Banks are important institutions of a country. The financial products and services they offer to the public affect the economy. To maintain the consumers’ trust and confidence in banks, banking regulations are set up by enacting laws.
This article is especially for new lawyers who are looking to build their knowledge of banking regulations.
Who regulates banks in Canada?
There are two main government regulators which implement Canada’s banking regulations:
- Office of the Superintendent of Financial Institutions (OSFI)
- Financial Consumer Agency of Canada (FCAC)
OSFI is concerned with the federal incorporation and financial stability of banks doing business in the country. Meanwhile, the FCAC is focused on banks’ compliance with consumer protection regulations.
Office of the Superintendent of Financial Institutions (OSFI)
According to Jason Kroft, partner at Miller Thomson LLP and co-leader of its national Structured Finance and Securitization practice, the main regulator of banks in Canada is the OSFI. “OSFI produces guidelines for the conduct of banks and must be reviewed carefully by counsel,” Kroft says.
Powers of the OSFI
By way of example of OSFI’s powers in regulating banks in Canada, Kroft highlighted the OSFI Guideline B-15. “This guideline sets out enhanced climate change risk disclosure and risk management of banks to address the evolving impacts of climate change.”
He also expects that Guideline B-15 will have far-reaching implications for banks and their customers and clients. “As banks develop enhanced risk management processes and disclosure around climate change, invariably their borrowers, customers and clients will have to comply with enhanced reporting and onboarding requirements related to climate change that Canadian banks may identify,” Kroft adds.
Kroft, who is also co-chair of Miller Thomson’s ESG and Carbon Finance practice, says that these enhanced reporting and onboarding requirements will be needed to facilitate the banks meeting their regulatory obligations.
Find out more about OSFI’s Guideline B-15 with this article from Miller Thomson LLP, authored by Kroft and his peers:
For questions on any banking regulation in your province, contact a lawyer in your area. If you’re in Ottawa, for example, reach out to any of the Lexpert-Ranked best banking lawyers in Ontario.
Jurisdiction of OSFI
Aside from banks, the OSFI also has jurisdiction over other financial institutions in Canada, such as:
- trust and loan companies
- insurance companies (both life, and property and casualty)
- fraternal benefit societies
Read more about the OSFI and the Financial Institutions Act in our primer.
Financial Consumer Agency of Canada (FCAC)
Under Canada’s banking regulations, consumers have certain rights and obligations, which must be upheld and imposed by banks. Any violation of these rights may open a bank to sanctions from the FCAC.
Prohibited acts of banks
Certain banking conduct are prohibited by Canada’s banking regulations, such as:
- providing false or misleading information as to its financial products
- coercing consumers or using undue pressure in relation to its products and services
Responsibilities of banks
In relation to these prohibited acts, banks are expected to:
- acquire prior, express consent from its consumers when selling or providing them with its financial products or services
- inform consumers that they no longer benefit from their previous offers, and get their express consent before it can impose additional charges
- use clear and simple language in its forms and agreements when providing consumers information about its products and services
What are Canada’s banking regulations?
The primary legislation on the formation, operation, and business of banking in Canada is the Bank Act, a federal law.
Kroft also elaborates on the important provisions of the Bank Act. “The Bank Act describes the business that regulated banks can perform in Canada and identifies the constraints, limits and oversight for banking business including the types of activities or investments permitted by banks,” Kroft says.
“If an institution intends to carry on banking business in Canada, it must be licensed and approved as a bank.”
Licensing of Banks
Here’s an overview of how banks and other federally regulated financial institutions (FRFI) are incorporated under the Bank Act:
- Phase 1: Pre-Application
- Phase 2: Issuance of Letters Patent
- Phase 3: Issuance of an Order
Here is a more detailed look at each phase:
Phase 1: pre-application
During Phase 1, an initial in-person meeting will be conducted between the OSFI and the applicant. At this meeting, they will discuss the proposed FRFI and the application process. The applicant will also submit the Phase 1 Information Requirements for OSFI’s review.
Upon review, the OSFI will then issue an Expectations Letter. This will explain any material risk or concern in the proposed business plan that may need to be addressed during the next phases.
Phase 2: issuance of Letters Patent
Phase 2 starts with the publication of a Notice. After this, the applicant can submit its application for the issuance of the Letters Patent, along with the Phase 2 Information Requirements.
The applicant will also include any changes to its Phase 1 Information Requirements, when directed.
Phase 3: issuance of an Order
After the Letters Patent is issued, the application will now proceed to Phase 3. Here, OSFI will first ensure that the applicant has its necessary systems, management structure, control processes, and regulatory compliance management systems. The OSFI may also conduct an on-site review.
Only when the Order is issued can the applicant conduct business. The Order may also set out conditions or limitations on the applicant’s business whenever necessary.
A somewhat different application procedure will apply to a foreign bank branch in Canada:
- Pre-Notice Period
- Post-Notice Period
- Conversion of a Deposit Taking Subsidiary
The business of banking
The Bank Act also prescribes what activities and investment-related business a bank can do. In general, banks are prohibited from doing any activities outside the business of banking.
In Canada, the business of banking includes:
- providing consumers with any financial product or service
- acting as a financial agent on behalf of a client
- operating and issuing payment, credit, or charge cards
- providing investment counselling and portfolio management services
As such, banks may not engage in these activities as fall outside the scope of the business of banking:
- offering and providing insurance services
- carrying out fiduciary activities
- engaging in financial leasing activities
- dealing in securities
To know more about Canada’s banking regulations, consult any of the best banking lawyers in Canada as ranked by Lexpert.