2023 Budget: proposed changes relevant to financial institutions, small businesses and lenders

The 2023 Federal Budget includes several proposals that financial institutions, lenders and other organizations will want to watch.

What you need to know

On March 28, 2023, the Federal Government (the Government) announced its Budget 2023, which included a number of proposed legislative actions applicable to financial institutions, small businesses and lenders,including to:

• amend the Criminal Code (Canada) to address predatory lending by lowering the criminal interest rate to 35% APR;
• amend corporate governance-related provisions of the Bank Act (Canada) (BA), Insurance Companies Act (Canada) (ICA), and Trust and Loan Companies Act (Canada) (TLCA) (collectively referred to as the FI Acts) to apply the Canada Business Corporations Act (CBCA) diversity disclosure requirements for board directors and senior management at federally regulated financial institutions (FRFIs) and to permit virtual-only meetings;
• introduce targeted legislative measures to strengthen the external complaints handling system for banks and to designate a single, not-for-profit body corporate to be the sole external complaints body;
• address crypto-asset risk through requiring FRFIs and pension funds to disclose crypto-asset exposure to the Office of the Superintendent of Financial Institutions (OSFI); and
• amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) (PCMLTFA) and the Criminal Code (Canada) to set up obligations for the financial sector to report sanctions-related information to FINTRAC.

Proposed changes primarily relevant to federally-regulated financial institutions

Corporate governance

Diversity disclosure

Budget 2023 announced plans to amend the FI Acts to apply CBCA diversity disclosure requirements for the boards and senior management of FRFIs. It is unclear if the intention is to apply these standards to all FRFIs or only widely-held FRFIs (consistent with the CBCA, which only applies to public corporations).

Public CBCA corporations are required to provide the following information to place before their shareholders at every annual meeting:

• The number and proportion (expressed as a percentage) of women, visible minorities, Indigenous peoples and people with disabilities:
  • on the corporation’s board of directors; and
  • among senior management of the corporation, including its major subsidiaries.
• Whether or not the corporation has adopted a written policy in respect of board diversity relating to the four designated groups and, if not, why not.
• If a board diversity policy has been adopted:
  • a short summary of its objectives and key provisions;
  • the measures taken to ensure effective implementation;
  • the annual and cumulative progress by the corporation in achieving the policy’s objectives; and
  • whether or not the board measures the policy’s effectiveness and, if so, how this is done.
• Whether or not the board or nominating committee considers the representation of the four designated groups in identifying and nominating board candidates, and either an explanation of how this is done or the reasons why it is not done.
• Whether or not the corporation considers the representation of the four designated groups in appointing members of senior management, and either an explanation of how this is done or the reasons why it is not done.
• Whether or not the corporation has adopted target numbers or percentages of board positions or senior management positions to be held by members of any of the four designated groups by a specific date and:
  • if any target has been adopted, the corporation’s annual and cumulative progress in achieving it; and
  • for each designated group for which a target has not been adopted, the reasons for not adopting a target.
• Whether or not the corporation has adopted term limits for directors or other mechanisms of board renewal, and either a description of such mechanisms or the reasons for not adopting them.

The foregoing information about diversity must be provided separately, not just on an aggregated basis, for women, visible minorities, Indigenous peoples and people with disabilities. CBCA corporations may also choose to disclose aggregated diversity information, including additional groups (if any) identified in their diversity policies. To assess levels of diversity required to comply with the disclosure requirements, CBCA corporations are expected to rely on self-identification by members of the designated groups. For example, questions, which should be expressed as voluntary, could be added to the customary annual D&O questionnaire.

Virtual meetings

The Government proposes to introduce legislative amendments to the FI Acts to permit virtual-only meetings and allow for the introduction of conditions ensuring participation.

Modernizing financial sector oversight to address emerging risks

Budget 2023 announced the government’s intention to amend the FI Acts, the OSFI Act and the PCMLTFA to modernize the federal financial framework to address emerging risks to Canada’s financial sector. These amendments will include expanding OSFI’s mandate to include: (i) supervising FRFIs to determine whether they have sufficient policies and procedures to protect themselves against foreign interference; (ii) expanding the range of circumstances in which OSFI can take control of an FRFI to include where the integrity and security of the FRFI is at risk; and (iii) introducing the ability of OSFI to issue a direction of compliance in these circumstances. The amendments will also provide new powers under the PCMLTFA to allow the Minister of Finance to impose enhanced due diligence requirements to protect against national security threats; to improve information sharing between FINTRAC, OSFI and the Minister of Finance; and to designate OSFI as a recipient of FINTRAC disclosures pertaining to threats to the security of Canada, where relevant to OSFI’s responsibilities.

Additionally, the Government may amend the Canada Deposit Insurance Corporation Act to provide expanded authorities to increase deposit insurance and related measures in the event of a market disruption.

Complaints handling

The Government has proposed to introduce targeted legislative measures to strengthen the external complaints handling system for banks and to designate a single, not-for-profit body corporate to be the sole external complaints body, following a selection process led by the Financial Consumer Agency of Canada (FCAC).

Crypto-asset risk

Budget 2023 announced the Government’s intention to address risks relating to crypto-assets by introducing measures such as requiring FRFIs to consult with OSFI on guidelines for publicly disclosing their exposure to crypto-assets, requiring federally regulated pension funds to disclose their crypto-asset exposures to OSFI and ensuring that Canadians are aware of their pension plan’s potential exposure to crypto-assets.

Proposed changes relevant to consumer protection and small businesses

Predatory lending

In Budget 2023, the Government announced its intention to amend the Criminal Code to crack down on predatory lending by: (i) moving from an effective annual rate to an annual percentage rate (APR); (ii) lowering the criminal interest rate from 60% (the Government states this is the equivalent of 47% APR, which is the effective cap in Quebec) to 35% APR; and (iii) adjusting what payday lenders may charge to no more than $14 per $100 borrowed, which is in line with the lowest cap among the provinces in Newfoundland and Labrador. The Government intends to launch consultations to determine whether the criminal interest rate should be further reduced. Lowering the criminal interest rate will likely limit access of borrowers to lenders of last resort, which may have a more detrimental effect on certain borrowers than paying higher interest rates.

We would hope that, if the proposed changes are made, the Government would not criminalize existing loan arrangements that comply with the interest rate limits that were in effect at the time such loans were made, and would consider excluding certain fees from the calculate of interest under the Criminal Code.

Lowering credit card transaction fees for small businesses

In response to increased use of credit cards during the pandemic and the impact on small businesses, the Government announced that it has secured commitments from Visa and Mastercard to lower interchange fees for small businesses, while also protecting reward points for Canadian consumers offered by large banks. More than 90% of credit card-accepting businesses will see their interchange fees reduced by up to 27% from the existing weighted average.

Junk fees

Budget 2023 announced the Government’s intention to crack down on junk fees by working with regulatory agencies, provinces and territories to reduce junk fees for Canadians. Such fees could include higher telecom roaming charges, event and concert fees, excessive baggage fees and unjustified shipping and freight fees. This objective ties to other recent amendments and steps the Government has taken to prevent against hidden costs, such as amendments to the BA and the Financial Consumer Agency of Canada Act.

Code of conduct to protect Canadians with existing mortgages

In response to elevated interest rates which have impacted Canadians with existing mortgages, the Government, through the FCAC, is publishing a guideline to protect Canadians with mortgages who are facing exceptional circumstances. Specifically, the Government is taking steps to ensure that FRFIs provide Canadians with fair and equitable access to relief measures that are appropriate for the circumstances they are facing, including by extending amortizations, adjusting payment schedules or authorizing lump-sum payments. Existing mortgage regulations may also allow lenders to provide a temporary mortgage amortization extension—even past 25 years.

Proposed changes relevant to anti-money laundering/anti-terrorist financing and sanctions

Amending anti-money laundering and anti-terrorist financing legislation

Budget 2023 announced the Government’s intention to introduce several amendments to Canada’s anti-money laundering/anti-terrorist financing (AML/ATF) legislation—the Criminal Code and the PCMLTFA—to strengthen the investigation, enforcement and information sharing tools. The proposed amendments will, among other things, (i) allow law enforcement to seize virtual assets with suspected links to crime; (ii) improve information sharing between law enforcement and FINTRAC; (iii) criminalize the operation of unregistered money services businesses; (iv) provide whistleblower protections for employees who report information to FINTRAC; and (v) introduce obligations for the financial sector to report sanctions-related information to FINTRAC. As noted above, amendments will be made to the PCMLTFA to facilitate greater information sharing between FINTRAC, OSFI and the Minister of Finance.

Additionally, the Government announced that it will launch a parliamentary review of the PCMLTFA this year, which will consider how Canada’s AML/ATF regime can be improved. Topics of the consultation will include considering new measures to seize proceeds of crime, to support prosecutions, to enhance information sharing and to close regulatory gaps as well as to implement the remaining recommendations from the Cullen Commission that have not yet been introduced. Further legislative amendments will be made that will be informed by these consultations.

Public registry

The Government introduced further amendments to the CBCA and other legislation, including the PCMLTFA, to implement a publicly accessible beneficial ownership registry through Bill C-42, which is a measure that has been introduced to address the use of shell companies to conceal true ownership of property.

Sanctions-related amendments

In 2022, the Government introduced a seizure, forfeiture and disposal framework under sanctions laws through amendments to the Special Economic Measures Act and Justice for Victims of Corrupt Foreign Officials Act (Magnitsky Act). In Budget 2023, the Government has proposed to make targeted changes to this legislation to support this framework in relation to Russia’s invasion of Ukraine.

The Government also proposes to make related amendments to the PCMLTFA to require FINTRAC to disclose information to the Minister of Foreign Affairs in certain circumstances.

Additionally, the Government also plans to review FINTRAC’s mandate to determine whether it should be expanded to counter sanctions evasion and to include the financing of threats to Canada’s national and economic security.

We await details of these proposals to better understand their implications.