Modernizing the Credit Unions and Caisses Populaires Act

Modernizing the Credit Unions and Caisses Populaires Act
Additional Draft Regulations for Consultation

PROPOSED BY THE MINISTRY OF FINANCE
FEBRUARY, 2009

This Consultation Draft is intended to facilitate constructive dialogue concerning its contents.

Note that these regulations will become law only if the Lieutenant Governor in Council proclaims legislative changes and approves the regulations.

Table of Contents

I. Invitation for Comments
II. Summary of Proposals
III. General Regulation
1. Trusts for Named Beneficiaries (s. 6)
2. Payments re Deceased Members (s. 7)
3. Number of Shares (s. 8)
4. Offering Statement (s. 10 - 13)
5. Adequate Capital (s. 14 - 17)
6. Group Capital (s. 18)
7. Adequate Liquidity (s. 19 - 20)
8. Credit Committee
9. Duties of Audit Committee (s. 26)
10. Salary Disclosure (s. 27)
11. Bond for Persons Handling Money (s. 28 - 29)
12. Ancillary Business (s. 30)
13. Security Interests (s. 47)
14. Classes of Loans (s. 48 - 57)
15. Lending Limits (s. 57)
16. Eligible Investments (s. 59 - 60)
17. Financial Statements (s. 83)
18. Leagues (s. 94)
19. DICO Investments (s. 100 - 101)
20. Continuance (s. 107 - 111)
21. Consumer Complaints (s. 115 - 116)
22. Administrative Penalties (s. 117)
IV. Cost of Borrowing and Disclosure to Borrowers
V. Consultation Draft of General Regulation
VI. Consultation Draft of Cost of Borrowing and Disclosure to Borrowers Regulation
VII. Consultation Draft of Capital Adequacy Guideline

I. Invitation for Comments

The Ministry of Finance invites your comments on the proposals outlined in this consultation draft. Interested parties are asked to provide their written submissions by March 31, 2009. This guide gives readers a brief outline of changes under consideration. Readers are encouraged to focus their attention on the actual wording of the consultation draft of the regulations, rather than relying only on this guide.

If you have any comments or questions about this consultation or how any element of your submission may be used or disclosed, please contact:

Luba Mycak
Senior Manager
Industrial & Financial Policy Branch
Ministry of Finance
95 Grosvenor St., 4th Floor
Toronto, ON M7A 1Z1

Tel: 416-326-9227
Fax: 416-325-1187

E-Mail: cucpconsultations.fin@ontario.ca

A copy of this consultation document can be reviewed online at:
 http://www.fin.gov.on.ca/en/consultatons/cu-cp

The content, structure, and form of the draft regulations are subject to change as a result of the consultation process and as a result of review by the government. These proposals will become law only if the Lieutenant Governor in Council proclaims legislative changes and approves the regulations.

Please note that this is a public consultation. All comments received will be considered public and may be used by the ministry to help evaluate and revise the proposed draft regulations. This may involve disclosing some or all comments or materials, or summaries of them, to other interested parties during and after the consultation.

Any personal information in submissions, such as names and contact details (e.g., home addresses and phone numbers, personal email addresses, etc.) – in addition to any other information that could be used to identify an individual – will not be disclosed, subject to any legal requirements, without prior written consent. However, records created by individuals acting in their professional capacity (i.e., on behalf of a group, association, business, commercial enterprise, etc.) may be disclosed, unless the covering letter states that such disclosure would be harmful and/or prejudicial. Further information regarding the collection, use and disclosure of information can be found in the Freedom of Information and Protection of Privacy Act at www.e-laws.gov.on.ca.

If  you feel your comments should not be shared with other parties, please indicate this in your covering letter and include your reasons.

II. Summary of Proposals

Amendments to the Credit Unions and Caisses Populaires Act, 1994 (“the CUCPA”) received Royal Assent on May 17, 2007 but have not yet been proclaimed. Many of the proposals in these draft regulations are contingent on the legislative amendments being proclaimed.

It is proposed that Ontario Regulation 79/95 (Stabilization Funds Established Under a Predecessor Act) made under the CUCPA be repealed.

It is also proposed that three regulations currently made under the CUCPA be repealed and replaced with a single new regulation. These regulations are: Ontario Regulation 76/95 (Credit Unions), Ontario Regulation 77/95 (Leagues), and Ontario Regulation 78/95 (Deposit Insurance Corporation of Ontario).

In addition, a new regulation regarding the Cost of Borrowing and Disclosure to Borrowers is being proposed.

III. General Regulation

1. Trusts for Named Beneficiaries (s. 6)

When proclaimed, an amendment to the CUCPA will permit a credit union to accept deposits from a member in trust for a named beneficiary if the deposits are required or governed under an Act. The proposed regulation would list the Acts that are prescribed for these purposes.

2. Payments re Deceased Members (s. 7)

 It is proposed that the regulation set $50,000 as the maximum amount a credit union can pay in respect of a deceased member’s deposits or shares to an entitled person in the circumstances to be set out in the CUCPA.

3. Number of Shares (s. 8)

When proclaimed, an amendment to the CUCPA will permit a member of a credit union to hold more than the minimum number of shares required to be a member. The draft regulation proposes that a member be permitted to purchase up to $1,000 in additional membership shares. These additional shares would be included in the determination of the regulatory capital of a credit union.

4. Offering Statement (s. 10 - 13)

The proposed regulation would set out the information that would be required in an offering statement if a credit union were incorporated or amalgamated within 90 days before the date on the offering statement

5. Adequate Capital (s. 14 - 17)

The proposed regulation would set out updated criteria for determining whether a credit union is maintaining adequate capital.  The calculation of total assets and regulatory capital and the risk-weighting of assets would be updated and would include new requirements regarding tier 1 and tier 2 capital.

Additional rules regarding the calculation of total assets and regulatory capital, as well as the risk-weighting of assets, would be set out in the Capital Adequacy Guideline for Ontario’s Credit Unions and Caisses Populaires, to be published in The Ontario Gazette by the Deposit Insurance Corporation of Ontario (DICO).  A copy of the draft guideline is included in this consultation.

6. Group Capital (s. 18)

When proclaimed, an amendment to the CUCPA will permit two or more credit unions to enter into an agreement with a league to form a group for the purpose of assisting credit unions in the group to satisfy capital requirements.

The proposed regulation would set out the mandatory requirements of the group capital agreement. For example, if a credit union were ordered to increase its capital by DICO, then the league would agree to advance the additional capital within 45 days of the order. Member credit unions would agree to jointly and severally indemnify the league for any amounts the league invested to assist a member in meeting capital requirements. In addition, a credit union would be allowed to withdraw from the group on 18 months notice to the league and the other credit unions in the group, but only if all group members have satisfied statutory capital requirements throughout the 12 months prior to its withdrawal.

The proposed regulation would also set out the circumstances under which DICO could revoke its approval of an agreement.

7. Adequate Liquidity (s. 19 - 20)

Under the proposals, the regulation would set out separate liquidity requirements for class 1 and class 2 credit unions.

A class 1 credit union would be required to keep seven per cent of its total assets in eligible liquid assets. The amount would be reduced to five per cent if the credit union has a line of credit with a financial institution, Credit Union Central of Canada, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, or La Caisse centrale Desjardins du Québec totaling at least two per cent of the credit union’s deposits. However, the line of credit could only be revoked after at least 30 days notice to the credit union, and the terms of the line of credit would need to be set out in writing. The proposed regulation would also remove the requirement for determining net liquidity.

A class 2 credit union would be required to establish and maintain prudent levels and forms of liquidity sufficient to meet its cash-flow needs.

The proposed regulation would no longer define or set requirements for the operation of a liquidity pool.

8. Credit Committee

When proclaimed, amendments to the CUCPA will repeal the requirement for a credit union to have a credit committee. The proposed regulation would therefore not prescribe any matters regarding the reports or business of the credit committee.

9. Duties of Audit Committee (s. 26)

The audit committee’s report to members at the annual meeting would need to include information about the number of meetings held by the committee, a summary of significant activities undertaken by the committee, confirmation that the committee is conducting its affairs in accordance with the CUCPA, and information about any failure of the credit union to implement any significant recommendation previously made by the committee.

10. Salary Disclosure (s. 27)

When proclaimed, an amendment to the CUCPA will require a credit union to disclose prescribed information about remuneration paid to its officers and employees. The proposed regulation would require the disclosure of the name, title, salary, bonuses, and benefits paid to the officers or employees of a credit union whose total remuneration for the year was over $150,000.  If the credit union had more than five officers and employees whose total remuneration was over $150,000, then disclosure would be required for only the five highest earners.

11. Bond for Persons Handling Money (s. 28 - 29)

The regulation proposes to increase the minimum amount of the required bond to the lesser of $5 million (currently $1 million) or the amount of the credit union’s assets.

In addition, the regulation would require the bond to provide coverage for dishonesty and to satisfy specific conditions. The insurer would be required to provide the Superintendent and DICO with copies of any notice given to the credit union concerning termination or potential termination of coverage.
 
A transition period would be provided so that these proposals would come into effect after December 31, 2009.

12. Ancillary Business (s. 30)

When proclaimed, certain permitted activities in the CUCPA would be moved to the regulations as permitted ancillary businesses. The proposed regulation  includes the list of permitted activities and ancillary businesses.

13. Security Interests (s. 47)

The proposed regulation would set out the circumstances in which a credit union could create a security interest in its property.

A credit union would be permitted to grant a security interest in its property to secure a debt, including any obligations to settle for payment items in accordance with the rules of the Canadian Payments Association, provided that all the secured debts of the credit union do not exceed 15 per cent of its total assets. Only debts to banks, loan or trust corporations, leagues, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, or the Credit Union Central of Canada would qualify. The security agreement would need to specifically identify assets and could not create a general charge against the business of the credit union. The total value of all secured property could not exceed 25 per cent per cent of its total assets.

The proposed regulation would permit a credit union to create a general security interest in its property in limited circumstances. The debt could only be owed to a league, Central 1 Credit Union, La Fédération des caisses Desjardins du Québec, La Caisse centrale Desjardins du Québec or the Credit Union Central of Canada. DICO could, at its option, require the security interest to be assigned to DICO if the credit union came under administration, or if DICO were appointed as liquidator. If the security interest were assigned to DICO, then DICO would provide the secured party with payment in full of the indebtedness secured by the agreement, a guarantee of payment, or a partial payment and a guarantee of payment for the balance.

A credit union would not be able to create a security interest in assets used to satisfy the requirements for adequate liquidity.

14. Classes of Loans (s. 48 - 57)

When proclaimed, an amendment to the CUCPA will repeal the requirement for a credit union to obtain a lending licence and to make loans in accordance with its lending licence. Consequently, the proposed regulation would no longer prescribe classes of lending licences.

However, the proposed regulation would define classes of loans for the purposes of the lending limits to be set out in the regulation.

It is proposed that the definition of commercial loan be amended to include the supply of funds for use in automated bank machines that are not owned and operated by the credit union. The proposed definition would be consistent with the accounting treatment  mandated by the Superintendent for these types of transactions.

15. Lending Limits (s. 57)

The current lending limits for class 1 and 2 credit unions would remain unchanged, except for the following proposals.

Under the draft regulation, a credit union could not lend more than 50 per cent of its regulatory capital to an agency of the Government of Canada, an agency of the government of a province or territory of Canada, or a school board. This limit would apply to both class 1 and class 2 credit unions.

In addition, it is proposed that the lending limits for class 1 and class 2 credit unions would not apply in respect of a loan made to the Government of Canada or the government of a province or territory of Canada.

16. Eligible Investments (s. 59 - 60)

It is proposed that a class 1 credit union could only invest in or hold the types of securities and property listed as eligible investments.

A class 2 credit union would be permitted to hold any asset authorized by its investment policies so long as the investment met the conditions set out in the regulation and was not otherwise prohibited.
 
The following restrictions would apply to both class 1 and class 2 credit unions:

  • total book value of all investments in improved real estate in Canada could not exceed 100 per cent of the credit union’s regulatory capital
  • no investments would be permitted in any commodity, including metals, food, and grain, that trades on a commodity exchange

In addition, the total book value of all investments in widely-distributed shares or participating shares could not exceed 25 per cent of regulatory capital for class 1 credit unions or 70 per cent of regulatory capital for class 2 credit unions.

17. Financial Statements (s. 83)

It is proposed that the financial statements of a credit union disclose:

  • the amount and composition of tier 1 and tier 2 capital and the percentage of regulatory capital held
  • the amount of each type of asset held for liquidity purposes
  • the amount of outstanding loans in each class of loan described in section 48 of the draft regulation
  • the amount of impaired loans, allowance for impairment, and charge for impairment
  • the value of marketable securities that are held to maturity, available for sale, and held for investment

18. Leagues (s. 94)

The proposed regulation would permit an exception to the 10 per cent single investment limit for leagues. La Fédération des caisses  populaires de l’Ontario would be permitted to invest 25 per cent of its deposits and regulatory capital in La Fédération des caisses Desjardins du Québec.

19. DICO Investments (s. 100 - 101)

It is proposed that DICO be permitted to invest any funds not required in carrying out its objectives in securities in which a class 2 credit union may invest its funds.

20. Continuance (s. 107 - 111)

When proclaimed, an amendment to the CUCPA will permit an entity incorporated under the laws of another jurisdiction in Canada, or under another Ontario Act, to be continued under the CUCPA, and for an Ontario credit union to transfer to another jurisdiction or another Ontario Act.

The proposed regulation sets out documents that would need to be provided and conditions that would need to be met in order to obtain approval for the continuance.

21. Consumer Complaints (s. 115 - 116)

The proposed regulation would require a credit union to designate a complaints officer who would be responsible for reporting to the credit union’s board at least once annually on complaints received from members and depositors and how they were resolved.

A credit union would be required to inform its members of the name and contact information for the complaints officer. It would also be required to respond in writing to all written complaints and keep records related to these complaints for six years from the date of the original complaint.

The credit union would be required to inform a complainant that he or she may refer his or her complaint to the Superintendent if the person is not satisfied with the proposed solution and if the complaint relates to a contravention of the CUCPA or regulations.

22. Administrative Penalties (s. 117)

When amended, the CUCPA will enable the Superintendent or DICO to impose an administrative penalty if a person or entity contravened certain requirements of the CUCPA. The draft regulation proposes a fixed-rate administrative penalty of $100 per day for a class 1 credit union and $250 per day for a class 2 credit union for the contraventions listed in the CUCPA (e.g., failure to file reports and provide required information). The regulation would also outline the list of factors that the Superintendent or DICO would be required to consider when deciding whether or not to impose an administrative penalty.

IV. Cost of Borrowing and Disclosure to Borrowers

The draft regulation describes how the cost of borrowing is to be calculated by a credit union and disclosed to a borrower. It also proposes mandatory disclosure requirements and rules about advertisements related to the cost of borrowing. The draft regulation reflects the federal-provincial-territorial harmonization agreement that was created through a process of public consultations and intergovernmental negotiation. The proposals related to credit unions were previously consulted on by the Ministry of Finance.

V. Consultation Draft of General Regulation 2009
VI. Consultation Draft of Cost of Borrowing and Disclosure to Borrowers Regulation 2009
VII. Consultation Draft of Capital Adequacy Guideline 2009

© Queen's Printer for Ontario, 2009
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