Every bank account and transaction comes with its own set of rules working behind the scenes. While banking laws in Canada primarily protect clients, they also ensure that banks play fair and keep any illegalities at bay. In this article, we'll discuss the different Canadian laws governing banks, how they work, and why they matter for account holders.
What are the banking laws in Canada?
Canadian banks are regulated by many government agencies and are subject to several laws and regulations. The federal laws on banking in Canada are the:
- Bank Act
- Canada Deposit Insurance Corporation Act (CDIC Act)
- Canadian Payments Act (CPA)
Kyla Mostowich, the Senior Correspondence and Monitoring Officer for the CDIC, also gave some insights on the following authorities, whose regulations also form part of Canada’s banking laws:
- Department of Finance Canada (DFC): oversees banks, implements various banking laws in Canada, and sets the rules for how banks are regulated
- Office of the Superintendent of Financial Institutions (OSFI): implements various banking laws in Canada, such as the Bank Act, the CDIC Act, and the CPA
- Financial Consumer Agency of Canada (FCAC): ensures banks and other federally regulated financial institutions comply with consumer protection rules
- Financial Institutions Supervisory Committee (FISC): comprised of the Bank of Canada, OSFI, CDIC, FCAC and the DFC for consulting and exchanging information on matters related to the supervision of federally regulated financial institutions
- Canada Deposit Insurance Corporation (CDIC): insures bank deposits across Canada and processes CDIC membership of banks and other financial institutions
- The Bank of Canada (BoC): regulates matters concerning credit and currency, establishes Canada's monetary policy, and oversees clearing and settlement systems together with OSFI
“While other organizations, such as OSFI, ensure application of various acts, it is ultimately the DFC that is responsible for the Bank Act, the CDIC Act, and the CPA,” Mostowich notes.
By way of example, here’s a video about what the Bank of Canada is and how it affects the country's financial system:
To learn more about the country's banking laws, you can reach out to the best banking lawyers in Canada as ranked by Lexpert.
Bank Act
The Bank Act is an important and comprehensive banking law as it covers most of the regulatory provisions for Canadian banks. This law grants banks and other financial institutions their legal identity with regards to their capacities, rights, powers, and privileges.
Restrictions on a bank’s capacity
The legal identity granted by law to banks is subject to several restrictions. One of these is that banks cannot carry any other business not related to the “business of banking.”
As defined by the Bank Act, the term “business of banking” includes:
- providing financial services
- acting as a financial agent
- providing investment counselling and portfolio management services
- issuing and operating payment, credit, or charge cards
Banks, therefore, cannot engage in any business other than what is specified in the law.
Incorporation of banks
When creating a bank or getting a bank licence in Canada, it must be incorporated under the Bank Act. The OSFI makes recommendations to the Minister of Finance when a bank applies for incorporation and the Minister considers several factors, such as the applicant’s:
- financial resources and their nature and sufficiency
- business record and experience
- character and integrity
Bank Act security
The law allows banks to lend money to certain types of borrowers, where security is issued over the borrower’s assets. This security is called the Bank Act security; watch this video to learn more:
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Laws on liquidity and stability of banks
Regarding its capital resources and liquidity, a bank is required to maintain adequate capital, including sufficient and appropriate forms of liquidity to ensure its lifespan. When appropriate, the OSFI may also order a bank to increase its capital.
As to liquidation and dissolution proceedings, the Bank Act provides various ways of liquidating or dissolving a bank, such as:
- Simple liquidation: applies when the bank has no properties and no liabilities, as approved by the bank’s shareholders
- Court-supervised liquidation: when the OSFI or any interested person applies to the court to continue the liquidation of a bank
However, the Bank Act states that insolvent banks under the meaning of Winding Up and Restructuring Act (WURA) will be governed by the WURA instead of the Bank Act.
Foreign banks in Canada
The Bank Act also governs foreign banks. It provides for the matters to be considered by the OSFI in recommending to the Minister before a foreign bank can be allowed to establish a domestic branch in Canada. It would also follow the same process of incorporation as those with domestic banks to operate in Canada.
Law on bank secrecy
Banking laws in Canada state that banks are prohibited from disclosing personal information of their clients to third parties.
The Bank Act provides that banks and their agents ensure that unauthorized persons are prevented from accessing or using any information from the registers and records they maintain. This duty is specifically placed on the bank’s directors.
Similarly, the provisions of the Personal Information Protection and Electronic Documents Act (PIPEDA) apply to banks. This is because banks are among the institutions that collects and utilizes personal information of their clients.
Consumer protection
Banking laws in Canada, such as the Bank Act, have provisions on consumer protection that financial institutions must follow. Consumer protection laws also include the PIPEDA and Canada’s anti-spam legislation (CASL).
Bank’s right of set off
One example of how the law protects clients is its restrictions on the bank’s exercise of its right of offset or set off. As a rule, banks are allowed to set off any debts from a borrower’s own account in the same bank. This applies for any debt from a credit card or a loan, if it's also from the bank that maintains the bank account.
However, there are limits to this right, such as:
- contractual limitations: this right can be limited through a contract between the parties (e.g., in a loan contract itself)
- restrictions on the amount: unless there is a court order, the bank can only set off the amount that the client owes to them directly and not with any other creditor
Canada Deposit Insurance Corporation Act (CDIC Act)
According to Mostowich, the CDIC was established to protect Canadian’s savings in the rare event their financial institution fails.
“We insure eligible deposits at member institutions, promote and contribute to the stability of the financial system in Canada, and act for the benefit of depositors while minimizing loss. As Canada’s resolution authority, we are responsible for handling the failure of any of our member institutions, from the smallest to the largest,” she says.
Membership with CDIC
Mostowich lists the CDIC members, which “include banks, federally regulated credit unions as well as loan and trust companies and associations governed by the Cooperative Credit Associations Act that take deposits.”
The OSFI also has a hand on who becomes a member of the CDIC.
“OSFI assesses applications for federal incorporation and makes a recommendation to the Minister of Finance who has the ultimate responsibility for approving the incorporation of financial institutions. Once approved, they automatically become members of CDIC,” Mostowich says.
CDIC insured deposits
Under the CDIC Act, the CDIC’s main role is to insure deposits made in Canadian banks. By doing so, it secures the stability of the country’s banking system.
However, Mostowich clarifies that the CDIC does not insure all deposits in Canadian banks. Rather, CDIC protection applies to eligible deposits, such as:
- Canadian or foreign currency,
- Guaranteed Investment Certificates (GICs)
- other term deposits, when they are held at member institutions
“Eligible deposits are protected up to $100,000 (principal and interest combined), per insured category, per member institution,” Mostowich adds.
Bail-in regime of D-SIBs
Mostowich defines a Domestic Systemically Important Bank (D-SIB) as a bank that could harm the domestic economy should it fail. “In a bail-in scenario, CDIC would convert some of the bank’s long-term debt into common shares to improve the bank’s balance sheet.”
The aim, according to Mostowich, is to “continue the bank’s retail deposit-taking and lending businesses and preserve its going-concern value. This would recapitalize the bank and restore it to viability.”
Canadian Payments Act (CPA)
The CPA established the Canadian Payments Association, which operates the systems for clearing, settlement, and other systems for banks and financial institutions. Under this law, the members of the Association shall be composed of:
- all domestic banks
- all authorized foreign banks
- all designated bridge institutions under the CDIC Act
Domestic banks and authorized foreign banks are required to be members of the Association. However, it is only optional for other financial institutions that accept check deposits, such as cooperative credit associations, loan companies, or trust companies.
How can lawyers help clients with banking laws?
With their extensive knowledge of the law, banking lawyers can guide clients when dealing with financial institutions. Regardless of whether these clients are individual account holders or businesses with huge accounts, banking lawyers can:
- help clients understand the banking laws in Canada, and explain what the rules mean for each account and for every bank transaction
- deal with the bank when clients have issues, such as helping resolve disputes, as they know the complaint process, and communicate to the bank when needed
- help escalate the client’s complaint to a bank regulator or even to the courts if the issue is not fixed using the bank’s internal resolution process
- review documents when clients transact with the bank (e.g., when getting a loan from the bank) and advise the client on the consequences of signing
In short, banking lawyers guide clients on their rights, look out for their interests, and help them find legal solutions when issues come up.
Banking laws in Canada: For safe and sound banking
Banking laws in Canada work quietly behind every account to keep things fair and secure. These laws set the standards for banks and give clients peace of mind, knowing there are rules in place to protect their interests.
By learning about these laws, clients can take charge of their finances and avoid unexpected financial letdowns. For more complex issues, legal guidance from a banking lawyer can help clients get the most out of their banking experience.
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