Obtaining a bank license in Canada means meeting stringent and numerous requirements set by the Canadian government. That’s not surprising since banks play an important role in economic matters. Of course, that doesn’t make it impossible – just difficult.
In this article, we’ll talk about the salient steps of obtaining a bank license to operate in Canada. For the purposes of this article though, we’ll limit the discussion to Schedule I banks, which means domestic banks only. Foreign banks incorporated in Canada or authorized foreign banks would necessitate additional requirements.
Who can start a bank in Canada?
Corporations that are incorporated through the Bank Act are allowed to apply for a bank license. These corporations are typically domestic corporations, which means that they are based and operate only in Canada. Prior to operation, however, they must first meet the requirements set by the Bank Act and its implementing agencies.
Can foreigners open a bank in Canada?
Being a corporation, it follows that banks are owned by shareholders who buy their stocks. A common question now asked is: can foreigners buy stocks of a domestic bank? Before the passage of Bill C-8, the answer would have been: it depends.
Prior to Bill C-8, banks were bound by the “widely held” rule. This means that a single entity cannot hold more than 10 percent of a domestic bank’s total voting shares. Today though, the “widely held” rule is no longer effective. Instead, Canada uses equity to determine how much of a bank can be owned by non-Canadians.
Here’s a table detailing these new categories:
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Category |
Restriction |
|---|---|
|
For banks with an equity of less than $1 billion |
No restrictions on ownership |
|
For banks with an equity of more than $1 billion but less than $5 billion |
At least 35 percent of voting shares must be on public float |
|
For banks with an equity of more than $5 billion |
No single entity may hold more than 20 percent of the voting shares or for non-voting shares, not more than 30 percent |
Under these new conditions, domestic banks with less than a billion in equity can have majority of its shares held by foreigners. Even if most of the shares are held by foreigners though, the bank is still domestic because it was incorporated in Canada. This distinction is important because domestic banks have precise obligations under the law.
How to get a banking licence in Canada
Incorporation creates the entity or the personality of the corporation. A bank license gives the corporation the authority to operate as a bank. However, the steps for incorporation and getting a bank license are both found in the Bank Act, combining these two steps into a seamless process.
Other than the Bank Act, opening a bank in Canada involves multiple relevant bodies, including the Office of the Superintendent of Financial Institution (OSFI) and the Minister of Finance. Here’s an overview of the three-step process for opening a bank:
Step 1: Pre-application
Everything starts with the payment of the application fees costing around $33,000 for the letters of patent of incorporation. At the outset, the applying bank must also have a paid-in-capital of no less than $ 5 million. Once these financial obligations are met, the applicant will send a written proposal to OSFI outlining the reasons for the application.
The bank license pre-application step also involves the following:
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A meeting with OSFI discussing the content of the proposal which should include the target market, business strategy, and the ownership structure of the corporation
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The meeting can include discussions about the specifics such as the proposed incorporators, directors, or management team the bank
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After the interview process, the applicant needs to submit an information package containing elaborate details about the banks. This includes the expected number of shares, pricing, and pertinent financial statements
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OSFI will also require a business plan detailing the bank's operation for the next five years. This will include the extent of financial services offered, place of operation, and a forecast of challenges and how they will be resolved by the organization
This is the stage where the applicant must convince OSFI that they have a solid plan for a bank covering years into the future. After the pre-application process, the applicant will receive a letter from OSFI raising possible concerns about the planned bank which can be answered later on.
Step 2: Letters Patent
If OSFI is convinced about the viability of the bank, it will issue a letter of recommendation to the Minister of Finance. The Minister is responsible for issuing the letters patent of incorporation, which essentially creates the personality of the bank. Before the letters of patent though, the following requirements must be met:
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Publication notifying the public of the intention to apply for letters patent must be made in the Canada Gazette. Depending on the Minister, the notice may also be published in another magazine of general circulation
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Subject to the Minister’s approval, publication may also be required multiple times with a set number of consecutive weeks
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After publication, the applicant will submit a formal application to the Minister for letters patent. This is accompanied by another information package detailing further information about the bank, like operational policies or management
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At this stage, membership with the Canada Deposit Insurance Corporation (CDIC) is required in case the bank intends to take deposits
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If all requirements are met, the Minister of Finance will issue a letters patent, officially turning the corporation into a bank
Note though that the letters patent does not authorize operations. An Order must be issued by OSFI first before a bank can perform activities expected of a financial institution.
Step 3: Order
The Order from OSFI is issued anytime within one year from the issuance of the letters patent. After one year, they can no longer issue an Order, which is why it’s important to follow up with their office to prevent lapses. During this period, OSFI can still ask for additional information, which should be answered quickly to prevent delays.
Prior to the issuance of the Order, OSFI may also do the following:
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Onsite review where representatives from OSFI will check the readiness of the bank to operate. This includes not just the ability to take deposits but also the security of the bank’s online and offline data
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OSFI will raise any concerns they find during the onsite review which need to be addressed quickly
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OSFI will also require minutes from the first meeting of the Board and shareholders. A final verification of the bank’s financial status will also be made
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The corporation also needs to submit a letter undertaking to inform OSFI in case of any changes to the business plan
Meeting these requirements results in the issuance of an Order allowing the start of bank operations. Note though that part of OSFI’s mandate includes continuous monitoring of established banks. Here’s what you should know about this department’s affairs:
Provincial requirements for bank licensing
The Bank Act is a federal law, but what if a bank wants to operate within a specific territory? Depending on the area and the bank’s services, additional requirements must be met. For example, Ontario has the Financial Services Regulatory Authority of Ontario (FSRA), which oversees mortgage transactions, loans, and trust.
British Columbia has their own version of Financial Services Authority that also handles mortgages, credit unions, and more. If the intent is to establish a bank within a specific territory, it’s best to consult banking and financial institutions in precise provinces like Ontario.
Services and limitations of banks
Domestic banks are allowed to be full-service banks, letting them offer all possible services expected of a financial institution. This includes offering deposits, savings, checking, credit cards, loans, mortgages, and more.
The bank’s by-laws should detail all the services it can offer pursuant to the bank license it was issued. Under the Bank Act, there are also specific activities that a bank cannot do. These are:
- undertaking any fiduciary activities or guaranteeing the payment or repayment
- dealing in securities
- engaging in leasing activities of personal properties
- entering partnerships
- engaging in the insurance business
There are also limitations as to:
- the type of investments they can undertake
- the number of investments they can make
Violations could expose banks and their directors to administrative penalties. In worst cases, bank operations could even be stalled, or a license revoked if there are repeated violations.
Emerging trends of virtual banks
An interesting trend today is virtual banks and digital banks. For the purposes of this article, it’s important to distinguish between virtual, digital, and traditional banks.
This table should help offer a clear view of how these banks are different from each other:
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Virtual banks or neobanks |
Online-only banks mean that they have no physical location. Instead, account holders access their funds all through their computers or mobile phones. Canada currently has several virtual banks like EQ Bank and Neo Financial |
|
Digital banks |
These are online platforms of existing physical or traditional banks. For example, the National Bank of Canada has an app that can be downloaded from Google Play |
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Traditional banks |
These are banks with physical locations incorporated under the Bank Act of Canada |
Here’s a nice explainer about neobanks and traditional banks:
So how does the Bank Act treat these different categories? Currently, there is no precise law that governs the creation of neobanks. This means that the Bank Act still governs, prompting neobanks to comply with the same set of requirements.
Digital banks are simply online platforms of traditional banks. Hence, it’s the traditional banks that hold the bank license. The digital banks are simply extensions of physical financial institutions.
Money Service Business (MSB) Licence
An MSB Licence is granted to businesses that function as financial service providers. At the outset, it’s easy to confuse them with digital banks, but they’re actually entirely different. This is because an MSB licence gives a company the authority to engage in money transfer services, cryptocurrencies, and currency exchange.
MSB’s do not undertake depository services. They simply facilitate the transfer of funds between accounts. A perfect example of this is PayPal or the Western Union. Because of the nature of their operations, MSB’s must comply with anti-money laundering laws and are regulated by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
For this licence, the following basic requirements are necessary:
- business plan
- information about the company owners or senior management
- information about the anti-money laundering officer
- the anti-money laundering and “know-your-client" policies
- company representatives and their contact details
- planned financial indicators
- a list of services to be provided and their descriptions
Best practices in establishing banks in Canada
Getting a bank licence in Canada is not for the faint of heart. It’s a long process that involves meeting strict documentary and capital requirements. From preparation to operation, getting a bank license requires a clear understanding of the regulatory framework that governs the operation of domestic foreign institutions.
You can never have too much information when applying for a bank license from the proper authorities. For more insights about establishing banks in Canada, choose from any of these Lexpert-ranked best banking and financial institution lawyers.