• Mon. May 20th, 2024

Canada – Financial Services – 2024 Federal Budget: Money Talks

Introduction

The 2024 Federal Budget proposes a series of legislative and
regulatory measures with a particular focus on middle class and
younger generations. The proposed actions focus on attempting to
make life more affordable, with measures impacting the rules
related to:

  • Capital gains

  • Access to banking

  • Predatory lending

  • Financial crime

Our Tax team previously covered the capital gains changes in our
Budget 2024 article. This article provides an
in-depth discussion of the rest of these measures and how they
continue to unfold.

A winding road to open banking

Canada’s winding road to a regulated open banking system has
taken a major step forward. Rebranded by the 2024 Federal Budget
(the 2024 Budget) as consumer-driven banking (CDB), the Government
of Canada (the Government) announced the following key
proposals:

  • The Financial Consumer Agency of Canada (FCAC)’s mandate
    will expand to include oversight, administration, and enforcement
    of Canada’s CDB framework.

  • The Government will introduce its first tranche of legislation
    to implement CDB this spring/summer, which will cover foundational
    elements like scope, system participation (accreditation),
    safeguards and common rules (on privacy, liability and
    security).

  • One technical standard for data sharing for CDB participating
    businesses will be selected.

  • Three years after full implementation, Canada’s CDB
    framework will be reviewed.

Open banking: Full implementation on the
horizon

Open banking, and by extension, open finance, aims to empower
Canadians and small/medium businesses with control over their
financial information (data portability rights), offering no-fee
access to data and phasing out the less secure screen scraping
method. In the 2024 Budget, the Government disclosed its intention
to introduce legislation later this year to establish the
country’s inaugural open banking framework, which promises a
robust governance framework, strict liability rules for data
breaches, and the potential to stimulate more competitive financial
products and services. The initial phase will see mandatory
participation from larger banks, read-only access, and an inclusive
approach for smaller institutions and third parties. An initial CDB
system was targeted to go live in January 2023, a goal put forth by
the federal Open Banking Advisory Committee (the Advisory
Committee) as “ambitious but achievable”.1 The
goal now for open banking in Canada, rebranded as CDB, is full
implementation in 2025.

Building open banking regulation in Canada: A
timeline

The Government has long contemplated designing and implementing
a regulated open banking framework in Canada. In the timeline below
we map out some of the key CDB dates since 2018.

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What will CDB/open banking look like in
Canada?

Given the key Government’s actions described above, we can
be certain that open banking in Canada will be a regulated system,
as opposed to solely market-driven. We can also glean from the
Advisory Committee’s final report that businesses engaged in
open banking activities will be subject to an accreditation
framework, with a focus on protecting consumers and their data.
Accredited participants will likely be subject to common rules in
the system that must be followed in the course of sharing or
receiving consumer financial data. According to the Advisory
Committee, there should be rules addressing how liability will be
allocated among participating businesses; what privacy measures
specific to CDB should be taken (as there is already a privacy
regime for the private sector in Canada); and what security
standards must be maintained in accordance with best practices.

As announced in the 2024 Budget, the FCAC will be the authority
of Canada’s CDB framework. This accords with an observed
reluctance to create a net-new regulatory entity for open banking
and aligns with the FCAC’s recently enhanced financial consumer
protection mandate, enshrined in amendments to the Bank
Act
and its associated regulations under the same banner.

Consumer protection from predatory lending practices

Criminal interest rate

The Government has indicated it will introduce an amendment to
section 347 of the Criminal Code, to create a new criminal
offence prohibiting the offer or advertisement of credit at a
criminal interest rate.

Currently, section 347 of the Criminal Code includes
two distinct offences, namely (1) entering into an agreement or
arrangement to receive interest at a criminal rate, and (2)
receiving interest at such a rate.

In Canada, the criminal annual interest rate is presently set at
60 per cent. However, the previous year’s federal budget
implementation bill included provisions to reduce this rate to 35
per cent. This reduced rate has not yet taken effect and will be
implemented on a date determined by order of the Governor in
Council. It should be noted that in December 2023, draft regulations were published to clarify
which agreements the amended criminal interest rate provision would
cover, for which a final version has not yet been published.

Although the Government has announced its intention to introduce
a new offence concerning the advertising of an offer to enter into
an agreement at a criminal rate of interest, it remains to be seen
whether this new offence will be broadly worded to include all
types of agreements that may involve interest charges, or if it
will have a narrower scope, targeting only specific types of
agreements such as consumer loans. This is particularly important,
as historically, offences related to criminal interest rates have
encompassed a broad range of agreements, including service
agreements where interest may be charged for late payment.

The Government has also indicated plans to further amend section
347 of the Criminal Code. This amendment aims to eliminate
the requirement for obtaining the Attorney General’s consent
before initiating criminal proceedings for offences related to this
section of the Criminal Code.

Consumer protection, payday loans and other federal
changes

The 2024 Budget also announced the Government’s intention to
further protect consumers against predatory lending by working with
provinces and territories to harmonize and enhance consumer
protections across Canada.

In this regard, the Government will need to coordinate its
actions with the provinces, as consumer protection legislation, as
per the Canadian constitutions, mostly falls under provincial
responsibility, although the Government has indicated that it may
consider legislative initiatives as well.

As an illustration, currently, in Canada, payday loan rules
differ from one province to the other. For instance, the definition
of “high-cost loan” is not consistent across Canadian
jurisdictions, with the province of Québec having the lowest
threshold for a loan to be deemed “high-cost”.

The proposed federal measures related to consumer protection
encompass the following:

  • Implementing caps on the costs of optional insurance products
    for high-cost loans, such as payday loans.

  • Improving transparency and marketing practices for high-cost
    and payday loans, which includes restrictions on advertising these
    products.

  • More restrictive rules and disclosure requirements for payday,
    including by establishing a minimum duration for loan terms,
    mandating repayment in instalments, and banning payday loan
    rollovers.

  • Increasing action and harmonization on proactive approach
    towards lead generators.

  • Increasing monitoring and data collection practices within the
    high-cost loan market, including payday loans.

Other specific changes related to consumer protection as
proposed by the 2024 Budget includes the following:

  • Telecommunications. The 2024 Budget includes proposed
    amendments to federal telecommunications legislation to, inter
    alia
    , require telecommunication services providers to (i)
    provide consumers with advance notice of contract expiration, (ii)
    provide consumers with information on available plans-in market,
    (iii) prohibit service providers from charging “switching
    fees” to consumers, and (iv) to require that consumers be
    provided with a self-service mechanism providing the ability to
    cancel or modify plans with their existing service provider.

  • Airline fees. The 2024 Budget proposes measure to
    address the disclosure of air passenger fees by prescribing the
    manner of disclosure of fees for optional services charged by
    airlines, including fees in relation to seat selection, checked and
    carry-on baggage, meals on board, and in-flight entertainment.

  • Junk fees. The Government will work with the
    provincial and territorial governments to identify and legislate
    “junk fees”. As previously announced, the Government is
    targeting unexpected, hidden, and additional fees charged to
    consumers for goods and services. Additionally, the Office of
    Consumer Affairs will research historical deceptive “junk
    fee” practices in Canada, presumably to inform
    legislation.

  • Right to repair. Further to earlier initiatives, the
    Government will launch public consultations to develop a right to
    repair framework and is asking the common law provinces and
    territories to, similar to Québec , amend their consumer
    protection legislation to support a right to repair and
    interoperability.

  • Ticket sales. The Government will work with the
    provinces and territories to address “excess fees”,
    timely refunds when events are cancelled, and reseller practices
    that drive prices up including by use of bot technology.

Amendments to financial institutions statutes

The 2024 Budget proposes to make various amendment to the laws
governing federally regulated financial institutions (FRFIs), such
as the Bank Act, the Trust and Loan Companies Act and the
Insurance Companies Act (the Financial
Institutions Statutes).

Electronic delivery of governance documents

First, it proposes to modernize how FRFIs can deliver governance
documents to their owners by introducing a
“notice-and-access” method of delivery, while retaining
the owners’ rights to request paper copies. Notice-and-access
allows for the electronic distribution of materials as opposed to
mailing them; for example, by providing notice to shareholders and
posting the materials online. The Government has not yet indicated
if it will allow FRFIs to implement notice-and-access by default or
whether the prior consent of the recipients will need to be
obtained. Should the Government implement a regime similar to the
one currently in force under the Canada Business Corporations Act, it
is probable that it will require prior written consent from the
recipients of the materials.

Prohibition of bearer forms documents

Secondly, the Government intends to prohibit FRFIs from issuing
documents that evidence conversion privileges, options, or rights
to acquire a share in bearer form.

Bearer shares and similar instruments can make it more difficult
to obtain accurate beneficial ownership information, and are
therefore criticized by international financial oversight bodies
and regulators, such as the Financial Action Task Force.

Mandatory diversity disclosure

Thirdly, the Government has indicated it will introduce
legislative amendments to require diversity disclosures from
FRFIs.

Currently, there are no diversity-specific requirements in Financial
Institutions Statutes
, and only FRFIs listed on securities
exchanges are required to comply with diversity disclosures,
because of applicable securities laws.

More specifically, the Government intends to adapt the Canada Business Corporations Act
(CBCA) diversity disclosure model to FRFIs.

Currently, the CBCA model requires an annual disclosure related
to diversity from corporations, which focuses on board members and
senior management. For the purposes of the CBCA, diversity refers
to the following “designated groups” : women, Aboriginal
peoples (First Nations, Inuit, and Métis), persons with
disabilities and members of visible minorities (with the latter
three terms being further defined in Section 3 of the Employment Equity Act).

Corporations subject to the CBCA’s diversity disclosures
must adhere to a “comply-or-explain” model. It notably
involves detailing: (1) the number and percentage of individuals
from each designated group who are on the board of directors and in
senior management; (2) whether there is a formal policy for the
nomination and selection of individuals from designated groups for
director positions; (3) the consideration of these groups’
representation when nominating or re-electing board members or
appointing senior management; and (4) whether the corporation has
set specific targets for the representation of each designated
group within the board of directors and senior management by a
specific date.

Transition from CDOR to CORRA

The Canadian Dollar Offered Rate (CDOR), a benchmark reference
rate for Canadian currency banker’s acceptance borrowing, will
be phased out as of June 28, 2024, and replaced with the Canadian
Overnight Repo Rate Average (CORRA). This change follows
recommendations made by the Canadian Alternative Reference Rate
(CARR) Working Group, which found that the CDOR does not meet the
high standards expected of critical interest rate benchmarks.

Accordingly, the 2024 Budget announces legislative amendments to
the Bank Act to clarify the definitions of deposit-type
instruments and principal-protected notes to ensure that term
deposits issued based on the CORRA are deposit-type
instruments.

Review of federal deposit insurance

The Government announced that the Department of Finance Canada,
in collaboration with the Canada Deposit Insurance Corporation and
other financial sector agencies, will undertake a review of the
federal deposit insurance framework, which protects Canadians’
savings and ensures access to financial services in the unlikely
event of a bank failure. Consultations are planned for later in
2024 to explore changes to the depositor protection framework.

Sunset provisions

Lastly, as it relates to Financial Institutions Statutes, the
2024 Budget also proposes to extend the sunset dates in the
Financial Institutions Statutes to June 30, 2026. For example, the
sunset provision of the Bank Act currently states that
“banks shall not carry on business, and authorized foreign
banks shall not carry on business in Canada, after June 30,
2025”. This extension was expected. The intended effect of
sunset provisions is not to force the shutdown of the Canadian
financial services sector but rather to compel the Government and
the federal legislature to periodically review and update these
statutes.

Halal mortgages a no interest alternative

The Government announced it has begun consulting on expanding
access to alternative financing products, including halal
mortgages. Halal mortgages involve alternative financing agreements
to enable the purchase of a home without the payment of interest,
in accordance with Islamic law.

These alternative financing strategies do not involve loans.
However, they still imply the payment of fees by the purchaser to
the financing entity, for example, through a partnership agreement
where the financing entity also owns part of the house.

At this time, halal mortgages are offered by financing entities
that are not federally regulated. This is partly due to the
restrictions on the type of activities in which FRFIs can engage,
which create significant regulatory hurdles for such institutions
to offer halal mortgages. It remains to be seen what changes the
federal government will propose to these restrictions. An update in
this regard will be provided in the 2024 Fall Economic
Statement.

Regulatory crackdown continues on financial crime

Canada’s 2024 Federal Budget proposes amendments to key
anti-money laundering and anti-terrorist financing laws to
strengthen the regulatory regime. The proposed changes include
increased information sharing between government agencies,
reporting agencies and law enforcement, a wider net of mandated
reporting financial service providers, and stringent penalties for
non-compliance.

In 2019 the government of British Columbia set in motion
Canada’s first public inquiry into the state of its anti-money
laundering (AML) framework by way of the Commission of Inquiry into
Money Laundering in British Columbia (the Commission) (our summary here). Ever since the
Commission’s Final Report a broad stroke of financial services
providers across the country have continued to be impacted. In many
ways, the 2024 Budget is an extension of the Commission’s
recommendations in action.

The 2024 Budget proposes to introduce amendments to key AML and
anti-terrorist financing (ATF) laws to strengthen the regime,
including: the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act
, the Criminal Code, the
Income Tax Act, and the Excise Tax Act.

Information sharing and transparency

One of the more scathing observations the Commission made was
that “the federal [AML] regime is not effective”,
particularly the Financial Transactions and Reports Analysis Centre
of Canada’s (FINTRAC) ability to share high value intelligence
to law enforcement for the purpose of detecting and deterring money
laundering.2 As a response to this, the 2024 Budget
proposes changes that would enhance information sharing abilities
to not only among FINTRAC and other law enforcement agencies
(e.g., provincial civil forfeiture offices), but among
reporting entities as well. In the same spirit, the Commission
recommended the enactment of a “safe harbour provision”
to allow financial institutions to share information for AML
purposes without giving rise to liability. Although the 2024 Budget
did not go so far as to suggest introducing such a law, it proposed
for the Privacy Commissioner to oversee FINTRAC reporting
entities’ use of any enhanced information sharing ability.

With the Government launching a public beneficial ownership
registry for federal mandated corporations in January, the 2024
Budget echoes the Commission’s call upon provinces and
territories to co-operate and create the same registries across the
country.3

More businesses to become FINTRAC reporting
entities

During the AML inquiry, the Commission identified a multitude of
gaps in Canada’s AML/ATF regulatory regime. A number of
recommendations called for reforms that would increase compliance
obligations for some financial businesses and bring financial
services providers that have historically not been subject to
AML/ATF regime into scope of the requirements.

Following suit, the 2024 Budget proposes amendments to enable
AML/ATF regulatory obligations to cover factoring
companies, cheque cashing businesses and leasing and
finance
companies. The more imminent change is for
armoured car companies and mortgage
administrators
, brokers, and
lenders, who should be preparing to comply with
FINTRAC’s requirements from July 1, 2024 and
Oct. 11, 2024 respectively.

FINTRAC cracks down on non-compliance

Keeping up with the heightened AML/ATF scrutiny, in late 2023,
FINTRAC demonstrated that it is not afraid to wield its hammer,
imposing historic administrative monetary penalties on some of
Canada’s largest financial institutions. We expect this penalty
escalation to continue throughout 2024. As such, reporting entities
should prioritize performing review and updates of their AML/ATF
compliance practices. At the same time, financial institutions will
have to dig deeper into their coffers to pay up as FINTRAC’s
cost recovery program comes into force.

Canada Financial Crimes Agency: Financial crime
investigations under one roof

In June 2023, the Department of Finance published a white paper,
Consultation on Strengthening Canada’s
Anti-Money Laundering and Anti-Terrorist Financing
Regime
“. The Commission and a mutual evaluation conducted
by the Financial Action Task Force in 2016 both identified a need
for Canada to enhance its ability to detect, investigate and
prosecute financial crime. As a result, the federal government has
moved toward creating the inaugural Canada Financial Crimes Agency
(CFAC), a dedicated central body with the resources and expertise
focused on investigating and prosecuting major financial
crimes.

In the 2024 Budget, the Government proposes to allocate $1.7
million over two years to finalize the design and legal framework
of the CFCA.

Conclusion

BLG has extensive and specialized knowledge in financial
services regulation, including open banking/CDB, AML/ATF, open
data, privacy, consumer protection and other related legal matters.
Our team will assist your business in preparing for the upcoming
legislative changes and can effectively mitigate risks. For
assistance with your legal needs, please reach out to our authors
or key contacts below.

The authors would like to thank articling students, Kaliopi
Dimitrakoudis and Tyrone Sequeira, for their efforts and
contribution to this article.

Footnotes

1. Government of Canada, Department of Finance, “Final Report – Advisory Committee on Open
Banking
,” section 6.1 (2 June 2023) online.

2. Commission of Inquiry into Money Laundering in British
Columbia, “Final Report, ” June 2022 at 2
online.

3. The Commission recommended BC to work with its
federal, provincial, and territorial partners to ensure that a
publicly accessible pan-Canadian corporate beneficial ownership
registry be established by the end of 2023.

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