REPORT TO THE MINISTER OF FINANCE
|Ministry of Finance
Office of Laura Albanese
Parliamentary Assistant to the Minister of Finance
|Ministère des Finances
Bureau de Laura Albanese
L’adjoint parlementaire du ministre des Finances
Frost Building South, 7th Floor
7 Queen's Park Crescent
Toronto ON M7A 1Y7
Telephone: 416 325-0400
Facsimile: 416 327-4493
|Édifice Frost Sud, 7e étage
7 Queen's Park Crescent
Toronto ON M7A 1Y7
Téléphone: 416 325-0400
Télécopieur: 416 327-4493
November 20, 2015
The Honourable Charles Sousa
Minister of Finance
7 Queen’s Park Crescent, 7th floor
Dear Minister Sousa:
Please find attached my report on the review of the Credit Unions and Caisses Populaires Act, 1994 (CUCPA).
I am pleased to present this report to you in accordance with the requirements set out in section 334 of the Act. In fulfilling my mandate, I have reviewed the operation of the Act and its regulations. In doing so, I have solicited the views of the public through an open consultation process. Together with Ministry of Finance officials and Professor Poonam Puri, I have travelled across the province, from Thunder Bay to Windsor and held eight in-person consultations, listening to the difference credit unions have made in northern, rural and urban communities. I had one-on-one meetings with individual stakeholders and held two roundtable sessions with key sector participants. There were also over 35 written responses submitted and considered within this report.
It is clear to me that credit unions play a pivotal role in their communities. For example, in the northern region of the province in communities where banks have closed down, credit unions have stepped in and are the only remaining financial institutions. In urban centres, ethnic credit unions act as facilitators by assisting members in their native languages.
Many credit unions support small businesses and entrepreneurs that may not otherwise have qualified for credit with other financial institutions. Credit unions also support local economies by typically giving back to the communities in which they operate. This report reflects the views and ideas heard across the province and I sincerely hope that the changes recommended will enable credit unions to fulfill their growth potential.
I would like to acknowledge the advice provided by Professor Poonam Puri of Osgoode Hall Law School, who was appointed as my Expert Advisor. Her knowledge and expertise proved to be invaluable. I am grateful for the public input I received as well as the support provided by the Ministry of Finance staff. I also want to thank you for the opportunity to conduct this review of the CUCPA which has been a rewarding experience for me and my staff.
[Original Signed by]
Parliamentary Assistant to the Minister of Finance
MPP (York South – Weston)
A - Capital Adequacy
B - Lending and Investment Rules
C - Rules Based on Size
D - Corporate Governance
E - Consumer Protection
F - Roles of Regulators
G - Deposit Insurance
H - Extra-Provincial Operations
I – Technical Amendments
On September 30, 2014, I was appointed by the Minister of Finance, the Honourable Charles Sousa, to conduct a review of the Credit Unions and Caisses Populaires Act, 1994 (CUCPA).
The requirement for the review and my mandate as appointee are set out in section 334 of the CUCPA,
(1) Within five years after section 177 of Schedule 7 to the Budget Measures and Interim Appropriation Act, 2007 comes into force, the Minister shall appoint one or more persons to review the operation of this Act and the regulations and to make recommendations to the Minister.
(2) The Minister shall, no later than five years after the appointment under subsection (1), appoint one or more persons to conduct a subsequent review and shall, no later than five years after the most recent appointment under this subsection, appoint one or more persons to conduct subsequent reviews.
(3) When conducting a review, the appointees shall solicit the views of the public.
(4) The Minister shall make the recommendations of the appointees available to the public.
My appointment is the first one required after section 334 came into force on October 1, 2009. This report is the product of a robust consultation process which began with the release of a discussion paper in November 2014. Over 35 written submissions were received and carefully considered. As well, consultation sessions were held in all regions of the province, in Hamilton, London, Ottawa, Kingston, Sudbury, Thunder Bay, Windsor and Toronto. These sessions were open to the public and attracted over 220 participants from diverse perspectives including credit union members, small business owners, local chambers of commerce, and sector representatives. This was followed by two roundtable discussions with key organizations in the credit union sector. Throughout this period, I held one-on-one meetings with stakeholders who requested to meet with me on an individual basis to share their views.
In conducting the review, I received valuable advice from Professor Poonam Puri of Osgoode Hall Law School who was appointed as my Expert Advisor. I would like to thank her for her assistance, as her input was essential to the development of the recommendations contained in this report.
I would also like to thank the staff from the Ministry of Finance that provided support by helping to arrange public consultation sessions, organize stakeholder roundtable meetings, compile and analyze sector data, and review written submissions. Valuable input and expertise was also shared by the Financial Services Commission of Ontario (FSCO) and the Deposit Insurance Corporation of Ontario (DICO).
Credit unions and caisses populaires are important players in Ontario’s financial services sector. As co-operative financial institutions, they are owned by, and provide products and services primarily for the benefit of, their members. They typically operate with a community focus and, in some cases, provide financial services in regions where no other financial services providers exist.
In the consultation paper I released in November 2014, I noted the significant changes that the credit union sector has undergone since the last legislative review in 2009. The sector continues to evolve at a rapid pace. At the time that the consultation paper was released, there were 118 credit unions and caisses populaires in Ontario. There are now 110 due to ongoing consolidation through mergers and acquisitions. Sector assets continue to grow, the number of large credit unions has increased, and the average asset size of a credit union is larger. However, the low interest rate environment persists and continues to put pressure on credit unions to seek new and innovative business lines in order to generate non-interest income.
|Asset Size||September 2009||September 2014||September 2015|
|# of credit unions||Assets
|% of Total Assets||Average Assets
|# of credit unions||Assets
|% of Total Assets||Average Assets
|# of credit unions||Assets
|% of Total Assets||Average Assets
|$500M - < $5B||12||15,360||52||1,280||17||19,919||48||1,172||19||24,075||53||1,267|
|$100M - < $500M||48||10,020||34||209||41||9,090||22||222||42||8,833||19||210|
|$50M - < $100M||35||2,505||9||72||19||1,479||4||78||11||838||2||76|
|$10M - < $50M||45||1,264||4||28||32||973||2||30||31||961||2||31|
|Note: Some numbers may not add up due to rounding|
“Some broad sweeping changes are needed to keep the financial cooperative business model competitive, so consumers continue to have a choice for their banking needs.” – The Advisory Council for Smaller Asset Sized Credit Unions
Members of credit unions, including small businesses, rely on credit unions for essential financial services, often as alternatives to banks or in small communities where banks do not operate. Their views were clear – they encourage the government to enable credit unions to do even more to serve their communities and Ontarians.
The sector’s vision and strategic priorities are to grow market share by creating awareness of the credit union sector, generate new sources of revenue through expanded service offers, and seek collaborative projects in addition to consolidation to achieve efficiencies and scale. The sector is looking to provide mainstream financial services across Ontario while staying true to their co-operative principles.
It is within this context that the following recommendations are made. The topics are presented in the same order in which they were raised in the November 2014 consultation paper.
Adopt updated capital adequacy requirements based on Basel III principles, with appropriate adjustments to reflect the capital structure of credit unions
Repeal the group capital provisions
“Ontario credit unions support the principles behind new international standards. The need to ensure financial institutions have a strong capital base that can carry them through times of trouble is recognized and respected….However, it is also recognized that in applying the new standards the co-operative structure of credit unions must be acknowledged.” - Central 1 Credit Union
In 2010, in response to the global financial crisis, the Bank for International Settlements released a global regulatory framework to promote more resilient banks and banking systems. Known as Basel III, the framework enhanced capital standards by raising the quality and quantity of regulatory capital.
Many jurisdictions have moved to adopt the new standards, including the federal Office of the Superintendent of Financial Institutions with respect to Canadian banks. Ontario credit unions are generally supportive of a move towards stronger capital requirements. However, credit unions are concerned they would not be able to strictly meet the new definition of capital, a key component of which is common equity, the highest quality component of capital under Basel III.
Unlike banks, credit unions do not issue common shares. Credit unions issue membership shares, but the amount that can be raised in this manner is limited. For most credit unions, the issue price of a membership share ranges from $5 to $100 per share. Members can purchase up to $1,000 worth of membership shares in addition to the minimum number of membership shares required by a credit union’s by-laws.
To raise additional capital, many credit unions issue investment shares to their members. These shares do not meet the criteria for classification as common shares for regulatory capital purposes. As well, since they are typically redeemable, investment shares do not meet the criteria for inclusion as additional Tier 1 (highest quality) capital.
Basel III acknowledges that the criteria for capital inclusion do not reflect the unique legal and capital structure of co-operative financial institutions. It encourages supervisory authorities to apply the criteria to ensure consistent implementation, although no uniform approach has been identified for authorities to follow.
To move forward and strengthen the capital framework for credit unions, and based on an approach being adopted by the European Union, I recommend that investment shares be included in the computation of additional Tier 1 capital provided that:
With respect to other detailed aspects of the Basel III framework, I recommend the Act and regulations:
“[Group capital provisions in the CUCPA] would provide limited access to capital from the system given asset growth rates and targeted growth aspirations and we do not believe there is enough excess capital within Ontario’s system to have this as a solution within the foreseeable future.” – First Ontario Credit Union
Currently two or more credit unions are permitted to enter into an agreement with a “league” for the purposes of meeting capital adequacy requirements, with approval from DICO. To date, no credit unions or leagues have used this provision to establish group capital arrangements. Credit unions indicated that the provisions are not useful and would provide very little benefit. As a result, I recommend that the group capital provision be repealed.
Permit Ontario credit unions to enter into loan syndication agreements with credit unions in other provinces
Harmonize subsidiary ownership rules with those in place for banks and permit credit unions to wholly own insurance brokerage subsidiaries
“By restricting the ability of Ontario credit unions to syndicate directly with credit unions across the country, an important risk management tool is severely constrained.” – Association of Large Ontario Credit Unions
The CUCPA currently permits credit unions to enter into loan syndication agreements with other Ontario credit unions, or with listed entities such as a league. However, it does not permit credit unions to enter into a syndication agreement directly with credit unions in other jurisdictions. Credit unions have expressed a strong desire to be able to enter into such agreements with credit unions in other provinces. In their view, it would enable better risk management through portfolio diversification, as well as improving access to funding to meet loan demand in Ontario.
Consequently, I recommend that Ontario credit unions be permitted to enter into loan syndication agreements directly with credit unions in other Canadian jurisdictions.
“We would suggest the list of prescribed subsidiaries for credit unions be fully harmonized with the list of permitted investments for banks under the Bank Act…In particular, credit unions should be permitted to acquire control of an entity operating the business of an insurance agency in the same way that banks are permitted to do so…” – Meridian Credit Union
Credit unions may establish or acquire a subsidiary only if the type of subsidiary is prescribed in regulation, and only with the approval of DICO. Otherwise a credit union can invest in no more than 30 per cent of the voting shares of an entity.
To provide credit unions with more choice and flexibility to pursue new lines of business to meet members’ needs, I recommend that credit unions be given broader powers to own subsidiaries. For example, to put credit unions on an equal footing with banks, credit unions should be permitted to establish or invest in insurance brokerages as subsidiaries. To the extent that credit unions currently have more flexibility in ownership of subsidiaries than banks (e.g. vehicle leasing) Ontario should maintain these differences.
Remove differentiated rules for small credit unions
“We would discourage the implementation of regulatory tiers or cliffs which establish very different requirements and limitations on different credit unions due solely to size or other arbitrary factors…” – Parama Credit Union
Currently, the CUCPA applies more restrictive rules to credit unions with assets of less than $50 million if they do not engage in commercial lending. As illustrated earlier in Table 1, there are only 37 credit unions with assets less than $50 million each, and they represent less than two per cent of aggregate system assets. About half of these credit unions engage in commercial lending, so these differentiated rules apply to fewer than 20 credit unions. Most small credit unions have established prudent lending and investing policies, and many are well capitalized through retained earnings. The prescriptive rules are now seen as unnecessary, if not arbitrary. It would be impractical to raise the threshold to an amount greater than $50 million, as this would result in applying more restrictive rules to credit unions that are already operating under the prudent portfolio approach. Furthermore, no other jurisdiction in Canada applies differential regulatory requirements to credit unions based on their asset size. Some advocate that a more effective approach would be to tailor regulatory requirements based on the complexity of the business activities of the credit union. Accordingly, I recommend Ontario abolish differentiated rules for small credit unions.
The regulator should continue to monitor the investment and lending policies put into place by each credit union to ensure they are appropriate given the credit union’s ability to manage risk.
Encourage the regulator to continue monitoring governance in the credit union sector
Require credit unions to report to members on gender composition of boards
“The current corporate governance requirements are adequate and should not be further enhanced at this time.” – Ontario Educational Credit Union
Strong corporate governance is essential for credit unions to maintain the confidence of members, properly manage risk, and pursue a strategy that supports growth. Governance failures can lead to business failures, and are often attributed to inadequate board oversight a lack of systems to identify, manage and report risk or weak internal controls.
DICO has taken steps to raise supervisory expectations around governance practices such as the issuance of guidance notes and self-assessment workbooks for boards, audit committees and management. In addition, DICO administers a risk-based deposit insurance premium system, which rewards credit unions who employ sound corporate governance practices to manage and reduce risk.
These approaches have been well received by the sector and no regulatory gaps were identified during the consultations.
Some smaller credit unions noted that existing DICO standards are challenging to meet. They discourage changes that might impose additional compliance costs for credit unions without commensurate benefits.
Based on the feedback I received, I conclude no enhancements to corporate governance standards are necessary. The regulator should continue to monitor compliance with the current requirements.
That being said, considerable national and international attention is being drawn to how women are under-represented in decision-making positions in business, especially on the boards of directors of public companies. At the end of 2014, the Ontario Securities Commission adopted new rules that require publicly traded companies to reporting on the number of women who sit on their boards and hold their senior officer positions. In addition, the federal government, through the Advisory Council for Promoting Women on Boards, has established a target of 30 percent for female composition on boards, and is urging all Canadian companies to aim for this target.
Based on the co-operative values that guide credit unions, it came as no surprise to discover that credit unions are, on average, very close to the federal target. On average, 28 per cent of board seats in an Ontario credit union are held by women, which exceeds 15 per cent to 20 per cent for publicly traded companies. To encourage credit unions to continue to consider diversity when nominating and appointing board members, I recommend credit unions report annually to their memberships on the gender composition of their boards.
More closely align Ontario’s credit union consumer protection framework with that in place for banks
Explore voluntary commitments with credit union sector to publish annual accountability statements, provide notice of branch closures, and submit complaints data to the regulator
Work with credit unions to explore options for providing consumers with alternatives to high-cost payday loans
“La base de la caisse populaire est d’avoir des propriétaires-usagers. Ainsi la protection du consommateur et la vitalité de la communauté est incluse a même nos bases d’affairs.” – L’Alliance des caisses populaires de l’Ontario limitée
Recognizing that credit unions operate on a co-operative basis and carry on business primarily for the benefit of members, it is nonetheless important to ensure that consumer protection is the cornerstone of financial services regulation.
There are a number of areas where the CUCPA does not mandate disclosures to members, but comparable federal legislation does. These include disclosures on account fees, deposit-type products (e.g., index-linked GICs), and mortgage default insurance. Similarly, there are no statutory or regulatory prohibitions for Ontario credit unions on coercive tied selling, negative option billing, maximum cheque holding periods, or minimum account balances as conditions for loans.
While credit unions may be voluntarily providing these types of disclosures and protections to their members, there is merit in enhancing the transparency and consistency of these practices. Accordingly, I recommend that standards be codified in legislation and regulations to ensure a high level of consumer protection in Ontario’s financial services marketplace.
With respect to other areas, it may be more appropriate for the credit union sector to enter into voluntary commitments to address these matters. These include commitments to publish public accountability statements on the contributions credit unions make to their communities, as well as commitments to post notices in communities where a credit union proposes to close a branch.
Since there is no third-party dispute resolution system, such as an ombudsperson for resolving credit union member complaints, there is a lack of publicly available data on consumer protection trends in the credit union sector. I recommend the regulator collect complaint data from credit unions, so that such data can be used to inform future policy decisions in this area.
During the consultations, some credit unions expressed an interest in exploring what they could do to help consumers find an alternative to the high cost of payday loans provided by alternative service providers. Credit unions believe they could play an important role in protecting these consumers by providing lower-cost alternatives coupled with education initiatives to improve their financial literacy. The Ministry of Government and Consumer Services has engaged credit unions as part of its public consultation on ways to better protect consumers of payday loans and other alternative financial products and services. I recommend the government continue to work, through the Ministry of Finance and the Ministry of Government and Consumer Services, with credit unions to explore the role they can play in protecting and educating consumers of payday loans, and to seek solutions whether in the CUCPA or other legislation.
Consider recommendations of FSCO-FST-DICO Mandate Review Panel with a view to clarifying the roles of FSCO and DICO with respect to the credit union system in Ontario
During the consultation, diverse views were expressed by the credit union sector regarding the roles of regulators and whether the allocation of regulatory responsibilities between FSCO and DICO was clear and appropriate. Some in the sector believed there is an inherent conflict of interest in having the deposit insurer responsible for solvency regulation. In their view, DICO’s role should be limited to providing deposit insurance, while FSCO should be responsible for solvency regulation and market conduct. Another contingent advocated for the transfer of all of FSCO’s remaining statutory responsibilities to DICO to build on its existing level of regulatory expertise. Others in the sector saw the allocation of regulatory responsibilities operating efficiently and effectively and did not see the necessity for any change.
Stakeholders had the opportunity to share their views with the Expert Panel that was appointed in the spring of 2015 to conduct a mandate review of FSCO, DICO and the Financial Services Tribunal. The Expert Panel and I met twice to share information on our respective reviews. I recommend the government consider their final recommendations to ensure the roles of FSCO and DICO are clarified where necessary, keeping in mind the best interests of the credit union system in Ontario.
Set deposit insurance coverage limit at $250,000 including $250,000 coverage for deposits held in each type of registered account (e.g. RRSP,TFSA)
Deposit insurance plays a key role in consumer protection and serves to maintain confidence in the stability of the financial sector. International best practices recommend certain design features of a deposit insurance scheme, such as setting a fixed limit on the dollar amount of deposits covered. Unlimited deposit insurance or deposit insurance limits that are set too high may give rise to moral hazard, the situation when financial institutions have incentives to take on more risk because they are insulated from the consequences of their actions. Well-designed deposit insurance systems need to mitigate against moral hazard. Ontario continues to endorse these international best practices as articulated in the Core Principles for Effective Deposit insurance Systems set out by the International Association of Deposit Insurers.
At the same time, it is important that the level and scope of coverage are reviewed periodically to ensure they meet the public policy objectives of the deposit insurance system.
Ontario’s current deposit insurance limit of $100,000 for basic deposits was last set in 2000. Unlimited coverage for all registered accounts such as Registered Retirement Savings Accounts (RRSP), Registered Retirement Income Fund (RRIF) and Tax-Free Savings (TFSA) accounts was implemented in 2009.
I recommend that the coverage limit for basic credit union deposits be increased to $250,000. At the same time, I recommend $250,000 in coverage be provided for aggregate cash deposits in each type of registered account. In other words, total cash deposits in all RRSP accounts held at a credit union by a member (regardless of the number of contracts) would be insured to $250,000. A separate $250,000 limit would cover cash deposits held in each of the other types of registered accounts. This approach would not impact other non-cash investments held in RRSPs, as such investments are not subject to deposit insurance coverage.
The $250,000 limit would be higher than the limit provided by the Canada Deposit Insurance Corporation for bank deposits. It would, however, be equal to the coverage currently provided for credit union deposits in New Brunswick, Nova Scotia and Newfoundland and Labrador and for credit union and bank deposits in the United States.
Differences in scope or coverage levels within or among jurisdictions may give rise to competitive concerns or can lead to consumer confusion. As well, it may impede potential coordinated responses to future market disruptions. For these reasons, I recommend Ontario take the lead in engaging other Canadian jurisdictions in exploring greater coordination of deposit insurance systems.
Robust data collection is necessary to support future periodic reviews of deposit insurance coverage levels. As well, having access to depositors’ records at all times by the deposit insurer is essential for it to be able to reimburse insured depositors promptly and contributes to financial system stability following the failure of an institution. For these reasons I recommend the deposit insurer embark on enhancing their data collection practices and procedures.
Maintain the ability for Ontario to enter into reciprocal agreements on credit unions with other governments
Historically in Canada, credit unions have operated exclusively within provincial borders to serve local communities and membership based on common bonds of association such as employment, religious or ethnic affiliation. In recent years, some credit unions have been exploring the idea of a new business model: operating on a national basis as a federal credit union under the Bank Act.
It may not be efficient or practical for credit unions who wish to operate across provincial borders to need to deal with two or more provincial regulatory and deposit insurance schemes. For these reasons, a series of reciprocal agreements among provincial jurisdictions may not be appealing or viable.
On the other hand, it remains to be seen whether the new federal framework will meet the business needs of credit unions and their members, or whether other operating models will emerge. For this reason, I recommend the CUCPA retain the ability of the province to enter into reciprocal agreement with other jurisdictions regarding the extra-provincial registration of credit unions.
Work with the Ministry of Municipal Affairs and Housing to consider changes to the investment rules for municipalities
Ministry of Finance to lead an initiative to address provisions in regulations under various statutes that do not include credit unions as permissible financial institutions
“There are many outdated definitions, requirements and restrictions in pieces of legislation beyond the CUCPA … that inhibit, prevent or forbid such entities from dealing fully with credit unions.” – First Ontario Credit Union
A number of credit unions noted that current restrictions placed on municipalities prevent them from doing business with credit unions. For example, municipalities may only invest in term deposits with a maturity of greater than two years if the financial institution has a credit rating. Given that credit unions do not have credit ratings, this restriction stands in their way of doing business with municipalities.
The government, through the Ministry of Municipal Affairs and Housing, is currently reviewing Ontario’s municipal legislative framework, including the Municipal Act. As part of this review, the government has an opportunity to reconsider the investment rules for municipalities. I therefore recommend the Ministries of Finance and Municipal Affairs and Housing work together to consider removing barriers to municipalities from doing business with credit unions.
During the consultation, it was also pointed out that a number of Ontario regulations do not treat credit unions on an equal footing with banks. One example of this is with respect to municipal tax sales. In regulations under the Municipal Act, the deposit paid in a municipal tax sale must be in the form of a money order, bank draft or certified cheque from a bank or a trust corporation — credit unions are not included. Similar examples can be found in regulations under a number of other Ontario statutes. I recommend the Ministry of Finance lead an initiative to identify all such provisions in legislation and work with the responsible ministries to make the appropriate amendments so that credit unions are treated equally to banks and trust corporations.
The CUCPA was first introduced in 1994 and has been the subject of a number of amendments since. As a result of these piecemeal amendments, the clarity and workability of the Act has deteriorated over the years. Regulators and credit union sector representatives have voiced a desire to repeal the existing CUCPA and introduce a new statute to govern credit unions in Ontario. A new statute would improve the clarity of the framework governing credit unions and could be written in a manner that is consistent with current drafting conventions. It would result in improved efficiency for the sector as less time and resources would be spent on the interpretation of various provisions. However, I also acknowledge that drafting a new statute is a lengthy process involving extensive consultations with the sector and other stakeholders. There are some key recommendations that stakeholders have requested be implemented on a much more expedient basis.
As such, I am recommending that the government adopt a three stage approach to implementing my recommendations in the following order: