Regulator Successful in First Test of its Powers

On May 18, 2010, Deposit Insurance Corporation of Ontario (“DICO”) made an order placing Arnstein Community Credit Union (the “Credit Union”) under its supervision and subject to its supervisory powers pursuant to the provisions of the Credit Unions and Caisses Populaires Act, 1994, S.O. 1994, c.11, as amended, (the “Act”). Prior to October 2009, DICO had for many years been the deposit insurer of credit unions and caisses populaires in Ontario. However, in statutory amendments in October 2009, DICO was given the responsibility and powers to regulate the solvency of Ontario's credit unions and caisses populaires generally.

The Credit Union appealed DICO's order to the Financial Services Tribunal, a statutory tribunal under the Financial Services Commission of Ontario Act, 1997, S.O. 1997, c.28 (the “FST”). This was the first appeal of a DICO order to the FST.

The Credit Union raised several issues as to the fundamental relationships between and among DICO, credit unions and the FST as the appellate body.

On May 31, 2011, the Credit Union's appeal was denied by the FST and the decision established a number of important principles for the regulation of financial institutions in Ontario under the new legislative scheme.

The Tribunal's decision makes clear that DICO's power to order that a credit union be supervised by DICO in s. 279(1)(3) of the Act requires only that DICO have a reasonable belief that there may be a risk of harm to the interests of members or depositors or that there may be an increased risk of claims against the statutory Deposit Insurance Reserve Fund if a supervision order is not made.

To place a credit union under its supervision, DICO is not required to prove that, absent a supervision order, harm would occur or claims against deposit insurance would actually increase.

Additionally, DICO may rely on the facts and conclusions set out in its statutory examination reports in making a supervision order. To successfully appeal a supervision order, the appellant institution must disprove facts included in the examination report.

In the case of the Credit Union, the FST held that DICO's 2008 and 2009 examination reports established the following facts and constituted a reasonable basis for DICO's belief that there may be a risk of harm to the interests of members or depositors or may be an increased risk of claims against the deposit insurance fund: 1) credit risk management practices that did not comply with all aspects of the applicable law, regulations, DICO by-laws and the Credit Union's policies; 2) holding investments in contravention of the Act; 3) failure to maintain minimum liquidity and capital requirements in contravention of the Act; 4) granting of loans or mortgages in contravention of the Act, the regulations, DICO by-laws and the Credit Union's policies; 5) inadequately identifying impaired loans as required by DICO by-law; and 6) allowing disqualified individuals to continue to serve as directors.

The FST also ruled that under its own procedural rules, the Credit Union was entitled to put before the FST documents that the Credit Union had provided to DICO prior to DICO providing notice of its intention to supervise the Credit Union in order to allow the Credit Union to argue that even if DICO did not rely upon those documents to make its order, it should have done so.

The Tribunal also considered issues of procedural fairness as they apply to DICO's decision-making authority and held that: 1) DICO need only meet the statutory notice requirements.

DICO is not required to notify a credit union that it has been placed on an internal watchlist; 2) written reasons for its order are required but the reasons may consist of DICO's notice to the credit union and its supervision order if they make reference to the substantive facts and issues raised and delineated in DICO's examination reports; and 3) DICO is under no duty to provide guidance to a credit union on how to conduct its affairs so to avoid a supervision order.

The Credit Union was represented by Richard Wozenilek and Patricia Harper of Keel Cottrelle LLP.

DICO was represented by Fred Myers, Dan Cohen and Monica Creery (research) of Goodmans LLP.