Banks and other financial institutions play an important role in Canada’s economic growth. It’s, therefore, not surprising that Canada constantly updates existing laws covering financial institutions. Its implementing agencies also make a point of improving their regulations to keep up with the changes.
Currently, financial institutions are governed primarily by the Bank Act and provincial-level financial institutions act (FIA). There are multiple differences between the two, starting with the scope of the law. This is because the Bank Act covers federal banks while FIA covers non-bank financial institutions.
In this article, we’ll talk about Canada’s laws affecting financial institutions, including banks.
What is the Bank Act 2025 in Canada?
The Bank Act is the federal legislation governing banks and the banking sector. In here, banks are classified into three:
- Schedule I banks - domestic banks
- Schedule II banks - subsidiary of a foreign bank
- Schedule III banks - authorized foreign banks
The Act defines the powers and limitations of a bank. It also defines its duties, responsibilities, and liabilities to shareholders, directors, and officers. It governs how the bank is created, owned, operated, and supervised by governmental bodies. Its implementing body is the Office of the Superintendent of Financial Institutions (OSFI).
Size-based classification
The “schedule” system is just one way of classifying Canadian banks. Bill C-8 introduced in 2022 also categorizes banks based on size. Under this new legislation, banks may be classified based on the following:
- Small banks – less than $1 billion in equity
- Medium banks – more than $1 billion in equity but less than $5 billion
- Large banks - $5 billion or more
The size of the bank determines the ownership restrictions set by law. Small banks have no restrictions as to ownership while medium banks require a 35 percent public float for voting shares. For large banks, no holder of voting shares must have more than 20 percent at a time. For non-voting shares, the limit is at 30 percent.
What is the Financial Institutions Act of Canada?
FIA functions more on a provincial level unlike the Bank Act, which operates at a federal level. Specifically, British Columbia and Alberta have their own versions of the Financial Institutions Act that regulates institutions within their jurisdiction.
Other provinces, like Ontario, have laws that are equivalent to FIA. As a rule, however, the financial institutions act of Canada can refer to any of the following:
- a domestic or foreign-authorized bank governed by the Bank Act
- a trust and loan company covered by the Trust and Loan Companies Act
- a cooperative under the Cooperative Credit Associations Act
- a company, society, foreign, or provincial company
- an insurance holding company under the Insurance Companies Act
- a pension plan under the Pension Benefits Standards Act or the Pooled Registered Pension Plans Act
When an entity falls under the definition set by pertinent laws, it will be regulated according to the financial institutions act. This is without exemption to the other Canadian laws and regulations on financial institutions.
To elaborate, a financial institution may be:
- a deposit-taking institution (e.g., banks, credit unions, trust companies, mortgage loan companies)
- an insurance company
- an investment institution (e.g., investment banks, underwriters, brokerage firms)
Some institutions may carry out all these functions. For example, a bank could take deposits, allow investments, and offer insurance. Each function is regulated by law and requires an entity to meet specific requirements per function.
Here’s an introductory video about different financial institutions:
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Regulatory bodies for financial institutions
Financial institutions act of Canada is not a single federal law. This means that the regulatory body responsible for financial institutions is not concentrated on a single agency. This helps streamline processes so that there’s minimum confusion due to overlaps. Here’s what you should know about these regulatory bodies:
Office of the Superintendent of Financial Institutions
Also known as OSFI, this office is responsible for enforcing the provision of the Bank Act. It’s also responsible for implementing the different financial institutions act in Canada, which include:
- banks covered by the Bank Act
- federal insurance companies under the Insurance Companies Act
- federal trust and loan companies under the Trust and Loan Companies Act
- federal cooperative credit associations under the Cooperative Credit Associations Act
- federal pension plans under the Pension Benefits Standards Act
You’ll note that OSFI’s regulatory powers are limited to those federal financial institutions act of Canada. Provincial credit unions, insurance companies, mutual fund dealers, mortgage brokers and others are not part of their mandate.
Here’s a short introduction on OSFI:
What powers does OSFI have?
The powers of OSFI are outlined under the different financial institutions act in Canada. As a rule, its purpose is to protect the clients while allowing financial institutions to remain competitive. A classic example would be OSFI’s ability to set a loan-to-value ratio which helps guide banks when it comes to extending loans to borrowers.
By setting an industry standard, OSFI is finding that sweet spot where banks can maintain their financial stability without overburdening the public. These are all in compliance with its ultimate mandate of building confidence in Canada’s financial system.
Some of its powers include:
Development of regulatory framework
OSFI’s regulatory framework sets precise standards for financial institutions in Canada. This helps control and manage risk that is often faced by the finance sector. Other than the loan-to-value ratio, it can regulate other matters like the bank’s capital requirements. Regulatory framework is subject to change depending on economic developments.
Supervision and monitoring
OSFI’s powers under the financial institutions act of Canada includes monitoring the status of entities under their jurisdiction. It may also intervene if it finds lapses or deficiencies in the entity. Since its primary mandate is to maintain confidence in the financial industry, OSFI may intervene to prevent possible collapse of an institution.
Corrective measures imposed by OSFI early on help prevent instability before it becomes a bigger problem. While early interventions aren’t always perfect, the presence of OSFI essentially creates insurance for stakeholders because someone is always watching over the financial entities.
What is the new mandate for OSFI?
As of 2023, OSFI’s mandate has been expanded. This now includes integrity, security, and foreign interference. The office has published in January 2024 the “Integrity and Security Guideline.” This outlines OSFI’s regulatory policies that will help financial institutions protect themselves against modern risks.
Through this new mandate, OSFI may address even foreign interference in the name of security. It can also advise the board of directors to take corrective action in the event of deficiencies in security.
Other agencies acting for financial institutions act of Canada
OSFI is just one of the many organizations that help track financial institutions. Other concerned government agencies and their mandates are:
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Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) |
They are the implementing body for the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) which covers banks, financial institutions, and even professionals as reporting entities. |
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Department of Finance Canada and Minister of Finance |
OSFI reports directly to the Minister of Finance. The Minister advises the government on policies and legislation, including matters on taxation and tariffs, financial security, and overall economic stability. |
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Financial Consumer Agency of Canada (FCAC) |
This independent regulator is focused on consumer protection. It regulates market conduct or commercial practices. FCAC also regulates payment card network operators and external complaints bodies (ECBs). |
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Canadian Payments Association (Payments Canada) |
Payments Canada governs the clearing and settlement of payments between its members. It also facilitates the interaction of its systems with both national and international payment systems. |
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Canada Deposit Insurance Corporation (CDIC) |
When a financial institution collapses, the CDIC provides deposit insurance against loss. Most financial institutions are members of CDIC. CDIC provides $100,000 in coverage per depositor. |
The list above does not include regulatory entities at the provincial level.
Common legal risks under financial institutions act of Canada
The number of laws and agencies targeted to regulate financial institutions in Canada creates legal risks that requires professional attention. Here are some situations where banks and other financial institutions can face legal issues due to negligence.
Failure to comply with regulatory requirements
Financial institutions performing multiple functions may be subjected to several regulatory guidelines from different agencies. This can be quite confusing and would require a dedicated team just to make sure that all reportorial requirements are submitted. Failure to properly report can subject banks to fines, penalties, and other sanctions.
Privacy and data protection violations
Financial institutions hold sensitive data beyond the name and address of their client. With most of this information now being stored electronically, banks must be doubly vigilant with data. OSFI’s new mandate has also extended to security and data protection regulation, which means that there’s something new to watch out for.
Financial institutions should, therefore, make a point of upgrading their systems to remain compliant with guidelines. This means not just increasing security but also having a team that constantly evaluates standards with practice.
Cross-border risks
Another pitfall would be the different versions of financial institutions act of Canada and how they relate with each other. Banks with several branches will need to comply with different regulations based on their place of practice. This is especially true for credit unions, which are regulated at a provincial level but have cross-border practices.
For these financial institutions, it’s important to have a dedicated legal team per province. This helps guarantee that the province-specific mandates are followed to the letter. At the same time, legal professionals can talk to their counterparts in other jurisdictions to update each other, consolidate practices, and ensure compliance.
Breach of fiduciary duty
Just because there are new risks associated with modern technology doesn’t mean the old risks are gone. Issues such as conflict of interest or breach of fiduciary duty are still possible. Having an internal legal counsel within the organization can help smooth out these issues before they become a persistent concern.
Note though that breaches of fiduciary duty may still fall within the jurisdiction of OSFI. This is because conflicts of interest could create doubt among depositors, which could destroy confidence in the financial sector. Part of the counsel’s job is to help limit any liability of the bank, if there’s any.
These Lexpert-ranked top banking and financial institutions law firms in Canada can help you sift through the noise and avoid legal troubles.
Consolidating financial institutions act of Canada
The financial institutions act of Canada is a combination of different laws at a federal and provincial levels. There’s no single law that financial organizations can refer to when trying to ensure compliance. On the upside, this allows the federal and provincial governments to exercise better control over entities. The downside is, of course, the confusion.
This is why all financial institutions should make a point of having an in-house counsel or one on retainer to help them with the legal quagmire. Having a legal professional on call helps minimize chances of mistakes and places an organization in good faith.
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