
While the Federal Government has been increasing its oversight of banks in the consumer protection and payment fields over the last several years by enacting new consumer protection measures under the Bank Act and entering into voluntary codes with the financial services industry, Bill C-86 is a response to two significant events over the last few years.
Marcotte Decision - the first significant event occurred in September 2014, when the Supreme Court of Canada released its decision in Bank of Montreal v. Marcotte, dealing with the question of which level of government has constitutional authority over consumer protection issues involving banks. In this decision, the Supreme Court of Canada adjusted the balance of federalism by holding, for the first time, that the provincial consumer protection legislation can apply to bank's consumer contracts even if those provincial provisions overlap with the federal legislative scheme applicable to the same contracts.
In the fall of 2016, the Federal Government introduced a series of amendments to the Bank Act in Bill C-29. One of the central goals of Bill C-29 was to more strongly assert federal jurisdiction in the consumer protection space over banks as a direct response to the Marcotte decision. However, when Bill C-29 reached the Senate, some senators took issue with the proposed amendments to the Bank Act that were intended to enhance the argument that only the federal government and not the provinces may regulate banking products and services. As a result, the proposed amendments to the Bank Act were withdrawn from Bill C-29, and the Minister of Finance referred the whole issue to the Financial Consumer Agency of Canada (FCAC) and asked the Commissioner of the FCAC to examine best practices in financial consumer protection across Canada. Bill C-86 is the result of that consultation.
FCAC Sales Practices Review - the consumer protection legislation that applies to Canadian banks is overseen by the FCAC. In 2016 there were two major incidents that called into question the retail sales practices of banks - one in the United States and one in Canada. In September 2016, Wells Fargo was fined $185 million for engaging in improper sales practices in that, in an effort to reach sales targets, bank employees opened more than three million fraudulent credit card and bank accounts. In the five years before the fine, Wells Fargo terminated over 5,000 employees for violating the bank's code of conduct. In November 2016, Canadian media reported allegations that a bank was signing up new customers without obtaining their express consent and again in late-February and March 2017, media reports alleged that Canadian banks were using high-pressure tactics and questionable practices to sell a broad range of products and services, citing information received from current and former bank employees. As a consequence, FCAC announced it would conduct an industry review of the business practices related to the sale of products and services by federally regulated financial institutions. FCAC conducted this review from May 2017 through to the end of November 2017, and issued its report in the spring of 2018.
The key findings outlined in the report of the FCAC form much of the back-drop to many of the proposed provisions in Bill C-86: (i) the retail banking culture is predominantly focused on selling products and services, increasing the risk that consumers' interests are not always given the appropriate priority; (ii) performance management programs, including financial and non-financial incentives, sales targets and scorecards, may increase the risk of mis-selling and breaching market conduct obligations; (iii) certain products, business practices and distribution channels present higher sales practices risk; (iv) governance frameworks do not manage sales practices risk effectively; and (v) controls within banks to mitigate the risks associated with sales practices are underdeveloped.
The two main conclusions of the FCAC have found their way into Bill C-86: (i) enhancements are needed to banks' management of sales practices risk; and (ii) enhancements are needed to permit FCAC to implement a modernized supervision framework that will allow it to proactively ensure banks have implemented the appropriate frameworks, policies, procedures and processes to effectively mitigate the risk of mis-selling and breaching market conduct obligations.
New Board Committee Responsible for Consumer Provisions
Bill C-86 would require a bank to create a new independent committee of the Board of Directors and that committee would be charged with the following duties:
- require the management of the bank to establish procedures for complying with the consumer provisions;
- review those procedures to determine whether they are appropriate to ensure that the bank is complying with the consumer provisions; and
- require management of the bank to report at least annually to the committee on the implementation of the procedures and on any other activities that the bank carries out in relation to the protection of its customers.
In addition to the work of the Board committee, the Directors will be required, within 90 days after each year-end of each financial year, to report to the Commissioner of the FCAC on what the Board committee did during the year in performing the duties required under the statute. The Bank Act currently provides that the auditors of the bank are entitled to attend and be heard at all meetings of the audit committee and the conduct review committee of the bank's Board. Bill C-86 proposes to expand that provision to now include attendance at the committee responsible for consumer provisions.
Financial Consumer Protection Framework
As noted in the introduction, Bill C-86 is intended to be a broad all-in-one set of consumer provisions that apply to banks. Without question, much of the detail on the various provisions will depend on regulations yet to be proposed.
By way of overview, the newly proposed framework proposed in Bill C-86 is composed of a number of new Divisions:
- Fair and Equitable Dealings – which contains sections on Responsible Business Conduct and a Complaints Process;
- Disclosure and Transparency for Informed Decisions – which contains provisions on Key Product Information and Optional Products or Services and Public Notices for Branch Closures; and
- Redress – enhanced provisions for a credit or refund or a charge or penalty.
Responsible Business Conduct
Under the Fair and Equitable Dealings division of the proposed framework, there are a number of proposals that will apply to banks, including:
- ensure that its officers and employees in Canada, and any person who offers or sells the bank's products or services in Canada, are trained with respect to the bank's policies and procedures established for complying with the consumer provisions of the Bank Act;
- enhancement of the current tied selling provisions under the Bank Act to now prohibit "taking advantage of a person" or engage in a conduct to be prescribed in the regulations;
- requiring banks to establish and implement policies and procedures to ensure the products or services in Canada that it offers or sells to a natural person, other than for business purposes, are appropriate for the person, having regard to their circumstances, including their financial needs;
- ensure that the remuneration of the bank's officers and employees in Canada, and any person who offers or sells the bank's products or services in Canada, as well as any payment or benefit the bank offers to them, does not interfere with such person's ability to comply with the policies and procedures established by the bank;
- enhancement of the prohibition on banks for the provision of a product or service by the bank without the express consent of the customer including the addition of provisions to the effect that use of the product or service does not constitute consent and the introduction of a regime similar to that in many provincial consumer protection statutes providing a customer with a cooling off period during which the customer can cancel the agreement without penalty;
- a requirement that all advertisements by banks in Canada be accurate, clear and not misleading;
- several new and enhanced provisions relating to access to basic banking services including new requirements on banks requiring them to open a retail deposit account where the person produces specified identification documents; a new prohibition on requiring a minimum deposit to open an account or maintain one; new availability of funds provisions requiring a bank to provide a customer with a minimum amount of cash upon deposit of a cheque; and enhanced requirements relating to the cashing of government cheques including a no fee for cashing requirement;
- a number of new and enhanced provisions related to the extension of credit including a right to prepayment of certain loans; prohibition on minimum credit balances without express consent; renewal of mortgages; no increase in lines of credit or credit cards without express consent where use does not equal consent; limits on the liability of a customer for unauthorized use of a credit card; credit card statements; minimum due payment due date; no interest if balance paid in full; allocation of payments; and
- enhanced provisions on prepaid payment products issued by banks.
Bill C-86 proposes a significant new complaints process. Under the proposal, banks will be required to: (a) establish procedures satisfactory to the Commissioner of the FCAC for dealing, within a period to be prescribed, with complaints; (b) designate one of its officers or employees in Canada to be responsible for implementing those procedures; and (c) designate one or more of its officers or employees in Canada to receive and deal with those complaints. There are 12 full sections dealing with the complaints procedures and the mechanical process related to complaints and the involvement of the FCAC.
Key Product Information
Under the Disclosure and Transparency for Informed Decisions division of the proposed framework, there are a number of proposals that will apply to banks, including:
- disclosure language that is clear, simple and not misleading;
- additional disclosure requirements for agreements entered into by telephone; the manner in which disclosure is to be made in branches, on websites and in information boxes;
- before entering into an agreement, the bank must provide a resource person who is knowledgeable about the terms and conditions of the product;
- enhanced disclosure in relation to promotional, preferential, introductory or special offers with respect to a product or service;
- a requirement to disclose the voluntary codes and commitments that the bank has agreed to;
- new disclosure provisions in relation to personal deposit accounts including new disclosure provisions related to when deposit insurance is not available for a deposit; and
- new prepaid payment product provisions.
Bill C-86 proposes a new whistleblowing procedure under which any employee of a bank who has reasonable grounds to believe that the bank or any person has committed or intends to commit a wrongdoing (defined to include a contravention of the Bank Act or the regulations, any voluntary code the bank has adopted or a policy or procedure established by the bank) may report the particulars of the matter to the bank or to the Commissioner of the FCAC, the Superintendent of Financial Institutions, a government agency or body that regulates or supervises financial institutions, or a law enforcement agency. If that person so reports, there is a requirement to keep the identity of the employee and any information that could reasonably be expected to reveal their identity, confidential. Banks will be required to establish and implement procedures for dealing with matters reported to it by employees and the bank is prohibited from dismissing, suspending, demoting, harassing or otherwise disadvantaging that employee or denying that employee a benefit of employment by reason of such employee's actions.
Amendments to Financial Consumer Agency of Canada Act
Consistent with the comments in the introduction about enhancing the role of the FCAC, Bill C-86 also proposes amendments to the Financial Consumer Agency of Canada Act including a new purpose provision to the statute which strengthens to role of the FCAC as to the supervision of financial institutions, external complaints bodies and payment card network operators and the protection of the rights and interests consumers of financial products and services. In what is undoubtedly a significant and controversial change, the proposals contains a new provision that requires the Commissioner of the FCAC to make public the nature of a violation, the name of the bank that committed it and the amount of the penalty imposed. This provision is subject to new regulations to be implemented but is a decided departure from the current regime where, while such matters may be disclosed, they are usually treated as confidential. In another measure strengthening the hand of the FCAC, the current maximum penalty for a violation of the consumer protection provisions of the Bank Act is proposed to be increased from $50,000 for natural persons and $500,000 in the case of financial institutions or a payment card network to $1 million and $10 million respectively.
Financial Intermediary Activities
When a bank looks at making an investment in an entity, it can only do so if that entity is a "permitted entity" under the Bank Act. One of the permitted investments most often used by banks is in an entity engaged in any financial service activity that the bank itself would be permitted to engage in. However, one of the constraints to that investment power is that the consent of the Superintendent of Financial Institutions is required in cases where the entity engages, as part of its business, in any financial intermediary activities that exposes the entity to material market or credit risk. The proposed amendments to the Bank Act establish a new materiality threshold which would permit such an investment, without the consent of the Superintendent of Financial Institutions, in circumstances where, in essence, the target entity's consolidated assets, when compared to the consolidated assets of the bank, are below this materiality threshold. Similar provisions were inserted into the Bank Act a number of years ago in connection with the acquisition by banks of other financial institutions.
Business Growth Fund
One of the recommendations coming out of the 2017 Minister of Finance's Advisory Council for Economic Growth was the creation of additional pools of growth capital, including a private-sector-led growth fund, to provide investments in established and high-growth Canadian businesses while contributing to an innovative and diversified economy support established high-impact firms and a matching fund to stimulate capital raising. The result of that recommendation was that Canada's leading banks and insurance companies came together to form Canadian Business Growth Fund (GP) Inc., the goal of which is to provide Canada with an independent, private sector fund that is focused exclusively on the financing gap facing Canadian growth companies. The proposed amendments to the Bank Act limit the total investment that any one bank can make in the business growth fund and restrict the nature of the investments of the business growth fund to those which a bank could make directly.
Electronic Documents and Consents
As all businesses, including banks, move more and more into electronic commerce, the Bank Act continues to evolve. One of the small technical changes proposed by the amendments to the Bank Act is to make it clear that if a customer consents to receiving documents electronically, that consent may also be provided electronically.
Protection of Privileged Information
Banks are providing more and more information to OSFI. Over the last several years, the Bank Act has been amended to provide greater protection and confidentiality for that information so that it is never available to the public. However, one of the concerns on the part of banks is that some of that information may be information that is subject to privilege under the law of evidence or solicitor client privilege and the concern is that by providing that privileged information to OSFI, it may then be used by OSFI against the bank in respect of a violation of the Bank Act by that bank. The proposed amendments to the Bank Act would contain a specific provision that where such privileged information is provided to OSFI, the Superintendent of Financial Institutions will not be entitled to use that privileged information as evidence in a proceeding in respect of an alleged violation by the bank. By way of commentary, there is an increasing concern on the part of many banks that the supervisory role of OSFI is extending deeper and deeper into all documents and records of the bank to the point that OSFI has knowledge of everything that the bank has. While this proposed amendment sound good in theory, it does not solve the practical concern about what OSFI has seen.