Canada Gazette, Part I, Volume 146, Number 27: Guidelines Respecting Control in Fact for the Purpose of Section 377.2 of the Bank Act

July 7, 2012

Statutory authority

Bank Act

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Guidelines.)

Issue and objectives

Credit unions represent an important second tier of banking in Canada, with almost one third of Canadians belonging to either a credit union or a caisse populaire. Significant consolidation has recently occurred in the credit union sector with the 10 largest credit unions now representing 41% of credit union system assets. Currently, credit unions are regulated exclusively by the provinces.

To promote the continued growth and competitiveness of the sector and to enhance financial stability, the Government of Canada introduced a legislative framework as part of the Jobs and Economic Growth Act (which received Royal Assent in July 2010) involving amendments to the Bank Act and other federal acts to enable credit unions to incorporate and continue federally. The legislative model is based on the framework applicable to banks. The model weaves in unique cooperative elements for federal credit unions and it establishes transitional elements to facilitate the migration of credit unions to federal jurisdiction. Legislative amendments embed internationally recognized cooperative principles for credit unions, including the following: each member has one vote, services are primarily for members, and membership is open, but bonds of association (e.g. based on a common workplace) are permitted.

The Guidelines Respecting Control in Fact for the Purpose of Section 377.2 of the Bank Act contribute to the federal credit union legislative framework.

These Guidelines are part of a larger package of proposed regulations required to implement the federal credit union framework, including consequential amendments to the Bank Act regulations to adapt the existing framework to allow for cooperative ownership, as well as a series of substantive regulations pertaining to demutualization, deposit insurance disclosure, the payments framework and disclosure to members on the issuance of investment shares. The Guidelines and regulations are being published for comment concurrently.

Description and rationale

The proposed Guidelines set out the policy objectives and factors that the Minister would consider in assessing whether an acquisition of significant interest would respect the prohibition on control of a federal credit union. In a transaction where an investor applies to acquire a significant interest of a federal credit union, the Minister would need to assess control. As every transaction presents a unique set of facts, a universal definition of control would be inappropriate.

When assessing a transaction, the Minister would examine the specific facts in light of the factors and assess how they relate to the policy objectives. If an investor has influence according to any one or more of the factors, this would not necessarily constitute control, as no one factor or combination of factors is necessarily determinative of control. Factors include the types of relationships (e.g. family relationships between shareholders), agreements (e.g. the existence of exclusive service contracts), and understandings or arrangements (e.g. the involvement of the shareholder in the business of the bank) that could lead to control in fact.

Consultation

Throughout the development of the proposed Guidelines and regulations, the Department of Finance (the Department) consulted with key stakeholders in the credit union system, including provincial governments, individual credit unions, provincial credit union centrals, national centrals, financial sector associations and federal agencies including the Office of the Superintendent of Financial Institutions, the Financial Consumer Agency of Canada and the Canada Deposit Insurance Corporation.

Written comments were received and the Department followed up with stakeholders to address questions of interpretation and points of clarification. Changes in drafting or policy were not required as a result of stakeholder questions.

Implementation, enforcement and service standards

The regulatory framework for federal credit unions is being implemented primarily under the Bank Act and, as such, the proposed Guidelines would be administered and enforced by the Office of the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation and the Financial Consumer Agency of Canada. This would provide consistency of treatment of entities under the Bank Act.

Contact

Jane Pearse
Director
Financial Institutions Division
Department of Finance
L’Esplanade Laurier, 15th Floor
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-1631
Fax: 613-943-1334
Email: finlegis@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is hereby given that the Minister of Finance, pursuant to subsection 3(5) (see footnote a) of the Bank Act (see footnote b), proposes to make the annexed Guidelines Respecting Control in Fact for the Purpose of Section 377.2 of the Bank Act.

Interested persons may make representations concerning the proposed Guidelines within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Jane Pearse, Director, Financial Institutions Division, Department of Finance, L’Esplanade Laurier, East Tower, 15th floor, 140 O’Connor Street, Ottawa, Ontario K1A 0G5 (tel.: 613-992-1631; fax: 613-943-1334; email: finlegis@fin.gc.ca).

Ottawa, May 23, 2012

JAMES MICHAEL FLAHERTY
Minister of Finance

GUIDELINES RESPECTING CONTROL IN FACT FOR THE PURPOSE OF SECTION 377.2 OF THE BANK ACT

INTERPRETATION

Definitions

1. The following definitions apply in these Guidelines.

“Act”
« Loi »

“Act” means the Bank Act.

“applicant”
« demandeur »

“applicant” means the applicant for an approval referred to in section 373 of the Act.

“senior officer”
« cadre dirigeant »

“senior officer” has the same meaning as in section 485.1 of the Act.

APPLICATION

Acquisition referred to in section 373 of the Act

2. These Guidelines apply for the purpose of section 377.2 of the Act in respect of an acquisition referred to in section 373 of the Act.

CONTROL IN FACT

Determination

3. In determining whether an acquisition referred to in section 373 of the Act would, if approved by the Minister, give a person control, within the meaning of paragraph 3(1)(d) of the Act, of a federal credit union, the policy objectives set out in section 4 must be considered.

Policy objectives

4. The following policy objectives must be considered for the purpose of a determination referred to in section 3, taking into account the factors set out in section 5:

(a) preserving the benefits of the ownership rules applicable to federal credit unions, including
- (i) continuing the organization and operation of federal credit unions on a cooperative basis,
- (ii) maintaining a high degree of transparency and member and shareholder oversight over federal credit unions,
- (iii) lessening the risk of distortions by federal credit unions in their credit allocation that may result from links with investors, and
- (iv) enhancing the safety and soundness of federal credit unions;
(b) allowing federal credit unions to manage their day-to-day operations and to develop their strategic visions by taking into account their best interests, as opposed to the best interests of any single member or shareholder, any group of members or shareholders, or any person or group of persons with which the federal credit unions have a business relationship; and
(c) allowing investors in federal credit unions to exercise the degree of influence necessary to gain the benefits of their investments, including allowing them to account for their investments using the equity accounting method in accordance with generally accepted accounting principles.

Factors

5. The factors referred to in section 4 are the following:

(a) the number, type and distribution of securities and membership shares of the following entities, and the rights, privileges or features attached to those securities and membership shares:
- (i) the federal credit union referred to in section 3, and
- (ii) any subsidiary of the federal credit union;
(b) the value of the equity, the number of membership shares and the number and type of securities of any entity referred to in paragraph (a) that the applicant has or proposes to acquire, and the rights, privileges or features attached to those membership shares and securities;
(c) the involvement of the applicant or any member or shareholder of an entity referred to in paragraph (a) in the business of that entity, and their knowledge or expertise in financial services or in areas relevant to the operations of the federal credit union;
(d) the relationships, agreements, understandings or arrangements
- (i) among members of one or more of the entities referred to in paragraph (a),
- (ii) among shareholders of one or more of the entities referred to in paragraph (a),
- (iii) among members and shareholders of one or more of the entities referred to in paragraph (a),
- (iv) between the applicant and the members or shareholders of any entity referred to in paragraph (a),
- (v) between the applicant and any person in relation to membership shares or securities of the federal credit union, or
- (vi) between the applicant and any entity referred to in paragraph (a);
(e) the composition and structure of the board of directors, any committees of the board of directors and any senior management committees of any entity referred to in paragraph (a), and the voting arrangements of those boards and committees;
(f) whether members, shareholders, directors or senior officers of any entity referred to in paragraph (a) are also members, shareholders, directors or senior officers of the applicant;
(g) the existence of family relationships between the applicant’s directors and senior officers and the directors and senior officers of any entity referred to in paragraph (a);
(h) the ability of any person, including the applicant, to nominate, appoint or veto the appointment of directors, members of committees of the board of directors or senior officers of any entity referred to in paragraph (a);
(i) the ability of any person, including the applicant, in respect of the board of directors, any committee of the board of directors or any senior management committee of any entity referred to in paragraph (a), to
- (i) require that their consent be obtained before a proposal is submitted to that board or committee, or
- (ii) veto a proposal submitted to that board or committee;
(j) the ability of any person, including the applicant, to determine, influence or veto the day-to-day operations, business plans, significant capital expenditures, patronage allocations, dividend policy or issuance of membership shares or securities of any entity referred to in paragraph (a);
(k) any dependency of any entity referred to in paragraph (a) on the applicant or on a member or shareholder of any entity referred to in that paragraph, by reason of an agreement or other arrangement between them;
(l) any links between the applicant or a member or shareholder of the federal credit union and an entity on which the federal credit union has a dependency by reason of an agreement or other arrangement between the federal credit union and the entity;
(m) any representations made to any agency or body that regulates or supervises financial institutions about any person’s control of the federal credit union; and
(n) any other relevant factor that is related to any of the policy objectives set out in section 4.

COMING INTO FORCE

S.C. 2010, c. 12

6. These Guidelines come into force on the day on which subsection 1897(2) of the Jobs and Economic Growth Act comes into force, but if they are registered after that day, they come into force on the day on which they are registered.

[27-1-o]

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