Vol. 144, No. 24 — June 12, 2010

Deposit Type Instrument Regulations

Statutory authorities

Bank Act, Cooperative Credit Associations Act and Trust and Loan Companies Act

Sponsoring department

Department of Finance

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issue and objectives

The Government of Canada is responsible for ensuring that the regulatory framework governing the financial services sector in Canada allows participants to operate as efficiently and effectively as possible in serving consumers and businesses, while maintaining the safety and soundness of the sector. The financial institutions statutes are subject to a regular five-year review, which represents an important tool in meeting these responsibilities.

In June 2006, the Government issued a policy paper entitled 2006 Financial Institutions Legislation Review: Proposals for an Effective and Efficient Financial Services Framework. Following consultations on this paper, legislation was introduced on November 27, 2006. On March 29, 2007, Bill C-37, An Act to amend the law governing financial institutions and to provide for related and consequential matters (the Act) received Royal Assent.

On April 20, 2007, provisions of the Act that did not require regulations came into force. The implementation of the remaining provisions of the Act requires regulations. This is one of several packages of regulations that are being brought forward to implement the policy intent of the Act.

Description and rationale

All proposed regulations, as discussed below, are consistent with government policy to enhance the interests of consumers, increase legislative and regulatory efficiency, and adapt the framework to new developments.

Deposit Type Instrument Regulations

There are a number of disclosure requirements that federally regulated financial institutions must follow when a customer opens an account. These requirements can be found in a number of regulations including the Disclosure of Charges Regulations and the Disclosure of Interest Regulations. However, while deposit accounts, e.g. savings or chequing accounts, and deposit type instruments, e.g. guaranteed investment certificates (GICs) and term deposits, do share some basic characteristics such as generating savings from a rate of interest, there are several important differences that are not currently addressed under the disclosure regime related to deposit accounts or that render several existing disclosure requirements irrelevant or inappropriate. For example, unlike deposit accounts, GICs may be subject to variable interest rates and invested for a definite period of time.

The proposed Deposit Type Instrument Regulations would ensure that consumers receive the appropriate disclosure that is specific to the type of product they are purchasing, i.e. deposit type instruments.

The proposed Regulations would define deposit type instruments to be a product with a fixed investment period and a fixed rate of interest or a variable rate of interest that is based on a financial institution’s prime lending rate or bankers’ acceptance rate. The Regulations would also specify the content, manner, and timing of disclosure that federally regulated deposit-taking institutions are required to provide at the point of sale for various sales channels (in person, by telephone, and online). For example, the Regulations would describe the information that must be disclosed to customers, such as the interest rate and the fees, before buying the GIC or the term deposit; specify that institutions make available, and provide on request, information to aid consumers in monitoring their investment; and set out requirements for advertising of these products, e.g. disclose how to obtain more information and the manner in which interest is to be accrued.

The proposed Regulations would set out a more outcomes-based direction in incorporating a mix of principles and specific requirements. For example, one of the desired outcomes is to ensure that buyers of GICs and term deposits receive all the necessary information when buying these vehicles regardless of the sales channels. The Regulations would provide institutions with flexibility to tailor the disclosures to the sales channel while providing consumers with the information needed to understand the specific product.

Registered Products Regulations

Federally regulated deposit-taking institutions must disclose all charges applicable to a deposit account and provide notice of increases in these charges. This provides customers with essential information to assist them in managing their deposit accounts. In some cases, financial institutions charge fees related to registered plans, e.g. Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans (RESPs). While some financial institutions have argued that these fees do not need to be disclosed because they are applicable to registered plans and not to deposit accounts, it is important that customers are provided the same level of transparency for registered plans as for deposit accounts.

The Act amended the financial institutions statutes to require the disclosure of fees in respect of registered plans offered by federally regulated deposit-taking institutions. The proposed Registered Products Regulations would define the type of registered products covered, e.g. registered retirement savings plans, registered education savings plans, tax free savings accounts, and would specify that disclosed information must be provided in a language and manner that is clear and simple, and not misleading. The Regulations would also specify the timing of disclosure in relation to the various sales channels (in person, by telephone, and online). For example, the proposed Regulations would indicate that, for accounts opened over the telephone, information provided orally must be provided in writing without delay. The disclosure requirements in the proposed Regulations would not apply to investments within the registered product, as separate disclosure requirements apply to these investment products. Therefore, should a GIC be added to an existing registered retirement savings plan, the disclosure requirements in relation to the GIC would be triggered by other regulations such as those found under the Deposit Type Instrument Regulations.

In addition, the proposed Regulations would set out disclosure requirements when making changes to registered products, e.g. amendments must be disclosed in advance. They would also require that a list of fees applicable to these products be publicly available. To clarify the requirements and avoid duplication, the proposed Regulations would outline the circumstances under which the disclosures do not need to be provided, e.g. when adding a GIC to an existing registered retirement savings plan, the disclosure about the plan does not need to be provided again if it has already been provided or when the financial institution is not issuing the registered product and is therefore only acting as the trustee.

Prescribed Products Regulations

The proposed Regulations are technical in nature and would define “prescribed products” for the purposes of the financial institution statutes. Prescribed products are considered to be either deposit type instruments, as defined in the proposed Deposit Type Instrument Regulations (i.e. a product with a fixed investment period and a fixed rate of interest or a variable rate of interest that is based on a financial institution’s prime lending rate or bankers’ acceptance rate), or principal protected notes, as defined in the Principal Protected Notes Regulations (i.e. a financial instrument that provides for payments to be made by the institution that is determined by reference to an index or reference point and that the principal amount that the institution is obligated to repay, at or before the note’s maturity, is equal to or more than the total paid by the investor for the note).

Consultation

In response to the consultation process leading to the development of the Act, the Government received comments from about 30 stakeholders — industry associations, consumer groups, individual Canadians and other groups — on the implementation of the proposed framework. Overall, the comments were supportive of the proposals.

Implementation, enforcement and service standards

The proposed regulations would not require any new mechanisms to ensure compliance and enforcement. The Financial Consumer Agency of Canada already administers the consumer provisions in the federal financial institutions’ statutes. As such, the Agency would ensure compliance with the new requirements, using its existing compliance tools, including compliance agreements and administrative monetary penalties.

Contact

Jane Pearse
Director
Financial Institutions Division
Department of Finance
L’Esplanade Laurier, 15th Floor, East Tower
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 Governor in Council, pursuant to sections 458.3 (see footnote a), 459.4 (see footnote b), 575.1 (see footnote c) and 576.2 (see footnote d) of the Bank Act (see footnote e), sections 385.252 (see footnote f) and 385.28 (see footnote g) of the Cooperative Credit Associations Act (see footnote h) and sections 443.2 (see footnote i) and 444.3 (see footnote j) and of the Trust and Loan Companies Act (see footnote k), proposes to make the annexed Deposit Type Instrument Regulations.

Interested persons may make representations concerning the proposed Regulations 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, 15th Floor, East Tower, 140 O’Connor Street, Ottawa, Ontario K1A 0G5 (tel.: 613-992-1631; fax: 613-943-1334; e-mail: finlegis@fin.gc.ca).

Ottawa, June 3, 2010

JURICA ČAPKUN
Assistant Clerk of the Privy Council

DEPOSIT TYPE INSTRUMENT REGULATIONS

INTERPRETATION

Definitions

 

1. The following definitions apply in these Regulations.

“deposit type instrument” « instrument de type dépôt  »

“deposit type instrument” means a product that is issued in Canada by an institution, that is related to a deposit and that specifies a fixed investment period and

(a) a fixed rate of interest; or

(b) a variable rate of interest that is calculated on the basis of the institution’s prime lending rate or bankers’ acceptance rate.

“institution” « institution »

“institution” means

(a) a bank, as defined in section 2 of the Bank Act;

(b) an authorized foreign bank, as defined in section 2 of the Bank Act;

(c) a retail association, as defined in section 2 of the Cooperative Credit Associations Act; or

(d) a company, as defined in section 2 of the Trust and Loan Companies Act.

“interest” « intérêt »

“interest”, in relation to a deposit type instrument, includes any return payable under the instrument by an institution in respect of the deposit.

MANNER OF DISCLOSURE

Clear and simple language

2. Any disclosure that is required to be made by an institution under these Regulations must be made in language, and presented in a manner, that is clear, simple and not misleading.

DISCLOSURE IN RESPECT OF THE
ISSUANCE OF A DEPOSIT
TYPE INSTRUMENT

Disclosure prior to entering an agreement

3. (1) Before entering into an agreement with a person for the issuance of a deposit type instrument, an institution must disclose the following information to the person, orally and in writing:

(a) the annual rate of interest in respect of the instrument, if the rate of interest is fixed;

(b) if the rate of interest is variable,

(i) how the rate of interest is determined,

(ii) the prime lending rate or the bankers’ acceptance rate, as the case may be, that is used for the calculation of the rate of interest,

(iii) the prime lending rate or the banker’s acceptance rate in effect when the information is disclosed, and

(iv) how the person may obtain the rate of interest from the institution during the investment period;

(c) any charges in respect of the instrument;

(d) when interest is calculated and paid under the instrument;

(e) the dates on which the investment period specified in the instrument begins and ends;

(f) whether the instrument may be redeemed prior to maturity and, if so, the effect of early redemption on the interest payable;

(g) if the agreement provides that the issuance of the instrument may be cancelled within a specified period, the duration of the period;

(h) if the agreement provides that after the maturity of the instrument a new instrument may be issued to the person without a further agreement being entered into, the fact that a new instrument may be issued without a further agreement, the conditions under which a new instrument may be issued without a further agreement and

(i) whether the instrument’s rate of interest is fixed or variable, and the rate or method for determining the rate,

(ii) the instrument’s investment period, and

(iii) any charges related to the issuance of the instrument or the cancellation of its issuance; and

(i) if the instrument relates to a deposit that is not insured by the Canada Deposit Insurance Corporation, the fact that it is not insured.

Exception: agreements entered into by telephone

(2) In the case of an agreement for the issuance of a deposit type instrument that is entered into by telephone, the financial institution is not required to provide the disclosure referred to in subsection (1) in writing before entering into the agreement. However, the institution must provide the written disclosure without delay after entering into the agreement.

Exception: agreements entered into by electronic means

(3) In the case of an agreement for the issuance of a deposit type instrument that is entered into by electronic means, the institution is not required to provide the disclosure referred to in subsection (1) orally. However, before entering into the agreement the institution must disclose, in addition to the written disclosure referred to in subsection (1), the telephone number of a person who is knowledgeable about the terms and conditions of the instrument.

New instruments issued without further agreement

(4) If a new instrument is issued to a person pursuant to an agreement referred to in paragraph (1)(h), the institution must disclose in writing the information concerning the instrument referred to in subsection (1) to the person without delay after the instrument is issued.

Calculation of time — disclosure by mail

4. An institution that provides the written disclosure referred to in section 3 by mail is considered to have provided the disclosure five business days after the postmark date.

SUBSEQUENT DISCLOSURE

Information — amendments

5. Before making an amendment to any terms or conditions of a deposit type instrument, the institution must disclose the amendment, and its potential impact on the interest payable, in writing to the person to whom the instrument was issued.

Information — current value

6. If a person to whom a deposit type instrument was issued requests the value of the instrument on a specified day, the institution that issued the instrument must disclose to the person without delay the value of the principal and accrued interest on that day.

Information — redemption before maturity

7. An institution that redeems a deposit type instrument before the end of the investment period must, before redeeming the instrument, disclose to the person to whom the instrument was issued the value of the principal and accrued interest, any penalty or charge for the redemption and the net amount payable by the institution on redemption.

ADVERTISEMENTS

Required content — all advertisements

8. (1) In each of its advertisements for deposit type instruments, an institution must disclose how the public may obtain information about the instruments.

Required content — advertisements referring to an instrument’s features or interest payable

(2) In each of its advertisements for deposit type instruments that refer to features of deposit type instruments or the interest payable under them, an institution must also disclose

(a) the manner in which interest is to be accrued and any limitations in respect of the interest payable; and

(b) if the instruments relate to deposits that are not insured by the Canada Deposit Insurance Corporation, the fact that the deposits are not insured.

Exception

(3) Paragraph (2)(b) does not apply to an institution to which subsection 413.1(2) or 545(5) of the Bank Act, subsection 378.2(2) of the Cooperative Credit Associations Act or subsection 413.1(2) of the Trust and Loan Companies Act applies.

CANCELLATION PERIODS FOR CERTAIN INSTRUMENTS

New instruments issued without further agreement

9. An institution must allow a person to whom a new instrument is issued pursuant to an agreement referred to in paragraph 3(1)(h) to cancel the issuance of the instrument within at least

(a) 14 days after the day of its issuance, in the case of an instrument with an investment period of less than 90 days; and

(b) 30 days after the day of its issuance, in the case of an instrument with an investment period of 90 days or more.

CONSEQUENTIAL AMENDMENT

10. The definition “principal protected note” in section 1 of the Principal Protected Notes Regulations (see footnote 1) is amended by adding the following after paragraph (b):

A principal protected note does not include a financial instrument that specifies that the interest or return on the instrument is solely determined on the basis of a fixed rate of interest or return or a variable rate of interest or return that is calculated from the institution’s prime lending rate or bankers’ acceptance rate.

COMING INTO FORCE

Registration

11. These Regulations come into force on the day on which they are registered.

[24-1-o]

Footnote a
S.C. 2009, c. 2, s. 271 

Footnote b
S.C. 2007, c. 6, s. 37 

Footnote c
S.C. 2009, c. 2, s. 274 

Footnote d
S.C. 2007, c. 6, s. 93 

Footnote e
S.C. 1991, c. 46 

Footnote f
S.C. 2009, c. 2, s. 278 

Footnote g
S.C. 2007, c. 6, s. 170 

Footnote h
S.C. 1991, c. 48 

Footnote i
S.C. 2009, c. 2, s. 291 

Footnote j
S.C. 2007, c. 6, s. 368 

Footnote k
S.C. 1991, c. 45

Footnote 1
SOR/2008-180

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