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 in 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 coverage to deposits with terms longer than five years and to deposits denominated in 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 information 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. Non-eligible deposits include stocks, mutual funds and bonds.
Under the new rules, travellers’ cheques will no longer be eligible deposits. That’s because CDIC-member 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 increase 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 in that system.”