Legislation tabled in the BC Legislature October 21st will radically re-jig the regulatory scheme in BC. The new Financial Services Authority (“BCFSA”) will have an exceptional role in defining the future of BC credit unions. Bill-37 has been four years in the making and reflects the wisdom of the international banking world, that financial inter-mediation needs ‘more’ regulation (as defined in BASEL III).
In the two weeks since Bill-37 was introduced most of the talk among credit unions has been technical, about this change or that change. Indeed there are several smaller items to consider (i.e market code of conduct, member initiatives, heavier penalties, D-SIFI designation, notice mailings, etc.). However, the introduction of ‘rule-making authority‘ is the big change.
Bill-37 gives the BCFSA the power to make ‘rules’ that will establish requirements for all financial institutions or a sub-group of financial institutions. This model for regulation is remarkable from the perspective of (a) Canadian administrative law, (b) the technical challenge its implementation presents BC credit unions, and (c) the political and strategic implications for BC credit unions.
To be clear, the existing legislation certainly granted the commission (now the “Authority”) powers to step in and intervene in the affairs of a credit union if the interests of depositors were in jeopardy. The commission, the superintendent, and the Credit Union Deposit Insurance Corporation of BC were each granted defined powers; including collecting information, assessing compliance with the Act or regulations, and issuing orders to a credit union cease and desist inappropriate activity. The powers delegated to each ‘decision-making authority’ were circumscribed – which is conventional in Canadian administrative law. Virtually all the powers to intervene or direct the affairs of a credit union were defined as ‘credit union specific’.
Bill-37 now will give the Authority the power to make rules on just about anything, applicable to all credit unions or just some credit unions. This includes capital requirements, liquidity requirements, market conduct requirements, governance requirements, and ‘risk management’. Essentially, the Authority will assume powers which currently only reside with the legislature (or cabinet), with the proviso that rules only come into effect if the Minister agrees. The breadth of this delegation is striking. Only the BC Securities Commission has any similar powers under BC statutes.
I have written previously about how FICOM asserted these kinds of powers in the past through the issuance of ‘guidelines’ (Overreach) , but those guidelines had no basis in law. The new ‘rule making’ is confirming that the new BCFSA may introduce new regulatory requirements.
The new regulatory model will require credit unions to refocus their attention – away from legislators, government, and the Ministry of Finance – onto the new BCFSA. The BCFSA will be researching, drafting and proposing new requirements. This is especially important in the context of capital and liquidity requirements which have in the past been set in Regulations developed by the Ministry’s Policy and Legislation group.
If the Canadian Credit Union Association (CCUA) is going to be the effective go-between, the BC credit union champion, they must now create a new comprehensive relationship with the BCFSA.
The changes say that BC credit unions may appeal to the Minister to decline new rules proposed by the Authority, but if that happens more than occasionally the regulated and the regulator are failing to communicate. I would see a particular need for the CCUA to now develop a strategy to reach out to build rapport with executive management and the board members of the Authority. The board will now be a key decision-making body in the new scheme.
Lastly, BC credit unions have to rethink their approach to government and the legislature, they will now have little direct involvement in financial institution regulation.
The move to a super-regulator model is rationalised as a better way to deal with a ‘rapidly changing industry’. Not everyone may see it as changing so fast, but the rule-making model will enable regulatory changes to be introduced, or added, without having to involve Victoria very much. In fact, the new model may actually invite more frequent changes and consequently introduce some uncertainty or risk.
The next two years will see a dramatic rewriting of the requirements as the BCFSA goes through consultations, and existing regulations are replaced. At this time, the Authority seems intent on pushing ahead to implement capital and liquidity requirements based on the BASELIII proposals for big banks. These may not be in the best interests of smaller institutions, and may be biased against the co-operative ownership model.
The super-regulator model invites the BCFSA to get more involved in the operations, control systems, and business development decisions at the credit union level.
An interventionist BCFSA could evolve into more of a ‘head office’, issuing rules that homogenise the BC credit union system. The Authority will also likely be inclined to a risk-averse posture – fearing a credit union failure more than seeking a ‘success’. There may be other risks within this new model.
The very large credit unions have some leverage, as they now can pursue continuance as a federal credit union if they so choose. Smaller credit unions have less leverage, as their leverage has in the past been at the political level, and the political level is now further removed.
The challenge to both big and small credit unions is to collaborate actively in crafting the future jointly with the new Authority.