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25 avril 2024

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.

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.

Key Contacts