Canada’s financial system is known around the world for its stability, but it isn’t immune to the pressures that face global banking. Economic uncertainty, changing regulations and shifting investment markets can all lead to a lack of trust in financial institutions.
Protection for investments and deposits, however, can play a role in bolstering investor confidence and injecting dependability into financial systems—which is where the Canada Deposit Insurance Corporation (CDIC) and the Canadian Investor Protection Fund (CIPF) step in.
What happens if your financial institution fails?
Canadians generally have two basic sources of account protection: the Canada Deposit Insurance Corporation (CDIC), and the Canadian Investor Protection Fund (CIPF). The CDIC is a federal Crown corporation, established by an act of Parliament in 1967, and CIPF is a not-for-profit corporation created by the Canadian investment industry in 1969.
The CDIC protects eligible deposits, within stated limits, made to member institutions—banks, trust companies, loan companies, and federal credit unions— in case a member institution goes under.
CIPF, for its part, protects property in client accounts, again within specified limits, if a CIPF member— investment firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC)—fails.
What does each type of protection cover?
Although the two institutions may sound similar, they provide coverage for different types of financial institutions and were established to fill two different purposes:
- The CDIC ensures Canadians don’t lose the money they’ve deposited as cash and Guaranteed Investment Certificates (GICs); invested funds are not covered by the CDIC. The goal of CDIC is to ensure that Canadians feel confident in the Canadian banking system. Without these protections in place, depositors might prefer to stash their money away under the mattress instead.
- In contrast, CIPF doesn’t cover investment losses. The goal of CIPF is to return your property, such as securities and cash, if your investment dealer folds.
How are hybrid accounts protected?
In recent months, the difference between these two forms of coverage has gained attention, in part because Canadian online portfolio manager Wealthsimple launched Wealthsimple Cash in January 2020. This hybrid account combines the features of a high-interest savings account, a prepaid Visa debit account and a regular spending account (the latter is similar to a traditional chequing account).
Unlike Wealthsimple’s previous Smart Savings accounts, which are eligible for CDIC coverage (as they were deposited with CDIC members), Wealthsimple Cash accounts are eligible for protection by CIPF, not CDIC. Balances in Wealthsimple Cash accounts are held in an account with Canadian ShareOwner Investments, Wealthsimple’s custodial affiliate dealer, which is a CIPF member. (As an investment dealer, Canadian ShareOwner Investments, holds and custodies investor assets for Wealthsimple customers.) CIPF protection is triggered, however, only if Canadian ShareOwner goes insolvent, not Wealthsimple.
Now that Canadians have access to a “bank-like” product that doesn’t have the traditional protections offered to banking clients, should they be worried about the lack of depositor protection on these “hybrid” accounts—or is the coverage provided by the CIPF adequate? Let’s take a closer look at how the CIPF’s coverage works.
How CIPF protects Canadian investors
When an investor opens an account with a CIPF member, they automatically receive CIPF coverage. In other words, you don’t need to apply or take any other action in order to be protected.
Each investor’s coverage at a CIPF member institution is set at:
- $1 million (in Canadian dollars) for general accounts (such as cash and and Tax-Free Savings Accounts) combined;
- $1 million for registered retirement accounts (such as RRSPs, RRIFs and Locked-In Retirement Accounts); and
- $1 million for Registered Education Savings Plans where the investor is also the plan subscriber.
Here’s how the coverage works. Let’s say you buy 100 shares of a public company, all held in an account with a CIPF member firm. If that member firm becomes insolvent, CIPF’s goal is to return the 100 shares to you. If, however, the 100 shares are not returned to you, CIPF would compensate you for the missing shares—provided you meet all requirements, such as applying for coverage within a 180-day window after your firm becomes insolvent—based on the value of the 100 shares on the date of the member firm’s insolvency. (That is, your compensation is calculated on the value of your shares at the time the firm failed, not at the time of your initial investment.)
Should Wealthsimple Cash account-holders worry?
Although the example above involves shares held in an institution with CIPF coverage, that protection includes cash and other property (such as segregated funds and futures contracts) held by member firms.
For Wealthsimple Cash clients, or for owners of any other hybrid bank-like products that might enter the Canadian marketplace in the future, this means CIPF coverage is available, providing the cash is held at a CIPF member. In the event that Canadian ShareOwner becomes insolvent, CIPF protection would be available to cover cash (and other property) in Wealthsimple Cash accounts, up to specified limits.
While the founders of the CIPF may not have envisioned covering accounts like Wealthsimple Cash when they set up the fund in 1969, this interpretation of CIPF coverage means that Canadian investors can continue to be protected as financial institutions continue to innovate.
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