There are clearly-defined laws in Canada that describe what a financial institution is and what the corresponding regulatory regimes are.
A financial institution may be:
- a deposit-taking institution (e.g., banks, credit unions, trust companies, mortgage loan companies);
- an insurance company; or
- an investment institution (e.g., investment banks, underwriters, brokerage firms)
Some institutions may carry out two of these functions (e.g., a bank may perform all these three) if the laws on financial institutions still apply.
Financial institutions are outlined in Canada’s federal laws. The Office of the Superintendent of Financial Institutions Act defines what a “financial institution” is.
According to the Financial Institutions Act, a financial institution (Section 3) may fall under the category of:
- a domestic or foreign-authorized bank (Bank Act);
- a trust and loan company (Trust and Loan Companies Act);
- a cooperative (Cooperative Credit Associations Act);
- a company, society, foreign, or provincial company (Insurance Companies Act);
- an insurance holding company (Insurance Companies Act); or
- a pension plan (Pension Benefits Standards Act, 1985 or Pooled Registered Pension Plans Act).
When a company, a corporation, a pension plan, or an organization falls under this definition, it will be regulated according to the Financial Institutions Act. This is without exemption to the other Canadian laws and regulations on financial institutions.
Financial institutions in Canada could be regulated at both the federal and provincial level. It all depends on its nature and the scope of its operations.
Foreign-owned and domestic banks are regulated by the federal government through the Bank Act, while the provincial government oversees all other entities.
Securities regulation falls under the authority of provincial and territorial governments since there is no federal securities regulator.
Both the federal and provincial governments regulate insurance companies and trust and loan companies.
The Bank Act is the federal legislation governing banks and the banking sector. Banks are classified as:
- Schedule I bank - domestic banks
- Schedule II bank - subsidiary of a foreign bank
- Schedule III bank - authorized foreign banks
The Act defines the powers and limitations on a bank; the duties, responsibilities, and liabilities of the bank’s shareholders and members, including its directors and officers; and the guidelines and restrictions on bank ownership.
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA)
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act PCMLTFA) is a federal law that imposes sanctions relating to money laundering and terrorist financing. The PCMLTFA is enforced by the Financial Transactions and Reports Analysis Centre of Canada or FINTRAC.
Laws on financial institutions in Canada, including the Financial Institutions Act, overlap or relate with each other, just like the regulating authorities that implement them.
While banks do fall under the Bank Act, they are also regulated by several bodies in Canada, including falling under the Financial Institutions Act.
Other organizations may also be governed by these regulatory bodies:
Department of Finance Canada
The Department of Finance Canada, together with the Minister of Finance, is the overall regulator of Canada’s financial sector. It advises the government on policies and legislation, including matters on taxation and tariffs, financial security issues, and the overall economic stability of Canada. The Department also helps implement such policies and legislation.
Office of the Superintendent of Financial Institutions (OSFI)
The Office of the Superintendent of Financial Institutions (OSFI) is considered the main regulating authority for banks and other similar institutions in Canada. The OSFI ensures their financial stability, interprets financial legislation in case of confusion, and issues guidelines governing these institutions.
Bank of Canada
The Bank of Canada is an independent Crown corporation and is Canada’s central bank.
The Bank works with the Department of Finance to help in the regulation of financial institutions by:
- helping keep the inflation rate low
- enacting policies on central banking services and banking systems
- regulating currency, bank rates, and foreign exchange reserves
- administrating public debt
Financial Consumer Agency of Canada (FCAC)
The Financial Consumer Agency of Canada or FCAC is an independent regulator that focuses on consumer protection. It also regulates market conduct or commercial practices. It does this by implementing the consumer protection provisions of the Bank Act.
The FCAC is also tasked with public awareness of standard market conduct or commercial practices which must be exercised by these financial institutions.
In addition, the FCAC regulates payment card network operators and external complaints bodies (ECBs).
Canadian Payments Association (Payments Canada)
Payments Canada governs the clearing and settlement of payments between its members.
All chartered banks, including the Bank of Canada, are required to be a member of Payments Canada. Other entities that meet its requirements may also become members.
Payments Canada also facilitates the interaction of its systems with other national and international payment systems. This results in a smooth payment system among its members.
Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
The Financial Transactions and Reports Analysis Centre of Canada or FINTRAC leads on detecting and uncovering suspicious transactions that may fall under money laundering and terrorist financing. These acts are prohibited by the Proceeds of Crime (Money Laundering) and the Terrorist Financing Act.
Canada Deposit Insurance Corporation (CDIC)
When a financial institution collapses, the Canada Deposit Insurance Corporation (CDIC) provides deposit insurance against loss of deposits. Most financial institutions (banks in particular) are members of CDIC. Other Canadian financial institutions are encouraged to be members as well.
CDIC insures depositors of its member financial institutions in the amount of C$100,000 per member per financial institution.
Want to know more about the financial institutions act in Canada and other regulations? Consult with the Lexpert-ranked lawyers in Canada whose focused practice area is on banking and financial institutions for your inquiries and consultations.