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  • Regulatory Offences in the Distribution of Insurance Products: A Call for Diligence

    On November 21, 2013, the Supreme Court of Canada issued its judgment in the case of La Souveraine, Compagnie d’assurance générale v. Autorité des marchés financiers, 2013 SCC 63, a decision which is now critically important in the context of the distribution of insurance products in Quebec. Indeed, the judgment sheds light on the extent to which insurers operating in Quebec may incur penal liability for regulatory offences committed by financial services firms which they authorize to distribute their products.In this case, the highest court of the land found an insurer guilty of the offence stipulated at section 482 of the Act respecting the distribution of financial products and services (the “ADFPS”) for having provided its consent to a Manitoba damage insurance brokerage firm which was not registered with the Autorité des marchés financiers (the “AMF”) to provide Quebec merchants with the opportunity to participate in a master insurance policy issued by the insurer to cover the inventories financed by a third party institution.Section 482 of the ADFPS provides that every insurer that helps, by encouragement, advice or consent or by an authorization or order, or induces a firm or an independent representative or independent partnership through which it offers insurance products to contravene any provision of this Act or the regulations is guilty of an offence.Although the case involved a situation of non compliance with the registration rules of a firm located in Quebec pursuant to the ADFPS, it is important to note that an offence which may have resulted in the filing of a penal complaint against an insurer pursuant to its section 482 may extend to the violation of any supervisory rule prescribed under the ADFPS by a firm, an independent representative or an independent partnership.The Court confirmed that section 482 of the ADFPS creates a strict liability offence for the insurer, that is, an offence for which the prosecution is not required to prove the culpable intent of the insurer. In turn, the physical element of the offence does not require evidence to the effect that the insurer has taken positive action to encourage the violation of the Act by the firm. For the insurer, to simply fail to oppose in due course to the illegal distribution of its insurance products is regarded as a consent or an authorization to such distribution.However, the Court noted that a due diligence defence is available to the insurer and it may be found not guilty if it demonstrates that it has committed an error in fact (which leads it to believe, on reasonable grounds, in a mistaken set of facts that, if true, would have rendered his or her act or omission innocent) or proves that it had taken all reasonable precautions to avoid the violation being committed. This being said, an insurer cannot rely on an error in law as a defence since “ignorance of the law is no excuse”. In the case under review, the insurer in question was therefore unable to validly defend itself by arguing that it did not believe that the complex distribution operations to which it was a party and which extended to several other provinces required that brokers not based in Quebec who were offering the product to persons or entities from Quebec were required to be registered in Quebec with the AMF. The insurer could not defend itself on the basis of an erroneous interpretation of the ADFPS.In this respect, the Court noted that as participants in a regulated industry, insurers agree to submit to strict standards which they are required to know and comply with.This decision of the Supreme Court therefore brings back to the forefront the obligation for any insurer conducting business in Quebec to ensure strict control and monitoring of the regulatory compliance of the activities related to the distribution of its products which are conducted on its behalf in Quebec by persons regulated under the ADFPS. In this respect, insurers must be proactive and demonstrate diligence. They cannot just obtain the opinion of inexperienced third parties, including their distributors, or rely on the silence of the AMF to efficiently mitigate the risk to their reputations brought about by having penal proceedings instituted against them.This new interpretation of Quebec regulatory penal law constitutes a good reason for insurers to adopt policies and procedures to better assess compliance with the process for the distribution of their products in Quebec by brokerage firms subject to registration and above all, to comply with the exculpatory standard which they are required to meet should they face proceedings arising from regulatory violations of brokers who distribute their products.

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  • Domestic Systematically Important Banks

    On March 26, 2013, the Office of the Superintendent of Financial Institutions (“OSFI”), the Canadian bank regulator, issued an Advisory in which it identified the banks considered to be systematically important for Canada in accordance with the framework set out by the Basel Committee on Banking Supervision. These banks are the Bank of Montreal, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, the National Bank of Canada, the Royal Bank of Canada and the Toronto-Dominion Bank.In October 2012, the Basel Committee published a document setting out certain principles for Member States of the Bank for International Settlements to help them address the impact that the distress or failure of certain banks can have on domestic financial systems and national economies.Following this designation as domestic systematically important banks, the above-mentioned banks will need to comply with stricter financial standards in order to expand their capacity to absorb unexpected losses. They will thus have to establish a risk-weighted capital ratio requirement equaling a 1 per cent common equity surcharge. OSFI also reserves the right to periodically revise this capital surcharge in light of domestic and international developments.Thus, as of January 1, 2016, the designated banks will be required to meet a risk-weighted all-in Pillar 1 target common equity Tier 1 of 8% compared to a 7% requirement for smaller institutions.In its Advisory, OSFI clarifies how such additional loss absorbency, which is required from designated banks, matches well with the capital targets established by the OSFI 2013 Capital Adequacy Requirements Guideline and the Internal Capital Adequacy Assessment Process Guideline. The OSFI Advisory also discusses the supervisory and disclosure implications for banks designated systematically important for Canada.

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  • Relaxing of the liquidity coverage ratio under Basel III

    On January 6, 2013, the Basel Committee on Banking Supervision announced that it was relaxing the liquidity rules that will be applied to banks beginning in 2015. The Group of Central Bank Governors and Heads of Supervision (“GHOS”), the oversight body of the Basel Committee, then unanimously adopted the last changes made by the Basel Committee to the liquidity coverage ratio (“LCR”), which were presented in the version published in December 2010. This ratio is intended to enable banking institutions to withstand a severe crisis for a period of 30 days. The new rule will require banks to hold enough securities that can be easily be converted into cash, such as government or corporate bonds, to cover net cash outflows in case of serious funding difficulties for one month, in order to avoid a taxpayer-funded bailout.Changes to the LCR are made at four levels:a) revisions to the definition of high quality liquid assets (“HQLA”) and net cash outflows by expanding the range of qualifying assets for these liquidity reserves to, among other things, equities and residential mortgage-backed securities (“RMBS”);b) a timetable for the gradual phase-in of the LCR standard;c) reaffirmation of the usability of the stock of liquid assets in periods of stress, including during the transitional period; and d) approval for the Basel Committee to continue its work on the interaction between the LCR and the provision of facilities by central banks.The full text of the LCR rules, incorporating the changes discussed here, was published on Monday, January 7, and is available on the website of the Bank for International Settlements.The GHOS announced that the LCR would be subject to transitional provisions, which will follow those defined for the implementation of the Basel III capitalisation requirements. More specifically, the LCR will come into force, as planned, on January 1, 2015, but the minimum requirement will initially be fixed at 60%, thereafter increasing annually by 10 points to 100% on January 1, 2019. The banks are therefore being given four more years, as many of them had indicated that it was impossible to meet the original deadline of January 2015 for building these reserves while continuing their lending operations. The aim of this gradual approach is to ensure that the implementation of the LCR does not disturb the process for strengthening the banking systems or ongoing financing of economic activity, particularly in certain euro zone countries.The Basel Committee can now turn its attention to improving the other component of the new global liquidity standard, the net stable funding ratio, still in the observation phase, which is scheduled for implementation in 2018.

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  • Supervising the Use of Social Networking Websites by Financial Sector Intermediaries

    The use of social media, discussion forums and other websites for business purposes, as a means of communicating with the public, raises increasingly significant compliance issues for regulated entities of the financial sector. Such use may expose registered or certified representatives and, consequently, their firms, to previously unheard of but nonetheless real non compliance and reputational risks.

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