The new federal disclosure regime governing principal-protected notes was published today in the Canada Gazette.

The new regime, which takes effect July 1, updates a disclosure regime that had become outdated as the PPNs became more complex and diverse. “The complexity of such products can make it difficult for retail investors to fully understand the risks, fees, and potential returns,” notes the impact analysis accompanying the final regulations.

The regulations specify the content, manner, and timing of disclosure that federally regulated deposit-taking institutions are required to provide for various sales channels (in-person, telephone and on-line). They also specify that institutions make available, and provide on request, information to aid consumers in monitoring their investment. In addition, the regulations set out requirements for advertising regarding these products. The Financial Consumer Agency of Canada will enforce the regulations.

“Initially, financial institutions may incur some minor costs as they adjust their policies and procedures to the new requirements, but these costs are mitigated by the ability of institutions to provide detailed information, as well as disclosures after purchase, in electronic format rather than paper, if agreeable to the consumer,” it says.

The government is also committed to making the new regime principles-based. “While it is important to ensure that consumers receive the necessary information to make informed choices, a regime that is overly prescriptive would become inadequate or irrelevant in a market that is characterized by the frequent introduction of new products,” it maintains. ‘A more principles-based approach will help to reduce regulatory burden as it allows institutions to determine tailored and innovative ways to comply with the principles. This better ensures effective disclosure of the information consumers’ need, while minimizing the burden on financial institutions.”

The new regime was announced in the 2007 federal budget. In developing the regulations the government consulted with the Canadian Bankers Association, the Ontario Securities Commission, l’Autorité des marchés financiers du Québec, the FCAC, the Office of the Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation. They were also published for public comment in late 2007, and the government claims that most of these comments are addressed through revisions to the regulations.

A few comments have not been reflected in this final version of the regulations, it allows. “Some stakeholders were asking for very specific pieces of information to be provided in a prescribed manner, which is inconsistent with the government’s decision to take a principles-based and results-focused approach to regulating, and to move away from very prescriptive requirements,” it says.