Laws regulating banks in Canada, or the banking laws in Canada, are regulated by various government agencies and are under the jurisdiction of numerous laws and regulations. The prevalent federal laws on banking are (1) the Bank Act, (2) the Canada Deposit Insurance Corporation Act, and (3) the Canadian Payments Act.
3 major banking laws in Canada
There are three main banking laws in Canada that we will look at in turn:
- The Bank Act
- The Canada Deposit Insurance Corporation Act (CDIC Act)
- The Canadian Payments Act (CPA)
(1) Bank Act
The Bank Act is an important, comprehensive law as it covers most of the regulatory provisions for banks in Canada. The Act grants banks and other financial institutions their legal or judicial identity – which is the same as that of a natural person with regards to its capacities, rights, powers, and privileges, as provided in Section 15 (1).
These legal grants of capacities etc. are subject to the provisions of the Act; one of which is the restriction on Section 409 (1) that banks cannot carry any other business which are not related to the “business of banking” and/or any other business generally relating to banking. The term “business of banking” is defined in Section 409 (1).
Incorporation
All banks must be incorporated as a corporation under the Act. While it is the Office of the Superintendent of Financial Institutions (OSFI) which recommends to the Minister of Finance on the application for incorporation of banks, the requirements are laid out on the Bank Act as specifically enumerated in Section 27. This is in accordance with all other considerations for the process of incorporating a bank mentioned in Part II of the Act.
Liquidity
With regards to its capital resources and liquidity, a bank is required by the Act, under Section 485 (1), to maintain adequate capital and adequate and appropriate forms of liquidity to ensure the lifespan of banks. When appropriate, the OSFI may also order a bank to increase its capital.
As to liquidation and dissolution proceedings, the Act provides for various ways in liquidating or dissolving a bank, such as Simple Liquidation (Section 342 (1)), and Court-supervised Liquidation (Section 347 (1)). However, Section 340 (1) provides that insolvent banks under the meaning of Winding Up and Restructuring Act (WURA) will be governed by the WURA and not by the Bank Act.
Read next: Insolvency vs illiquidity: Definition, Scope, and Remedies for Businesses
Foreign Banks
The Act also governs foreign banks, as provided in Part XII thereof. Section 526 provides for the matters to be considered by the OSFI in recommending to the Minister before a foreign bank is allowed to establish a domestic branch in Canada. Accordingly, it would also follow the same process of incorporation as those with domestic banks to be able to operate in Canada.
(2) Canada Deposit Insurance Corporation Act (CDIC Act)
According to Section 7 of the CDIC Act, among the CDIC’s main role is to insure all deposits and to ensure the stability of the banking system in Canada, together with the other banking laws. Under the CDIC regulations, all banks which accepts deposits are required to be a member of the CDIC. Other financial institutions in Canada, such as trust companies or credit unions, are not required to be a member of the CDIC, although it is highly encouraged to do so.
The CDIC is also connected with the Bank Act with regards to some matters. One of which is the bail-in regime of domestic systemically important banks (D-SIBs). When a D-SIB fails, or is starting to fail already, it may be resolved by adding capital funds when the said D-SIB is unable to raise capital anymore. Additionally, the CDIC will be appointed as the receiver of the D-SIB. This is in line with the goal of these laws which is to maintain the stability of the banking industry, and to prevent a ripple effect of a D-SIB's closure or insolvency to Canada’s economy.
(3) Canadian Payments Act (CPA)
The Canadian Payments Act (CPA) is the Act that established the Canadian Payments Association, which operates the systems for clearing, settlement, and other systems for banks and financial institutions. As provided in Section 4 (1), the members of the Association shall be composed of:
- all domestic banks;
- all authorized foreign banks; and
- all cooperative credit associations, loan companies, or trust companies designated as bridge institutions under the CDIC Act.
For domestic banks and authorized foreign banks, membership with the Association is mandatory, but is only optional for other financial institutions which accepts check deposits, such as cooperative credit associations, loan companies, or trust companies.
Is there a bank secrecy law in Canada?
The banking laws in Canada generally provides that banks are prohibited from disclosing personal information of their clients to third parties. Section 244 of the Bank Act provides that banks and its agents shall ensure that unauthorized persons are prevented from accessing or using any information from the registers and records being maintained by banks. This duty is specifically placed on the bank directors, as provided in Section 157 of the Act.
In the same vein, the provisions of Personal Information Protection and Electronic Documents Act (PIPEDA) are likewise applicable to banks, being one of the institutions which collects and utilizes personal information of its clients.
Who holds banks accountable in Canada?
Banking laws in Canada are mainly regulated federally, while also subject to the additional regulation by provincial laws. At the federal level, the Department of Finance oversees banks and implements the various banking laws in Canada. In coordination with the Department, are the Office of the Superintendent of Financial Institutions (OSFI), the Bank of Canada, the Canada Deposit Insurance Corporation (CDIC), and the Financial Institutions Supervisory Committee (FISC).
Compliance with these entities and the banking laws in Canada may be referred to a Canadian banking and finance lawyer (link below), who may further explain these laws and deal with these government agencies for regulatory purposes.
Each of these entities governs the banking industry in different ways:
- the OSFI implements various banking laws of Canada, such as the Bank Act, the CDIC Act, and the CPA;
- the Bank of Canada regulates matters concerning credit and currency, establishes Canada's monetary policy, and regulates clearing and settlement systems together with OSFI;
- the CDIC, in insuring bank deposits across Canada, processes membership of banks and financial institutions to the Corporation; and
- the FISC is the common Committee between these entities to discuss and consult on matters regarding the regulation of federal banking institutions.
Comment down below for any questions or find the list of the best Canadian banking and financial institution lawyers to get assitance with your needs around banking laws in Canada.