Vol. 149, No. 12 — March 21, 2015
Canadian Payments Association Election of Directors Regulations
Canadian Payments Act
Department of Finance
(This statement is not part of the Regulations.)
Legislative amendments to the Canadian Payments Act replaced the governance structure of the Canadian Payments Association (CPA) with a new structure overseen by a Board of Directors that will have a majority of independent directors (i.e. directors who are free of conflict of interest with CPA members) and that will be led by an independent Chairperson. In order to implement these changes, amendments to the Canadian Payments Association Election of Directors Regulations are required to establish the criteria for determining the independence of directors and to clarify other aspects of the new governance framework.
The CPA is a statutory body with a mandate to establish and operate national systems for the exchange, clearing, and settlement of payments between banks, credit unions, and other CPA members. Two systems operated by the CPA are the Automated Clearing Settlement System (ACSS) and the Large Value Transfer System (LVTS).
While the CPA is a capable operator of Canada’s core national payments clearing and settlement infrastructure and the infrastructure has proven reliable, the infrastructure is ageing and stakeholders have raised questions about whether it adequately meets the needs of end-users.
Two successive reviews of the payments system (1998 and 2012) have found deficiencies in the CPA’s governance structure.
Prior to its amendment, the Canadian Payments Act prescribed that the Board of Directors must consist of 16 directors, 13 of whom were CPA members and 3 were independent directors appointed by the Minister of Finance. The law also required the appointment of 16 alternate directors and designated the representative of the Bank of Canada as the Chairperson of the Board.
The statutory structure and composition of the Board will change as a result of recent legislative amendments. The Economic Action Plan 2014 Act, No. 2 received royal assent on December 16, 2014. The Act implements a series of amendments to the Canadian Payments Act that change the governance structure of the CPA. Specifically, the amendments reduce the size of the Board of Directors and transform it into a 13-member, majority-independent Board. Furthermore, the number of independent directors will increase from 3 to 7 (they will be elected by members rather than appointed by the Minister of Finance); the number of member directors will be reduced from 12 to 5 (who will continue to be elected by CPA members); and the President of the CPA will become an ex officio director. In addition, there will no longer be alternate directors and the Bank of Canada (who used to chair the Board) will no longer be represented on the Board of Directors; the Board will instead be chaired by an independent director.
Amendments to the Canadian Payments Association Election of Directors Regulations under the Canadian Payments Act are required to implement this new governance framework. These amendments would establish the criteria for selecting independent directors and would update the Regulations that are currently in force to reflect the broader changes to CPA governance implemented through the Act. Section 35 of the amended Canadian Payments Act explicitly delegates responsibility for defining independence to the Governor in Council and allows the Governor in Council to issue guidelines for the election of directors.
The amendments would also provide additional direction on the composition of the member directors of the CPA Board. Specifically, the Regulations would be amended to ensure a balanced representation on the Board of Directors of the largest financial institutions, which are the largest contributors and users (by volume and value) of the CPA’s clearing and settlement systems and bear the highest proportion of the risk.
In March 2013, the Superintendent of Financial Institutions identified six of the largest financial institutions in Canada as “domestic systemically important banks” (D-SIBs) and it was recognized in policy that should one of these institutions become unstable, it could affect the stability of the financial system. The Regulations would be amended to ensure a balanced level of representation on the Board between D-SIBs and other CPA member institutions.
The amendments would also provide guidance on other criteria for selecting nominees. For example, the Regulations would require that the nominating committee strive to ensure the nominees represent a sufficient range of skills, expertise, and experience to ensure that the Board can carry out its responsibilities effectively. The amendments would also require that member directors be senior executives within their organizations.
The objectives of the regulatory measures are to
- Facilitate independent decision making by the CPA Board by setting criteria for determining if independent directors are free of conflict of interest with CPA members;
- Ensure that the largest users of and contributors to CPA systems (i.e. D-SIBs) are represented in a balanced manner on the CPA Board;
- Provide guidelines for the selection of nominees for director positions; and
- Remove outdated regulatory provisions that are no longer applicable given the new voting structure and Board composition imposed through the legislative amendments.
The regulatory measures would repeal the Canadian Payments Association Election of Directors Regulations and replace them with new proposed regulations incorporating changes as follows:
- Add a definition of independence that establishes criteria used to identify nominees to stand for election as independent directors. The criteria are an adaptation of the thresholds of the widely used Canadian Securities Administrators National Instrument 52-110. Under this standard, a director is independent if he or she has no direct material relationship with a CPA member (e.g. employed as an officer or director of a CPA member financial institution) and no appearance of an indirect material relationship with a CPA member (e.g. is a spouse or common-law partner or household member of an officer of a CPA member financial institution). Therefore, adopting a definition adapted from this standard would ensure that any nominee for independent director would not have any professional, business or personal relationship that could reasonably be expected to interfere with the exercise of that director’s independent judgment. Specific criteria would be established in the Regulations, modelled on the criteria in National Instrument 52-110, to guide the CPA Board in determining whether a director or a director nominee meets the standard for independence.
- Require that two out of the three Board seats allocated to direct participants in CPA clearing and settlement systems must be held by banks that have been designated as domestic systemically important banks (D-SIBs) by the Superintendent of Financial Institutions.
- Require that CPA member directors be senior executive officers in their organizations.
- Modernize the Regulations by removing existing provisions of the Canadian Payments Association Election of Directors Regulations that are no longer applicable in light of the legislative amendments to the Canadian Payments Act (e.g. abolishing references to an all-member Board of Directors, voting formulas, and the Executive Committee).
The “One-for-One” Rule does not apply, as the regulatory changes do not impose new administrative burden costs on business.
Small business lens
The small business lens does not apply to this proposal, as there are no costs to small business.
The Canadian Payments Association and the Canadian Bankers Association (CBA) were consulted in the spring of 2014 on these measures. The CPA was also provided the opportunity to comment on drafts of these Regulations. The CPA and CBA support the proposed amendments to the Regulations.
The Regulations are needed to establish a majority-independent Board of Directors. The Regulations would deliver this outcome by setting out a transparent and objective set of criteria for determining which nominees qualify as independent directors.
By establishing these criteria, the Regulations would ensure that a majority of the Board of Directors remains free from any professional, business or personal relationship that could result in a conflict of interest with CPA members. Achieving this level of independence, in turn, should help the Board to better govern the CPA in the public interest, for example by assuring the safety and soundness of the CPA’s systems and ensuring that the systems are efficient and that the interests of end-users (such as consumers and businesses) are taken into consideration in both the operation of the CPA’s current systems and the design of the CPA’s next generation system.
Ensuring a minimal level of representation for domestic systemically important banks on the CPA Board will provide a safeguard to guarantee that the largest participants in the CPA’s systems and hence, those most exposed to risk, will continue to have representation on the Board.
The new requirements for the nominating committee, i.e. to consider the balance of core competencies required at the Board level when identifying candidates and to ensure that member directors are senior executives within their organizations, should result in more efficient decision-making at the Board level.
Implementation, enforcement and service standards
The regulatory changes would enter into force by July 2015. Compliance with the Regulations would be monitored by the Department of Finance Canada. In the event of non-compliance, the Minister of Finance could issue a directive to the Association, requiring compliance with the Regulations.
Financial Sector Division
Department of Finance Canada
90 Elgin Street, 13th Floor
Notice is given that the Governor in Council, pursuant to subsection 35(1) (see footnote a) of the Canadian Payments Act (see footnote b), proposes to make the annexed Canadian Payments Association Election of Directors Regulations.
Interested persons may make representations with respect to the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Erin O’Brien, Chief, Financial Sector - Payments, Financial Sector Policy Branch, Department of Finance, 90 Elgin Street, Ottawa, Ontario K1A 0G5 (tel.: 613-369-3871; fax: 613-369-3894; email: Erin.OBrien@fin.gc.ca).
Ottawa, March 12, 2015
Assistant Clerk of the Privy Council
CANADIAN PAYMENTS ASSOCIATION ELECTION OF DIRECTORS REGULATIONS
1. The following definitions apply in these Regulations.
« Loi »
“Act” means the Canadian Payments Act.
« appartenir à un groupe »
“affiliate” has the meaning assigned by subsection 9(3) of the Act.
« cadre dirigeant »
“senior officer” has the meaning assigned by the definition “officer” in section 2 of the Bank Act.
2. (1) The nominating committee must prepare a list of qualified candidates for the election as directors by ensuring that
- (a) candidates for directors referred to in paragraphs 8(1)(b) to (d) of the Act represent a sufficient range of skills, expertise and experience for the Board to carry out its responsibilities effectively;
- (b) candidates for directors referred to in paragraphs 8(1)(b) and (c) of the Act are at a level at least equivalent to the level of senior vice president or executive vice president within their organization; and
- (c) two of the three directors referred to in paragraph 8(1)(b) of the Act must be a representative of a financial institution listed in the schedule.
Particular case — independent director
(2) In regard to the directors referred to in paragraph 8(1)(d) of the Act, if the nominating committee is unable to prepare a list of qualified candidates in accordance with paragraph (1)(a) because of the requirements of the time period referred to in paragraph 3(1)(a), (f), (g), (h) or (i), it may recommend to the Board to reduce the time to a period of not less than one year.
3. (1) For the purposes of paragraph 8(1)(d) of the Act, “independent” means a person other than
- (a) a person who has been, within the last three years, a director, senior officer or employee of the Association, of a member or of an affiliate of a member;
- (b) a person who is involved in the day-to-day management or direction of the Association, of a member or of an affiliate of a member;
- (c) a director, senior officer or employee of a person referred to in subsection 4(2) of the Act, of a subsidiary of that person or of a corporation of which that person is its subsidiary;
- (d) a person who is a spouse or common-law- partner of a senior officer of the Association, of a senior officer of a member, of a senior officer of an affiliate of a member or anyone who resides with any such senior officer;
- (e) a person who is a family member in a financially dependent relationship, in a financially interdependent relationship or in a personal relationship with a senior officer of the Association, a senior officer of a member or a senior officer of an affiliate of a member, if in the opinion of the nominating committee that relationship could reasonably be expected to interfere with the exercise of a director’s independent judgment;
- (f) a person who has had within the last three years a contractual or business relationship with the Association, with a member or with an affiliate of a member, if in the opinion of the nominating committee that relationship could reasonably be expected to interfere with the exercise of a director’s independent judgment;
- (g) a partner, shareholder, director, senior officer or employee of an entity that has had a contractual or business relationship within the last three years with the Association, with a member or with an affiliate of a member, if in the opinion of the nominating committee that relationship could reasonably be expected to interfere with the exercise of a director’s independent judgment;
- (h) a person who has been within the last three years an advisor or consultant to the Association, to a member or to an affiliate of a member, or a senior officer or director of that advisor or consultant, if in the opinion of the nominating committee the relationship could reasonably be expected to interfere with the exercise of a director’s independent judgment; and
- (i) a person who has received, in a calendar year within the last three years, from the Association, from a member or from an affiliate of a member any compensation that is greater than $75,000, other than shares or share options or any compensation under a retirement plan, if in the opinion of the nominating committee the receipt of that compensation could reasonably be expected to interfere with the exercise of a director’s independent judgment.
(2) The nominating committee is to provide guidance with respect to the documents or information that it considers relevant to verify the independence of a candidate or director in regard to any circumstance referred to in paragraphs (1)(e) to (i).
ELECTION OF DIRECTORS
4. A candidate that receives the greatest number of votes in an election of directors for which they have been nominated is elected as a director. If only one candidate is nominated as a director, they are elected as a director when they receive a greater number of votes than the number of votes withheld.
REPORTING OF DIRECTOR INDEPENDENCE
5. (1) The nominating committee must confirm to the Board before the preparation of the annual report referred to in section 24 of the Act that each director referred to in paragraph 8(1)(d) of the Act is independent in accordance with section 3.
(2) The Board must indicate in the annual report
- (a) that the nominating committee has confirmed the independence of the directors; and
- (b) the instances when the Board has reduced the three-year time period referred to in paragraph 3(1)(a), (f), (g), (h) or (i) in accordance with subsection 2(2).
Change in circumstance
(3) A director referred to in paragraph 8(1)(d) of the Act must advise the Chairperson without delay of any change in their circumstance that is likely to affect their ability to meet the requirement to be independent in accordance with section 3.
6. The Canadian Payments Association Election of Directors Regulations (see footnote 1) are repealed.
COMING INTO FORCE
7. These Regulations come into force on the day on which subsection 356(1) of the Economic Action Plan 2014 Act, No. 2, chapter 39 of the Statutes of Canada 2014, comes into force, but if they are registered after that day, they come into force on the day on which they are registered.
- Bank of Montreal
- Bank of Nova Scotia (The)
- Canadian Imperial Bank of Commerce
- National Bank of Canada
- Royal Bank of Canada
- Toronto-Dominion Bank (The)