Law Times

LAw times • August 8, 2011 FOCUS PAGE 11 Canada joining push for financial reform Basel III rules among key changes following financial meltdown BY JULIUS MELNITZER For Law Times world in the wake of the credit and fi nancial crises hasn't quite made it to Canadian shores. Th ere are, indeed, those who I fear that the country is resting on its laurels. But nothing could be further from the truth. "I don't get the sense that Canadian bankers and risk of- fi cers are beating their breasts and saying we don't have to do anything," says Stephen Clark of Osler Hoskin & Harcourt LLP. "Th ey are typically con- servative and prudent with or without regulation and they're doing as much as they can to tighten up but they're doing it in the background." Canada's fi nancial regulatory system is not widely understood, according to Clark. "Th e nature of our system is diff erent from most countries. It's a consulta- tive process, so much so that some have called it soft nation- alization where our fi nancial in- stitutions don't take signifi cant steps without interfacing with the federal regulator." For example, it's not widely known that the Offi ce of the Su- perintendent of Financial Institu- tions has announced a desire to have corporate governance more carefully regulated. "You can expect OSFI to be much more proactive and in ef- fect vetting and approving di- rectors," Clark says. "Th ey want directors' skill sets upgraded and they're going to be a lot more skeptical of what manage- ment is telling them." Another area where OSFI has tightened up is in its review of business plans. "If a fi nancial institution wanted to change a product or a line of business, they just did it," Clark says. "But in the last few years, especially in the case of institutions who don't have a broad product line, OSFI has required a business plan as well as a stress-testing plan that evaluates how the new product will aff ect capital requirements." Th e burden has been signifi - cant because fi nancial institu- tions frequently do venture into new business lines. At the same time, regulatory reform looms large in the over-the-counter and derivatives markets. Still, it's important to distin- guish the situation in Canada from the global perspective. "Internationally, new frame- works are developing around capital rules, governance, n some quarters, a perception exists that the tsunami of fi - nancial reform sweeping the compensation and its relationship to prudent risk management, and too-big-to-fail institutions," says Stuart Carruthers of Stike- man Elliott LLP. "What we're seeing in Canada for the most part is an incremental response that amounts to adjusting and fi ne-tuning rather than wholesale changes." But the fact remains that regulatory change in Canada mirrors the ones most visible on the global level. "Changes to re- quired capital levels and support, prudence in investment poli- cies and practices, transparency of products in public delivery, and anti-money laundering and anti-terrorist fi nancing incentives lead the domestic list," says Ali- son Manzer of Cassels Brock & Blackwell LLP. First and foremost, Cana- dian fi nancial institutions must implement the Basel III rules, announced in September 2010, by Jan. 1, 2013, with phase-in pe- riods stretching to 2019. Th e core requirement is that Tier 1 capi- tal, primarily shareholder equity, must be at least seven per cent. "Th is requirement demands attention by even the best-capi- talized Canada institutions and could be done by issuing more common stock, preferred shares or long-term debt instruments," Manzer says. Basel III is so complex that Blair Keefe of Torys LLP spent between 300 and 400 non- billable hours following and analyzing the developments. "When a bank calls a lawyer about Basel III, it wants an answer to its question right away," he says. But sooner or later, Basel III will translate into billable hours in the refi nancing realm. "Ca- nadian fi nancial institutions will want to meet the Basel goals as quickly as possible because they want to be bigger and stronger and appear that way," says Robert McDowell of Fasken Martineau DuMoulin LLP. "Th e idea is to make everyone covet you as their counterparty." Otherwise, Basel III has re- moved many of the regulatory uncertainties surrounding the cost of capital. "Th ere isn't a se- nior vice president in any size- able fi nancial institution, bank or other deposit taker, life or property and casualty insurer or credit union who dares to go to an executive vice president with an investment or acquisi- tion plan unless they know the cost of capital," McDowell says. "And because no one could an- swer that question in 2009 or 2010, activity in the fi nancial sector was selective rather than broadly based." It's probably no accident that it was in late November 2010 — less than one month before the release of Basel III's fi nal text — that Scotiabank announced it would pay $2.3 billion for full ownership of family-controlled Dundee- Wealth Inc., one of the few large independent fund man- agers left in Canada. "At that point, everyone pretty well knew what the capital requirement rules would be," McDowell says. "Th e deal was a sure sign that growth in the sector is up for consideration again in a meaningful way." Th e announcement of new risk-weighting rules should also drive deal fl ow. "If an institution doesn't have enough capital when it applies the rules, it will either have to increase its capital or change its investment strategy by paring down some of its more adventuresome or aggressive ven- tures," McDowell says. Th e arrival of Basel III enhanced specialization in which institutions are looking at their areas of strength and focus and dedicating capital to them. Knowing what the capital rules are will accelerate that process." By way of example, Ryan cites CIBC's $2.1-billion ac- quisition of Citigroup Inc.'s Canadian MasterCard busi- ness in 2010 and the Bank of Montreal's US$4.1-billion pur- chase, through its U.S.-based Harris Bank subsidiary, of Marshall & Ilsley Corp. According to Ryan, the CIBC acquisition evidences a consolidation of Canadian fi nancial markets. "Many of the foreign banks 'You can expect OSFI to be much more proactive and in effect vetting and approving directors,' says Stephen Clark. should also hasten the evolution of Canada's fi nancial sector. "Fifteen years ago, the big Canadian banks tended to look alike," says Barry Ryan of Mc- Carthy Tétrault LLP. "But now, there's an ongoing trend towards who operate in Canada got into trouble in their home markets during the recent fi nancial cri- sis and quickly drew in their horns in Canada as they went home to fi x their domestic problems," Ryan says. "So the market share of Canadian banks in the domestic market, whether it be in retail, wholesale, corpo- rate or investment banking, con- tinues to spread." EXPERT GUIDANCE TO HELP YOU ANALYZE FEDERAL LABOUR AND EMPLOYMENT LAW THE 2011 ANNOTATED CANADA LABOUR CODE RONALD M. SNYDER Stay up to date with legal developments applicable to Federal union and non-union employees with The 2011 Annotated Canada Labour Code. 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