October 2002 marked the first anniversary of the proclamation of Canada's Financial Consumer Agency of Canada Act. The Act makes fundamental changes in the areas of financial institution ownership, investment, operations, corporate governance, consumer protection, and foreign bank branch regulation, thereby potentially having significant influence on the business decisions of Canada's financial institutions. New ownership regimes mean banks and insurance companies are now categorized according to size based on shareholder equity. New rules permit expanded interests to be held in Canadian financial institutions. In addition, regulated, non-operating bank and insurance holding companies may be established.
The merger earlier this year of Clarica Life Insurance Company and Sun Life Financial Services of Canada was the first transaction to occur under the Act's new regimes. As a result of the new rules, at the time that Clarica could legally be closely held, Clarica and Sun Life reached agreement, leaving shareholder and government approvals as major hurdles to completing the merger. While the required government approvals were granted, institutional shareholder dissent appeared to threaten closing. A sore spot - as in a number of recent transactions - was the size of the break fee, reported to be C$310 million ($197 million). Certain key shareholders argued that the break fee was too high, exceeded typical industry norms and that it discouraged competing bids. Valued at approximately C$7 billion, the transaction was ultimately approved and the resulting combined company is now the largest life insurance company in Canada.
The new rules should prove favourable to increased merger and acquisition activity among Canada's financial institutions. However, while the insurance industry has taken its first steps to consolidate, Canada has yet to see any movement in the banking industry. Though the country's legal landscape may have opened up for increased financial institution mergers, whether and when its political landscape follows suit, especially regarding the major banks, remain questions for the future.