Introduction

Canada is a relatively small country in terms of population, but it includes a number of large and diverse financial service providers. In recent years, many consumer groups have questioned whether or not these financial institutions have been responsive to the needs of low-income or underserved Canadian consumers. However, under Canadian law, the legislation that governs federally regulated financial institutions is subject to review every five years. This review provides legislators and community activists the oppor-tunity to comment on provisions that limit the growth of the financial services sector or negatively impact underserved communities. In 1996, legislators and regulators found that dramatic changes within the financial services sector were underway. Many of these changes directly altered the type of basic financial products offered and the manner in which basic financial services were delivered.

• Canadian financial services legislation has taken a passive approach to expanding access, enacting voluntary measures, and depending on financial institutions to self-regulate their service operations. Most of these voluntary measures were enacted as part of a comprehensive financial moderniza-tion movement beginning in the mid-1990s.



• By law, the legislation governing Canada's federally regulated financial institutions must be reviewed every five years. By 1996, Canada's financial services sector was undergoing rapid change, much like the financial services sector in the United States. To address these changes and to propose an effective modernization framework during the next legislative review, a task force was commissioned to draft recommendations for the future of the financial services sector.



• The task force presented its findings and over 124 specific recommendations in a report issued by the Department of Finance in 1999. The major findings stated that new regulation should be designed to enhance compete-tiveness, empower consumers, strengthen the relationship between financial institutions and the communities they serve, and make the current regulatory framework flexible to promote safety, soundness, and innovation.

Enacted Community Reinvestment Measures

• Draft legislation was introduced in 2000 as Bill C-38 (titled An Act to Establish the Financial Consumer Agency of Canada, and to Amend Certain Acts in Relation to Financial Institutions) based on the recom-mendations of the task force. This bill was not acted upon and was eventually derailed by the 2000 federal elections. The bill was reintroduced as Bill C-8 (titled An Act to Establish the Financial Consumer Agency of Canada, and to Amend Certain Acts in Relation to Financial Institutions) in 2001 with minor changes and was passed by the Canadian Parliament later that year. The enacted legislation contains a number of important, although voluntary community reinvestment measures.



• C-8 created the Financial Consumer Agency of Canada (FCAC) under the Ministry of Finance and funded by the Consolidated Revenue Fund paid into by all financial institutions (similar to the U.S. Office of the Comptroller of the Currency). This agency is responsible for reviewing an institution's voluntary consumer protection codes. These voluntary consumer protection codes are "non-regulatory" agreements that usually pertain to account term disputes and are not enforceable by FCAC. Financial institutions are also required to file a report describing their consumer complaints procedures. All of these disclosures would be made to the regulatory agency only, and would not be available for public review. Violations, as determined by the agency, would trigger fines of up to $100,000.



• All federally regulated financial institutions are now required to give public notice of branch closings. While the FCAC would not have the authority to prescribe branch distribution requirements, three months' notice is now required for all branch closings. Branch closings in underserved areas require six months' notice.



• Under C-8, the FCAC was also granted the authority to set up an independent inter-mediary organization to handle consumer banking complaint issues. Instead of creating a new organization, the Canadian Banking Ombudsmen, which had handled banking disputes since 1996, was merged with the consumer complaint office under develop-ment by the banking industry. Now called the Ombudsman for Banking Services and Investments, the office makes recommenda-tions on about 200 cases involving deposit-taking institutions each year.



• C-8 was criticized by the Canadian Community Reinvestment Coalition for not enacting mandatory requirements for low-cost bank accounts, providing subsidies for bank branches in underserved communities, or providing an independent consumer complaint board to resolve disputes. Most importantly, the new regulations did not require the disclosure of mortgage lending data.



• The Minister of Finance and the financial institutions also produced a Memorandum of Understanding in 2001, describing the availability of low cost bank accounts. Eight of Canada's 16 largest banks signed this initial agreement, agreeing to offer low-fee accounts with no minimum balance or deposit. In 2003, all of the original banks renewed their agreement to provide low-cost accounts. The government is committed to monitor these targets, but believes that it should encourage a self-regulatory approach and not set national standards.

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