At What Cost? Access to Consumer Credit in a Post-Financial Crisis Canada

Access to consumer credit is influenced by many factors, such as amount and security of the consumer’s income, and credit card company and financial institution practices. Access is also driven by social, cultural and cognitive factors, including consumer understanding of the cost of credit; perceptions regarding ability to repay; cognitive influences regarding immediate consumption and delayed payment; understanding of the benefits and risks of debt to economic security; and the conflicts of interest inherent in the business of lending. Overall, bank and credit union credit has tightened since the global financial crisis. However, the study found that for many Canadians, the issue is less whether there is access to credit, but rather, “access to credit at what high cost and on what terms and conditions”. Much of the reported need for credit in the past two years has been the need to bridge income loss from job loss, reduced hours of employment and small business failures. Many individuals that could not access personal loans from their bank or credit union turned to alternate, more expensive, forms of credit, such as merchandise finance company loans, increasing credit card debt, skipping monthly payments on loans, and payday loans. Consolidation loans have been increasingly viewed as a debt management strategy, yet there are problems associated with consolidation. One issue identified was the growth in home equity lines of credit, originally intended to bridge financing for emergencies or a significant purchase, but now being used more akin to account withdrawing, portending future issues in respect to debt load and longer term economic security. Consumers face the direct costs of high interest rate charges and loan and broker fees. There is evidence to suggest that costs increase when consumer borrowers do not understand how interest rates and terms work, and thus consumer debtors may be paying considerably more for their credit than they need to. The lack of financial literacy is a major concern in that many consumer debtors do not fully appreciate the costs of carrying expensive credit, identified as particularly an issue among younger adults and recent immigrants to Canada. Yet to date, financial literacy training does not align with consumer debtors’ particular needs for financing based on income and a range of other factors. There are also significant indirect costs to the consumer of access only to expensive credit, such as foregone basic necessities because of excessive debt load, health outcomes and costs associated with the stress of over-indebtedness, and the costs to society, borne by creditors or the general tax base, when consumers default on loans or file for insolvency or bankruptcy. Analysis of the causes of insolvency for a cohort of 4,000 consumer insolvency cases from 2008 to 2010 indicates that “access to credit” forms an extremely small percentage of declared reasons for filing bankruptcy or proposals under the BIA. Related causes are much higher. For bankruptcies, insufficient income accounted for 30.5% of insolvency, unemployment for 18.8%, and over-indebtedness for 12.4%. For proposals, insufficient income accounted for 40.7% of insolvency, unemployment for 15.8%, and over-indebtedness for 13.8%. Seeking relief under Canadian insolvency law is reported by bankrupts as less associated with access to credit and more an outcome of consumer debtors’ inability to meet the payment demands of expensive credit they previously accessed. Credit card debt is a significant issue for consumer debtors. The average credit card debt was $21,620 and the median debt was$13,979. The data show that 90% of all debtors filing for insolvency relief had credit card debt. Equally, however, mortgage debt, personal loans and finance company debt are significant factors in filing, evidence of credit behaviour that catches consumer debtors in a repeated pattern of refinancing expensive debt and re-incurring it, which can expedite financial distress. Considerably more research and policy development is required to make consumer access to credit more understandable, affordable and accessible on a fair and reasonable basis. While financial literacy is an important goal, there is also an urgent need for the federal government to complement its current work in financial literacy with a much more comprehensive program regarding consumer credit

The Corporation as Symphony: Are Shareholders First Violin or Second Fiddle?

This article focuses on shareholders and whether the current regime affords them adequate protection and participation rights. Recent changes to corporate and securities laws have facilitated the exercise of shareholder voice. These changes are important to capital markets in that they are aimed at increasing investor confidence and hence the strength of markets. The lead in shareholder activism is being taken by institutional shareholders who are utilizing new proxy and proposal provisions to express governance preferences regarding key issues such as independence of audit committees and enhanced transparency in financial disclosures. However, there continue to be barriers that institutional and other investors face in term so holding corporate officers accountable for their governance decisions. There is also a live issue as to whether recent legislative changes will adequately protect smaller capital investors and others who are implicated in corporate activity. This article suggests that this may not be the case and analyses why

Fiduciary Obligations in Business and Investment: Implications of Climate Change

Fiduciary obligation, under both corporate law and the common law, requires directors and officers to identify and address climate-related financial and other risks. In fulfilling their obligations to act in the best interests of the company, directors and officers must directly engage with developments in knowledge regarding physical and transition risks related to climate change and how these risks may impact their corporation. Depending on the firm’s economic activities, the risk may be minor or highly significant, but directors and officers have an obligation to make the inquiries, to devise strategies to address risks, and to have an ongoing monitoring to ensure the strategies continue to be responsive to the risk. Directors’ fiduciary duty requires that they have overseen and monitored the actions of the individuals charged with mitigation and adaptation; and have mechanisms in place to respond rapidly to changes in the company’s risk profile. In addition to fiduciary obligations, this study examines the statutory duty of care under corporate law, which requires directors and officers to exercise the care, diligence and skills that a reasonably prudent person would exercise in the circumstances. This duty requires directors and officers to supervise and manage the transition that will address the specific risks, as well as the new opportunities, posed by climate change. The study also examines pension plan trustees and other investment fiduciaries in respect of their fiduciary obligations related to climate change. Pension fund trustees have a fiduciary obligation to pension beneficiaries to act prudently in their best interests in making investment decisions regarding fund portfolios. In fulfilling their obligations to beneficiaries, pension trustees and their investment managers have an obligation to identify and address climate-related financial risk. Trustees can take climate change into account as a legitimate investment issue over the short or long term or both. If trustees fail to act to address material climate change risk, they may be personally liable for breach of their fiduciary obligation. Inaction is no longer acceptable, given all the evidence that climate change risk is material across the entire economy. Trustees can also take climate change into account because they have duties as public fiduciaries additional to their financial duty to beneficiaries. Fiduciaries have a duty to act even where the potential costs and benefits of climate change cannot be fully quantified immediately. Fiduciary obligation also requires considering the benefits of investment in green adaption and mitigation technologies and other products and services that are likely to have upside financial potential for return on investment

Strengthening Domestic Corporate Activity in Global Capital Markets: A Canadian Perspective on South Africa\u27s Corporate Governance

As a Canadian corporate law scholar who recently had the opportunity to visit South Africa, I was humbled by both the profound challenges and the immutable positive spirit of the South African people when it comes to thinking about their economic and social future. Hence while this paper is a reflective discussion on the kinds of challenges that exist and the strategies that could be deployed to enhance corporate governance in South Africa, it must be emphasized at the outset that it is for Sub-Saharan African nations to develop their own governance models. They are best positioned to adopt strategies that align with their social, economic and political goals, and it is not for the West to impose Anglo-American conceptions of corporate and securities laws on developing nations. While there are lessons, both positive and negative, from the North American governance experience, self-determination of optimal governance strategies for emerging economies will allow them to take account of both domestic needs and global capital markets. This paper is divided into four parts. The first part sets a context for the discussion, including an overview of the corporate law regime in South Africa and more generally, the challenges faced by Sub-Saharan Africa in terms of economic development. Corporate governance cannot be discussed without at least some appreciation of the challenges posed by foreign direct investment, the level of debt of these nations and broader development concerns. Much of the wealth of Sub-Saharan Africa has been mortgaged previously, creating enormous barriers to becoming independent in their economic policy choices. Part II then sets out a framework for thinking about corporate governance in Sub-Saharan Africa, briefly analyzing both shareholder wealth maximization and stakeholder models of governance. Part III shifts into a more specific discussion of corporate governance developments in South Africa. In this respect, South Africa shares much in common with Canada in terms of its capital structure, corporate law and challenges of being a host nation for many multinational enterprises (MNEs) headquartered elsewhere. The King II Report on corporate governance is examined in terms of its influence on shaping corporate governance policy in South Africa. A more fulsome conception of corporate governance for South Africa includes empowerment, equity and the inclusion of African value systems. Finally, Part IV looks forward, examining the possible benefits and limits of socially responsible investing through the new Johannesburg Stock Exchange SRI Index. It also briefly discusses areas of further research that may provide assistance in enhancing domestic corporate activity in South Africa

Convergence Versus Divergence, Global Corporate Governance at the Crossroads: Governances Norms, Capital Markets & OECD Principles for Corporate Governance

There is growing debate as to whether international corporate governance practices can or should converge. Effective corporate governance has been linked to the ability of corporations to compete in global capital markets. Corporations operating in diverse economies have capital structures that are the result of public and private choices, and the corporate governance issues that arise reflect these structures. There is market pressure for convergence of corporate governance norms. The OECD has formulated Principles aimed at setting standards for corporations as they seek to attract capital. While the shareholder protections proposed are helpful in articulating norms that will attract long-term investment capital, the Principles fail to fully appreciate some of the current tensions between shareholder rights and obligations of corporate officers. Moreover, while the Principles suggest that corporations comply with laws regarding obligations to stakeholders, they fail to adequately discuss why shareholder rights are elevated to a universal norm, whereas accountability to other parties implicated in the corporation, such as creditors and workers, is not

Flotsam, Financing and Flotation: Is Canada “Resolution Ready” for Insurance Company Insolvency?

Insurance represents almost 2 per cent of Canada’s gross domestic product (GDP), yet there is little public policy discussion regarding the viability of the companies that insure Canadians or about the policyholder protection and resolution regime that underpins the provision of these services. As new products and technology develop, and as the complexity of multinational insurance enterprises increases, new risks pose challenges for Canada’s oversight and policyholder protection regimes. This article provides an overview of the insolvency regime for insurers in Canada, focusing primarily on the federal regime as the exemplar of how Canadian regulators and the insurance industry have built mechanisms for early intervention. It examines the causes of financial distress and the kinds of asset values that may be identified and preserved during insolvency. It explores the regulatory capital requirements imposed on insurers with the goal of safety and soundness of the system. It then examines policyholder protection and insolvency resolution strategies, including the early intervention system, aimed at keeping companies afloat or enabling them to exit the market with as little disruption as possible. It analyses how Canada’s supervisory and resolution system measures up against international standards, and looks at aspects of the system that need improvement and suggests priorities for legislative reform, including clear assignment of responsibility for resolution, treatment of derivatives and provisions to facilitate cross-border proceedings. The article also highlights new complex challenges facing Canadian insurers in terms of solvency risk, including accounting standards changes, climate change risk and cybersecurity

Risk Management, Responsive Regulation, and Oversight of Structured Financial Product Markets

Globally, regulators, supervisory authorities, and governments are grappling with what have now been identified as systemic risk factors that contributed to the recent global financial crisis. Internationally, the Basel Committee on Banking Supervision and other organizations are developing standards to identify and address systemic risk, suggesting that the extent of regulation or exemption from it can serve as a mechanism by which risk is transferred within the financial system. The Cross-border Bank Resolution Group of the Basel Committee has developed ten recommendations as a result of its stocktaking of lessons learned from the financial crisis.\u27 The Financial Stability Board (FSB), an organization of national financial authorities and international standard-setting bodies, has developed a policy framework for reducing the moral hazard of systemically important financial institutions and for reforming derivatives markets. These initiatives are mirrored by similar initiatives in international organizations, national and regional governments, and a myriad of other regulatory and non-regulatory agencies. The recommendations being developed by government-sponsored international organizations point to three critically important aspects of today\u27s financial markets. First, they are highly globalized, which means that regulation solely by individual states is no longer a sufficient response to the conditions that created the crisis. Financial market players span hundreds of borders, and organize their structures globally for a variety of efficiency, tax-related, liability-related, and other reasons. The interconnectedness of both financial structures and financial products creates tremendous challenges for considering the scope and limits of regulatory oversight. Second, at best, the suggestions generated by these international organizations need to be broad brush strokes, as they operate in a global system in which the type and intensity of regulatory oversight varies considerably. While a need for global standards has been identified, the likelihood of global convergence towards one set of specific standards is slim. Third, there are very diverse regulatory spaces for oversight of financial markets, including state regulators, self-regulatory organizations, and coalitions of business or financial interests that actively pursue their objectives in an array of regulatory spheres. The complexity of the issues, and the regulatory structures that respond to them, pose significant challenges. It is evident that many of the initiatives to date have not addressed the need for a broad-based, participatory public policy debate on the normative objectives that new regulatory requirements seek to achieve. The issues raised by this significant upheaval in the financial system will be the subject of analysis for years to come. On the occasion of John Braithwaite\u27s Fasken Visiting Scholar Lecture and workshop on responsive regulation at the University of British Columbia in 2010, this paper explores a very specific issue among the many raised in respect of regulatory oversight of systemic risk in financial markets. Specifically, it analyses Braithwaite\u27s pyramidal approach to regulatory processes, to assess whether it offers helpful suggestions for the current effort to determine new regulatory standards for the structured financial products market. Derivatives, collateralized debt obligations, and similar products have been viewed as major contributors to the financial meltdown that commenced in 2008. The paper suggests that Braithwaite\u27s model of responsive regulation may have some application, particularly in engaging local citizens in a collaborative policy discussion regarding regulatory oversight. Essentially, Braithwaite advocates a highly dialogic and responsive process in which market participants engage with regulatorsto structure solutions to market problems and create a support structure promoting continuous improvement. He suggests that regulators should not rush to law enforcement solutions before engaging with stakeholders to develop a range of policy responses. However, the effectiveness of Braithwaite\u27s approach is limited by the global nature of these challenges, the intractable nature of private organizations on the global stage in their efforts to resist regulatory change, and profound power imbalances and information asymmetries that would need to be addressed to make such processes more accountable. Part II of the paper sets out the challenge for oversight of structured financial products markets, including the market conditions in respect of such products that contributed to the global financial crisis and the lacuna in regulatory oversight. Part III analyzes the contribution of responsive regulation theory to issues raised by current market conditions. Part IV then suggests that regulatory strategies must address the problems arising out of the crisis, including the moral hazards and the governance issues. Part V assesses the potential contribution of responsive regulation. One issue is that responsive regulation takes time, and there are specific normative principles that could be immediately implemented, as placeholders, to temper the most serious negative distributive harms to market participants. Such principles would guide regulatory responses in the financial services sector and help avoid regulatory capture, if the discourse about regulatory oversight that is an essential aspect of responsive regulation is truly to be meaningful. While the potential exists for more responsive regulation, it is vulnerable to hearing only from the regulated, given the classic problem of organized versus unorganized constituencies and the constraints on their capacity to acquire knowledge, disseminate their views, and influence regulatory change

A Bridge Over Troubled Waters - Resolving Bank Financial Distress in Canada

Effective June 2017, Canada formalized its new resolution regime for “domestic systemically important banks”. This article examines the new resolution regime in the context of the early intervention program by the financial services regulator. The system offers a complex but integrated set of mechanisms to monitor the financial health of financial institutions, to intervene at an early stage of financial distress, and to resolve the financially distressed bank in a timely manner. Resolution is the restructuring of a financially distressed or insolvent bank by a designated authority. To “resolve” a bank is to use a series of tools under banking and insolvency legislation to address its financial distress in a manner that safeguards the public interest, including continuity of the bank’s critical functions. Resolution can provide for an orderly winding-up of the bank or restructuring to restore the viability of all or part of the institution to allow it to continue operating, called open bank resolution. The Canadian regime uses “bridge banks” as a resolution tool, where part or all of the assets, liabilities and/or shares are transferred to a temporary entity until they can be sold to a private-sector third party. It also implements “bail-in”, which allows preferred shares and debt to be converted into equity, placing part of the burden of bank failure on shareholders and creditors of the bank, minimizing costs to taxpayers. Given that banks have a critical intermediary role in the economy, financial difficulties need to be resolved in an orderly and efficient manner, avoiding undue disruption to the bank’s activities and instability of the financial system. However, there remain important issues in the Canadian resolution system in respect of financial conglomerate insolvency, in terms of oversight and coordination

Reverse Vesting Orders – Developing Principles and Guardrails to Inform Judicial Decisions

Reverse vesting orders (RVO) are a new tool being used by insolvency practitioners in Canada’s Companies’ Creditors Arrangement Act (CCAA) and other insolvency proceedings, where the debtor is not required to propose a restructuring plan and creditors are not permitted a vote on the going-forward strategy. The article starts from the premise that the court has authority to approve an RVO pursuant to sections 11 and 36 of the CCAA and the court’s general authority under the statute. However, it suggests that there must be exceptional circumstances for the court to be persuaded to bypass provisions of insolvency legislation aimed at giving both secured and unsecured creditors a meaningful voice/vote in the proceedings, as they are the residual claimants to the value of the debtor’s assets during insolvency. It highlights some issues for consideration as the courts move forward in their deliberation of RVO and proposes questions the courts should be asking of their court-appointed monitors when considering such transactions

Prudential, Pragmatic and Prescient, Reform of Bank Resolution Schemes

The 2008-2009 global financial crisis highlighted the interdependency of financial institutions and markets worldwide. Globally, fiscal support packages totaling 3 trillion USD were introduced, placing enormous strain on the public finances of a number of countries. Even in jurisdictions such as Canada, with relatively well-managed banking systems, a generalized loss of confidence led to a sharp rise in funding costs. The largest negative effects of the financial crisis on the Canadian economy stemmed from crises originating in other countries, with adverse contagion effects on the Canadian banking system, making it very difficult for Canadian banks to fund themselves in foreign markets. Bank supervisory authorities and financial institutions now appreciate that financial systems must be strengthened to enhance their capacity to withstand shocks There is considerable international initiative to devise mechanisms to prevent such failures in the future and to create new insolvency resolution schemes to address financial firm failure. Bank supervisors and other regulators are trying to discern the appropriate mix of prudential oversight and private sector governance. This paper examines two discreet issues within this much larger topic. Part II examines the need for regulatory oversight and coordination in preventing liquidity and solvency issues related to banks and other financial institutions. Reform is required to smooth out highs and lows within capital cycles and to address the need for cross-border resolution mechanisms for bank insolvency. Part III then examines the role of bank governance in preventing and addressing bank insolvency, suggesting that governance needs to be prudential, pragmatic and prescient if we are to reduce the frequency and severity of future bank failures