Two years ago major changes were made to the Financial Institutions Act (‘FIA’). And the Financial Services Authority Act came into force creating the BC Financial Services Authority (‘BCFSA’). So what have been the consequences? As there will be meetings with the Minister of Finance and MLA’s in the coming weeks, credit union representatives have the opportunity to provide feedback on how things are going.
Consultations on the proposed legislative changes stretched over five years. I participated in some of these as a member of the Central 1 Legislative Committee and working group 2015-2018, and on the CCUA committees subsequently. I thought I’d offer some thoughts.
The Governance Framework
I find there is often confusion about how the law works and where certain powers are vested. This frequently leaves participants ill-prepared for conversations with regulators, government decision-makers, and elected representatives. First and foremost, the BCFSA is a creature of the legislature, government, and the Minister of Finance.
For a primer, I suggest anyone would benefit from reading this paper in the Canadian Encyclopedia. This paper notes that ‘Administrative Law’ relates to the administration of government, and it stands distinct from ‘Constitutional Law’ and ‘Criminal Law’. To recap the key concepts of Administrative Law; (1) the legislature delegates powers/authority, (2) the delegated authority has limited jurisdiction, (3) the actions of the delegated authority must conform to the principles of ‘procedural fairness’, and (4) decisions are subject to appeal/review.
The changes in 2019 substantially redistributed delegated authorities with an expressed intention of having a more independent regulatory body with some powers that would make it more effective. Notably, the BCFSA was established as a crown agency, with an ‘arm’s length’ board appointed by government. That Authority, the CEO, and others are delegated powers under seven different statutes, making BCFSA both complex and difficult to monitor.
Frequently in this industry the term ‘BCFSA’ is used conveniently, but the law actually defines several different ‘delegated authorities’ with each given different powers. There is a hierarchy that should provide checks and balances. The following lays out some components in the FIA:
- Government is given powers to set regulations in S.289 on select matters, and 47 are in place. (Government in this case is ‘Cabinet’ or, more formally, the Lieutenant Governor in Council.)
- The Minister of Finance is given the limited power to set regulations of one type in S.201, and one new regulation has been implemented in July 2021 (Reg.211/2021)
- The BCFSA board is given the power to issue Rules in S.201.1, but has not released any to date.
- The Superintendent has the power to conduct examinations, or “on-site visits”, in S.210.
- The Superintendent has the power require information under S.211, and new reporting requirements have been implemented for liquidity and capital.
- The BCFSA board determines deposit insurance assessment rates and methodology under S.268.
Pursuant to requirements for all crown agencies, BCFSA must annually provide a Service Plan, and an Annual Service Plan Report with audited financial statements. These are public and they are intended to provide transparency in the operations of the Authority. These publications provide the public and regulated sectors information upon which to make assessments about the performance of the regulatory authority.
The Minister is responsible for the various statutes under which the the BCFSA is created and empowered. Given the major restructuring in the past two years, I believe the Minister ought to be asking, ‘How is it working out?’ And if she isn’t asking, we should still be telling her.
I have taken a look at some of the original materials in my files. These documents provide some key issues upon which to reflect. But I admit, up front, this is no comprehensive assessment.
“Right-sized, proportional regulation”
Proportionality was emphasized in many ways in Ministry consultations and system submissions. The issue was central at the CCUA Advocacy Day May 28-29, 2019, and the Minister acknowledged the need not to put undue burden on smaller credit unions. Many of us thought the issue was potentially addressed in the first ‘complementary objective’ of a 2018 Ministry paper summarizing recommendations:
>> To create an environment where the financial services sector, and entities within it (i.e. financial institutions and intermediaries), can continue to grow and prosper. – For example, does the proposed change help reduce red tape and unnecessary regulations and hinder economic development?MOF Review March 2018 Page 5
However, almost nothing along these lines was put in the updated FIA when it was finalized late in 2019. The amendments only modestly enabled proportionality in FIA Section.201.1(3), which permits distinctions among different “classes of persons…” when ‘rule-making’. The principle of “proportionate supervision” is only expressed as a priority concern by way of the Minister’s annual Mandate Letter, which has given the BCFSA broad discretion in how the principle is to be applied.
From a small credit union’s perspective there has been no reduced red tape, quite the reverse. The regulatory burden has grown substantially with expanded reporting requirements, additional guidelines, and frequent data requests. These have been introduced with the most minimal concessions for “size, scope and complexity”. For small credit unions regulatory burden is now an existential threat.
In my mind, proportionality has not been adequately addressed with the legislative measures initiated two years ago (see also my previous post).
The same Ministry paper of March 2018 proposed to give BCFSA the “authority to issue enforceable guidelines/rules” that would require “public consultation and Ministerial approval”. The resulting FIA S.201.1 does enable rule-making. In discussions with the Ministry in 2018-19 many of us understood that these ‘rules’ would replace the ‘guidelines’ that were being issued independently by the regulator and that were ‘enforced’ through potential CUDIC assessment increases. We took comfort in the requirement that any added requirements would be subject to Ministerial approval.
To date no rules have been issued. New guidelines have been issued and the Regulatory Roadmap released in May 2021 advised of 7 planned new guidelines.
First, one has to ask if this need for ‘rule-making’, as the previously engineered ‘guideline’ approach is clearly preferred by the BCFSA. But the guideline approach does not require Ministerial approval and thereby leaves credit unions with no review process as was intended in the legislation.
Second, the increasing number of these ‘guidelines’, and potentially ‘rules’, represents a substantial added regulatory burden. BCFSA is setting out new requirements in territory that previously was clearly the domain of boards and management, and there may be a very good case to argue these are “unnecessary regulations”.
The introduction of ‘rule-making’ authority has not resulted in a reconsideration of the use of ‘guidelines’, which are not explicitly enabled in the FIA. The ‘guidelines’ remain an anomaly as the potential penalties for ‘non-compliance’ (via increased deposit insurance assessments) are far greater than many administrative penalties for non-compliance with the law.
This introduction of ‘rule-making’ has had no significant positive impact.
“Ministerial approval of deposit insurance assessment methodology”
The Ministry paper of March 2018 recommended that, similar to ‘rule-making’, future changes to the deposit insurance assessment methodology would require public consultations and Ministerial approval. I believe this measure was a response complaints from credit unions that previous CUDIC consultations had been unsatisfactory. However, this recommendation was not adopted in the final drafting.
Since then the CUDIC methodology was reviewed and revised in July 2020. The results were again problematic. The CUDIC premium setting system continues to reflect arbitrary decisions on indicators, thresholds, relative weightings, and the additional assessments levied; the top level of premium is 2.94 times that of the bottom and are unnecessarily punitive.
Credit unions would have appreciated a review and approval by the Minister.
“Accountability to the Public and Industry Sectors”
The following text is from a Ministry slide used in late 2018, as the Ministry was finalizing drafting instructions. Credit union representatives were most keen to ensure that the new crown agency succeed and we sought assurances that related to timely and responsive service, professionalism, and transparency. In response, the Ministry described what would be the case ‘after’ the legislative changes were in place.
The final bullet point is key. On review of the BCFSA Service Plan and Annual Service Plan Report one cannot say that a comprehensive accountability framework is in place. Important service metrics are missing. Standards for decision turn-around times, for example, are not included. Much of the BCFSA plan keys on ‘activity measures’ as opposed to substantive results. Notably, the BCFSA does not survey industry participants to seek an their assessment of the work of the regulator. There is little or no information provided by industry sector or on legislative responsibilities.
Additionally, March 31, 2021 closed the first full fiscal year for the BCFSA and they have published audited financial statements.
Financial transparency has not been achieved. The BCFSA financial statements provide the minimum information. There is no information provided on revenues and expenses by industry or by regulatory program/group. I would expect BCFSA to adopt, at a minimum, practices similar to the reporting of the Office of the Superintendent of Financial Institutions (Canada); detailing revenues and expenses by industry sectors – credit unions, insurers, pension plans, mortgage brokers, real estate developers and agents, etc..
Current practices do not provide the type of management metrics and public reporting that we were led to expect.
Feedback completes the accountability cycle
I think our government, and our regulator, need good constructive feedback on how they are doing. I am of the opinion that credit unions should be assessing the changes that have been made in the last two years and speaking up where they see deficiencies. The above is just a small set of observations. It is not a comprehensive approach. But the above sets out four key messages that we might take to the Minister and to MLAs when we meet with them in the coming weeks and months.