Greater flex­i­bil­ity

Investment Executive - - FRONT PAGE - BY RUDY MEZZETTA

the up­com­ing ex­pan­sion of Canada De­posit In­sur­ance Corp.’ s (CDIC) cov­er­age to in­clude long-term GICs and for­eign-cur­rency ac­counts, as well as two new reg­is­tered plan in­sur­ance cat­e­gories, could be of sig­nif­i­cant ben­e­fit to Cana­di­ans.

“The changes are re­ally about mod­ern­iz­ing the scope of the de­posit in­sur­ance sys­tem to bet­ter re­flect the prod­ucts i n the mar­ket to­day and the way Cana­di­ans use them,” says Dean Cos­man, pres­i­dent and CEO of the CDIC.

Jack Rando, manag­ing direc­tor with the In­vest­ment In­dus­try As­so­ci­a­tion of Canada in Toronto, agrees: “[The changes] pro­vide more flex­i­bil­ity to fi­nan­cial ad­vi­sors and con­sumers, which is a good thing.”

As part of the 2018 fed­eral bud­get bill passed in June, sev­eral amend­ments were made to the CDIC Act to re­flect the re­sults of a re­view of de­posit in­sur­ance cov­er­age that was con­ducted in 2016.

(Al­though the amend­ments have passed into leg­is­la­tion, no date has been an­nounced by the fed­eral gov­ern­ment for the rules to come into force.)

These changes in­clude an ex­ten­sion of CDIC c ov e rage to de­posits with terms longer than five years and to de­posits de­nom­i­nated i n for­eign cur­rency, such as U.S. dol­lar ac­counts, held in CDIC-mem­ber in­sti­tu­tions. Pre­vi­ously, only GICs with terms of five years or less and ac­counts de­nom­i­nated in Cana­dian dol­lars were eli­gi­ble for CDIC cov­er­age.

The ex­pan­sion of de­posit in­sur­ance to GICs with terms longer than five years — which com­pose a small but grow­ing part of the term de­posit mar­ket — was made “to make those prod­ucts more avail­able and more at­trac­tive to con­sumers,” Cos­man says.

Dan Hal­lett, vice pres­i­dent and prin­ci­pal with Oakville, Ont.-based HighView Fi­nan­cial Group, says he be­lieves there would be limited in­ter­est from clients for long-term GICs.

“Be­ing locked in for that long is not go­ing to be very at­trac­tive, even with CDIC cov­er­age,” says Hal­lett, who be­lieves many ad­vi­sors would rec­om­mend long-term gov­ern­ment bonds for their clients in­stead. “I don’t see peo­ple load­ing up on 10-year GICs.”

In ad­di­tion, two new CDIC in­sur­ance cat­e­gories are be­ing in­tro­duced: de­posits held in reg­is­tered ed­u­ca­tion sav­ings plans (RESPs) and in reg­is­tered dis­abil­ity sav­ings plans (RDSPs). Eli­gi­ble de­posits held in RESPs and RDSPs qual­ify for in­sur­ance cov­er­age un­der the pre­vi­ous rules, but only un­der other CDIC in­sur­ance cat­e­gories.

The cat­e­gory for mort­gage tax ac­counts will be dropped un­der the new rules be­cause the rel­a­tive size and use of these ac­counts has de­clined. Eli­gi­ble de­posits held in mort­gage tax ac­counts still qual­ify for CDIC in­sur­ance, but un­der one of the other in­sur­ance cat­e­gories.

Fi­nally, the CDIC is­sued a con­sul­ta­tion pa­per in July that re­views the by­laws gov­ern­ing the re­port­ing and dis­clo­sure of trust ac­counts by trus­tees, in­clud­ing nom­i­nee bro­kers and pro­fes­sional trus­tees, to the CDIC and its mem­ber in­sti­tu­tions. Pro­posed changes in­clude new re­quire­ments for the man­age­ment of i nfor­ma­tion for trust de­posits by mem­ber firms.

The trust de­posit changes are in­tended to make pro­tect­ing ben­e­fi­cia­ries and re­im­burs­ing them promptly in the event of a bank fail­ure eas­ier for the CDIC. That con­sul­ta­tion ends Sept. 28.

“We un­der­stand why the CDIC wants [these changes] and [they] make to­tal sense,” says Rando. “It’s just [a mat­ter of ] work­ing with [the CDIC] to get a clear un­der­stand­ing of what the re­quire­ments are.”

The CDIC, a crown cor­po­ra­tion, has a man­date to pro­tect in­vestors who hold eli­gi­ble de­posits with CDIC-mem­ber in­sti­tu­tions, pri­mar­ily banks and trust com­pa­nies, and to pro­mote sta­bil­ity in the fi­nan­cial ser­vices sys­tem. In the event of a bank fail­ure, the CDIC acts as the res­o­lu­tion author­ity.

The CDIC in­sures an in­vestor’s eli­gi­ble de­posits in each mem­ber in­sti­tu­tion, up to $100,000, sep­a­rately in seven dif­fer­ent cat­e­gories: de­posits held in one name; joint ac­counts; trust ac­counts; RRSPs; RRIFs; TFSAs; and mort­gage tax ac­counts. Eli­gi­ble de­posits for CDIC cov­er­age in­clude sav­ings and chequing ac­counts, term de­posits and money or­ders. Nonel­i­gi­ble de­posits in­clude stocks, mu­tual funds and bonds.

Un­der the new rules, trav­ellers’ cheques will no longer be eli­gi­ble de­posits. That’s be­cause CDICmem­ber in­sti­tu­tions no longer is­sue them.

The to­tal amount of eli­gi­ble de­posits held by mem­ber in­sti­tu­tions cov­ered by CDIC in­sur­ance is $770 bil­lion, the CDIC states. The in­crease in the scope of CDIC cov­er­age will mean an in­crease in the level of eli­gi­ble de­posits. For ex­am­ple, the cu­mu­la­tive size of for­eign-cur­rency de­posits held in mem­ber in­sti­tu­tions that will be cov­ered un­der the new rules is around $150 bil­lion.

As mem­ber in­sti­tu­tions pay to fund CDIC in­sur­ance, pre­mi­ums will rise, Cos­man says: “We’re pro­ject­ing that in­sured de­posits could i ncrease to the tune of 10%-20%.”

Al­though bank fail­ures in Canada are rare — the most re­cent CDIC mem­ber to go bank­rupt was Cal­gary-based Se­cu­rity Home Mort­gage Co. in 1996 — the is­sue of CDIC cov­er­age arose last year when Toronto-based CDIC-mem­ber Home Cap­i­tal Group Inc. ex­pe­ri­enced a flight of de­posits. Ul­ti­mately, that firm re­ceived a boost of eq­uity from Amer­i­can in­vestor War­ren Buf­fett and the com­pany’s for­tunes sta­bi­lized.

Even though eli­gi­ble de­posits are in­sured by the CDIC, de­posithold­ers can lose con­fi­dence, says Michael King, as­so­ci­ate pro­fes­sor of fi­nance at Ivey Busi­ness School at Western Univer­sity in Lon­don, Ont.: “Peo­ple can [with­draw] elec­tron­i­cally. [Runs on de­posits] can hap­pen much more rapidly.”

That’s why the CDIC must keep clients in­formed on what is and what is not in­sured, Cos­man says.

“A strong de­posit in­sur­ance sys­tem,” Cos­man says, “con­trib­utes to a strong fi­nan­cial sys­tem — and to con­fi­dence i n that sys­tem.”

Even though eli­gi­ble de­posits are in­sured un­der CDIC cov­er­age, de­posithold­ers can lose con­fi­dence

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