Ontario Credit Unions will be permitted to sell exempt market securities including 45-108-Crowdfunding

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Torys LLP | Blair W. Keefe, Eli Monas, William R. Walters | Dec 3, 2020

Ontario introduces the Credit Unions and Caisses Populaires Act, 2020

As part of its 2020 Budget¹, the Government of Ontario has introduced the Credit Unions and Caisses Populaires Act, 2020 (Act) which will replace the existing Credit Unions and Caisses Populaires Act, 1994 (CUCPA). We outline some of the key changes in our latest guidance.

What you need to know

Expanded capital raising options: Ontario credit unions will be permitted to sell securities through the exempt market under National Instrument 45-106-Prospectus Exemption and National Instrument 45-108-Crowdfunding.
Increased scope of permitted business: Ontario credit unions will be able to engage in any trade or business that is not otherwise authorized under the Act with the FSRA CEO’s written approval (with some limitations); make loans to non-customers; and sell insurance in branches and on their websites.
Updated governance: Ontario credit unions will be required to implement a code of conduct and file board gender diversity reports, while the governance provisions of the Act have been streamlined to be more principles based.
Increased administrative flexibility: Meeting rules have been updated with more technology neutral language to allow for alternatives to in-person meetings and voting, while record-keeping requirements have been liberalized to allow for storage outside of Ontario.
Stakeholder engagement: The Ontario government intends to work with stakeholders on necessary regulations to the Act and with FSRA to develop Authority rules. With completion of this phase targeted for the end of 2021, the Ontario government’s goal is for the Act to come into force in 2022.

The details

The Act is the outcome of a review process that began with a consultation on the development of a new legislative framework for Ontario credit unions in 2019 and a subsequent legislative review which was completed earlier this year.

See: SEC Votes to Approve Changes to Regulation Crowdfunding Increasing the Maximum Raise to $5 Million

Overall, a significant proportion of the CUCPA's content has been retained in the Act, but with much of the detailed, prescriptive content removed to be set out in regulations and Authority rules (i.e., the rules of the principal regulator of Ontario credit unions), the Financial Services Regulatory Authority of Ontario (FSRA)². Significant changes have been made, however, that should provide Ontario credit unions with a more liberalized and modern legislative regime, most notably with respect to capital raising and business powers, governance, and administrative practices.

I. Capital raising and business powers

Ontario credit unions will have readier access to capital as the Act includes provisions to permit Ontario credit unions to sell securities through the exempt market under National Instrument 45-106-Prospectus Exemption and National Instrument 45-108-Crowdfunding.

Currently, Ontario credit unions can raise capital by selling securities to their members which requires the filing of an offering statement with FSRA, in accordance with the CUCPA, or filing a prospectus with the Ontario Securities Commission (OSC). While the existing framework was originally intended as a less burdensome alternative to filing a prospectus with the OSC, the new ability to raise capital through the exempt market will offer Ontario credit unions a more streamlined and cost-effective approach.

The Act will also significantly expand the scope of business that an Ontario credit union may undertake, most notably with respect to ancillary businesses, lending, and insurance. The Act has removed the requirement that an Ontario credit union may only engage in businesses "reasonably ancillary to the provision of financial services".

Instead, an Ontario credit union will now be permitted to engage in any trade or business that is not otherwise authorized under the Act with the FSRA CEO's written approval (subject to any conditions or limitations which may be prescribed by the Authority rules) (section 139).

See: NCFA Response to the Modernizing Ontario’s Capital Markets Consultation Taskforce

Furthermore, under the Act, an Ontario credit union will be permitted to make loans to non-members (section 154). In addition, while the existing provision of the CUCPA restricting an Ontario credit union's insurance business will remain unchanged in substance, the Ontario government has stated in "Ontario's Action Plan 2020" that Ontario credit unions will be permitted to sell insurance within branches and on their websites and that the new Act will provide “opportunities for insurance intermediaries and credit unions to seek mutually beneficial business relationships that could reduce costs".

The final scope and effect of these new business powers will only become clear with the publication of the applicable regulations and Authority rules, but the indications are that Ontario credit unions will have a wide range of new opportunities to expand their client base, business partnerships, and product offerings.

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