File photo of a Scotiabank branch on Bay Street South of Queen Street in Toronto.Ryan Carter/The Globe and Mail
Canadians could soon see more competition in the financial services sector after the federal government vowed to investigate ways to open the door for new banks and insurers to enter the market and grow.
In Thursday's federal budget, Ottawa signalled a willingness to stoke competition in a sector that's long been dominated by a small number of heavyweight firms.
In recent years the government and regulators have been focused on reducing risks in the financial system and ensuring that institutions can withstand any future crises. Now there's a desire to step back and examine whether enough is being done to promote competition, government officials suggested.
The budget lays out the groundwork for a new risk management framework for systemically important banks, which will fulfill one of the remaining requirements that the G20 and Financial Stability Board have been looking for countries to implement in an effort to prevent a repeat of the financial crisis.
The desire to ensure competition among banks and insurers comes as Finance Minister Jim Flaherty has been verbally pressuring banks not to engage in a mortgage price war or cut their rates too low, a stance that has been characterized as anti-competitive.
"Consumers are best served by the financial services sector when the regulatory framework allows new financial institutions to emerge, grow and compete to offer Canadians better products and services," the budget states. "A competitive and efficient financial sector also benefits businesses and the broader economy."
Canada's banking sector has long been dominated by the six largest players, while the life insurance sector has three major players. ING Direct, one of the few relatively new entrants to grow into a major player, was recently bought by Bank of Nova Scotia.
"The government will review the regulatory framework, including the process for approval of new financial institutions, to ensure that it promotes the entry and growth of smaller institutions, while preserving the safety and soundness of the sector," the budget states. Ottawa is also pledging to do more to promote the Canadian financial sector internationally.
The risk management framework that it will implement for the nation's systemically important banks – those major players whose failure could pose a risk to the entire economy – will require those banks to hold more capital than others. The exact amounts will be determined by the banking regulator, the Office of the Superintendent of Financial Institutions.
The government is also planning to put in place a so-called "bail-in" regime for these banks, which will dictate recovery plans if one of them should burn through all of its capital. In that instance, the beleaguered bank would be revived by converting some of its liabilities into capital. The government plans to consult with the industry on how to implement the regime.
"This risk management framework will limit the unfair advantage that could be gained by Canada's systemically important banks through the mistaken belief by investors and other market participants that these institutions are 'too big to fail,'" the budget states.
The budget also proposes giving bank and insurance boards more flexibility about putting foreigners on their committees. Right now there is a requirement that the majority of directors on a bank or insurance board be Canadian, and that the majority of directors on any board committee be Canadian. While the former requirement will remain in place, the government is planning to give the institutions more leeway about who sits on which committees. This could be especially desirable at companies such as Scotiabank, which derives a large proportion of its business – and its risks – overseas.
In the meantime the government will be phasing out over five years a tax break for credit unions, a move that's expected to boost Ottawa's revenues by $205-million over that period.
Ottawa also intends to create a new "comprehensive financial consumer code" to protect consumers of financial services. It says the code will deal with the new digital and remote banking environment, as well as with the needs of groups such as people with disabilities and seniors at risk of financial abuse.
The budget also states that the federal government will work with provinces to support the regulation of payday lending-type high-interest rate products, and to promote the fact that government of Canada cheques can be cashed for free in any bank. And the government plans to collaborate with banks to help ensure that seniors who are vulnerable to financial abuse have more resources, and that topics such as power of attorney are better understood.