Banking secrets in jeopardy? Landmark ruling threatens financial industry’s confidential dealings

Banking secrets in jeopardy? Landmark ruling threatens financial industry’s confidential dealings

Theresa Tedesco | May 9, 2014 | Last Updated: May 9 9:16 PM ET
The impenetrable cloak of confidentiality between Canada’s major financial institutions and the country’s top financial watchdog is in jeopardy in the wake of a decision by a Quebec court that could dramatically alter the regulatory regime.

A Quebec Superior Court judge has declared that although the secrecy of information and correspondence exchanged between federally regulated firms, such as banks, insurance companies, and trusts with the Office of the Superintendent of Financial Institutions (OSFI) is protected by statutory obligation, the courts can still compel their disclosure in a lawsuit.

The decision, if upheld, could have a chilling effect on what financial institutions confide to regulars and potentially undermine the integrity of Canada’s much-vaunted financial system.

A document is not privileged because it is confidential

“A document is not privileged because it is confidential,” wrote Madame Justice Alicia Soldevila of the Quebec Superior Court in a 17-page ruling released May 7. “There are situations in which it is justified that a witness be forced to divulge information or a confidential document. This is generally the case when the disclosure of a document is necessary to assure the fundamental right of a party to a full and complete defense or when the document is relative to the litigation and it would be useful to the resolution of the matter.”

The decision was issued as part of a $1.4-billion class-action lawsuit filed against Manulife Financial Corp. over its risk management policies and practices during an era of explosive growth that forged the firm into the largest life insurer in North America – and threatened its survival amid the turmoil of the 2008 global financial crisis. The legal salvo was launched after the National Post published a report in 2010 outlining how the federal watchdog was so anxious about Manulife, it aggressively intervened in the affairs of the giant insurer over several months in late 2008 and 2009, increased its oversight and supervision, conducted an audit of its risk management controls and subjected the firm’s senior management to intense scrutiny.

Filed in 2009 by Siskinds LLP on behalf of shareholders who acquired Manulife shares from January, 2004 to February, 2009, the lawsuit seeks damages from the giant insurance company, former chief executive Dominic D’Alessandro and former chief financial officer Peter Rubenovitch. At issue is Manulife’s controversial hedging strategy for variable annuity and segregated funds products. The claim alleges, among other things, that the giant insurer “negligently made representations” regarding its risk management practices and policies and misrepresented and failed to disclose of the size of its exposure to equity markets during the financial crisis. A class action was certified in Quebec in 2011 and a similar lawsuit received the court’s blessing to proceed in Ontario earlier this year.

Lawyers for Manulife’s aggrieved shareholders sought 63 highly sensitive internal documents exchanged between the company and OSFI dating from December, 2006 to 2009, most of them so-called risk position reports containing “prescribed supervisory information” and minutes of meetings of the executive, audit and risk management committees of Manulife’s board of directors.

Manulife refused, citing its statutory obligations under OSFI rules and the federal Insurance Act, which prohibits financial institutions from disclosing documents regarding their business affairs that are exchanged with OSFI “to the extent that they contain supervisory information as defined in the relevant regulations.”

The matter was argued before Justice Soldevila last December, and after reviewing a sample of six of the 63 documents requested, she rejected Manulife’s argument of a “pre-emptory statutory privilege,” and ordered that all but two should be produced as evidence in the lawsuit. As a result, Manulife must release 57 other documents within 10 days of her judgment, although she cautioned the insurance company reserves the right to argue that some of the information contained in the internal papers may not be relevant to the class-action litigation.

Officials from Manulife and the banking regulator declined to comment except to say they are reviewing the judge’s decision. An OSFI official told the Post, “it would be inappropriate for OSFI to comment on this legal matter as there remains the opportunity for appeal.”

It is widely expected that Justice Soldevila’s ruling could have wider implications for Canada’s major banks and insurance companies, making them less forthright with the regulator because they are worried that documents relating to their supervision can be used against them for other purposes.

The risk is that the decision will hinder the free flow of information between financial institutions and the regulator

“The point of keeping privilege is to allow financial institutions to speak freely with their regulators without fear of having the information used against them,” said a lawyer who deals in the financial industry who spoke on the condition of anonymity. “The risk is that the decision will hinder the free flow of information between financial institutions and the regulator.”

Julie Dickson, Canada’s Superintendent of Financial Institutions, said as much when she told an audience in Cambridge, Ont., on Thursday that Canada’s regulatory regime was strong because “we can communicate effectively with institutions, and they with us. We have a ‘no surprises’ philosophy.”

In her decision, Justice Soldevila declared “a statutory promise of confidentiality does not constitute an absolute bar to compelling production of the documents and information in the possession and control of OSFI.” She also wrote that while financial institutions and the watchdog benefit from the fact they can freely communicate sensitive information without fear of it being publicly disclosed, “this protection in the form of a ban on disclosure cannot render impossible the duties imposed on the same institution under securities laws and regulations.”

If the federal government wants to shield financial institutions from being forced to disclose confidential documents by the courts, the judge wrote, Parliament should express those wishes explicitly in the legislation.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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