The Office of the Superintendent of Financial Institutions (OSFI) recently announced that the rules of the Bank Act will now apply to all non-bank financial service providers, including credit unions and unregulated financial service providers.
The language credit unions use for advertising online must comply with the new regulations by December 31, 2017. By June 30, 2018 print materials must comply and by June 30, 2019 any signage must comply.
Why Have the Regulator’s Made Changes?
OSFI became aware of an increased use of the words “bank”, “banker” and “banking” by non-bank financial service providers. Although credit unions in Canada are legally authorized deposit-taking financial institutions, they are not banks.
Although the new regulations do not change the services historically provided by credit unions, OSFI views that consumer protection is needed to avoid misunderstandings; consumers need to know whether they are dealing with a bank or another type of financial service provider.
Stricter criteria for lending money to individuals and companies and the recent interest rate increase are forcing many consumers to look to other lending institutions that may or may not meet federal or provincial standards.
For example, recently an organization known as the Switzerland Imperial Bank AG issued a fraudulent liability slip to a client as proof of auto insurance in Ontario. The company is not listed with OSFI as a foreign bank authorized to do business in Canada and not licensed for business in Ontario through the Financial Services Commission of Ontario (FSCO) or the Registered Insurance Brokers of Ontario. Wikipedia’s list of Swiss banks does not list Imperial Bank AG. The web site for the “private bank” advertises asset management capability and other financial services.
How Are Credit Unions Different From Banks?
Credit unions are financial cooperatives, so money left over at the end of the year is returned to members in the form of dividends or donated to communities in the form of scholarships and other member initiatives.
By contrast, banks are responsible to the shareholders to make a profit and profits are distributed to the shareholders, not the banks’ depositors.
2. Interest and Loan Rates
At credit unions, everyone is entitled to the best rates and offers available, regardless of how much they have on deposit. Every credit union member has an equal share, equal vote, and the right to be provided with the same financial advantages as other members.
Low interest loans, including mortgages, are also common at credit unions. Lower borrowing charges is commonly the result of tax savings passed on to members. Credit unions are taxed at a lower rate than banks because of their non-profit status and they receive tax benefits banks don’t qualify for.
At banks, however, you may qualify for “preferred rates” and promotional financial offers only if you have a sufficient business dealings with the bank and have done for several years. Banks additionally provide incentives to staff to selectively suggest promotional products to preferred customers to maximize corporate profits. Interest and borrowing rates fluctuate from one customer to another and can be affected by the bank rate set by the federal government
3. Deposit Protection
Credit unions obtain insurance from the Deposit Insurance Corporation of Ontario (DICO), which provides the same or higher deposit protection than what is available to chartered bank customers. Coverage is currently $100,000 on eligible insured non-registered deposits and will increase to $250,000 in January 2018.
DICO also provides unlimited insurance for each registered savings plan or contract, including Registered Retirement savings plans (RRSPs), Tax-Free Savings Accounts (TFSAs), Registered Retirement Income Funds (RRIFs), Registered Education Savings Plans (RESPs), and Registered Disability Savings Plans (RDSPs).
By contrast, banks register for deposit insurance through the Canadian Depository Insurance Corporation (CDIC). CDIC covers only the first $100,000 in very specific categories of accounts, such as savings accounts and chequing accounts, guaranteed investment certificates (GICs) and other term deposits with an original term to maturity of five years or less, held in registered or non-registered accounts.
4. Charter and Regulators
Banks are federally chartered corporations, approved and regulated by OSFI. Once approved, banks may operate across Canada and are subject to any applicable provincial laws.
Credit unions in Ontario are provincially incorporated and regulated; their regulators are the provincial Ministry of Finance, FSCO, and DICO, which oversees compliance with solvency rules and insures eligible deposits. As part of its’ mandate, DICO has the authority to issue bylaws to ensure that insured credit unions operate in agreement with prudent business and financial practices.
What Impact will the Regulatory Change Have?
Restrictions on the use of banking terms for advertising will now apply to all non-bank financial service providers, including both federally regulated trust and loan companies and provincially regulated institutions. As such, credit unions are required to discontinue their long-time practice of using the term “banking” to describe their business activities, even though many of the services they provide are the same or like those which banks provides.
The public can expect the same services from their banks and credit unions with the knowledge that financial institutions will now have to use language that clearly distinguishes them.
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