Banking Regulation Comparative Guide

• Published date: 19 August 2020
• Subject Matter: Finance and Banking, Financial Services
• Law Firm: Gowling WLG
• Author: Ms Kelby Carter and Christopher Alam

1 Legal framework

1.1 Which legislative and regulatory provisions govern the banking sector in your jurisdiction?

The Bank Act, which is a federal statute enacted by the Parliament of Canada, is the primary statute that governs the banking sector in Canada. The Bank Act regulates:

• domestic banks ( Schedule I);
• foreign subsidiary banks that are controlled by eligible foreign institutions ( Schedule II); and
• bank branches of foreign institutions ( Schedule III).

It has been supplemented by numerous regulations made under its authority, which elaborate on the rules and principles it contains.

Provincial legislation generally does not apply to the banking activities of banks, as federally regulated financial institutions. However, provincial provisions may apply to banking activities as long as they do not "in any way impair any activities that are 'vital or essential to banking' such that Parliament might be forced to specifically legislate to override the provincial law" ( Bank of Montreal v Marcotte, [2014] 2 SCR 725 at para 66).

1.2 Which bilateral and multilateral instruments on banking have effect in your jurisdiction? How is regulatory cooperation and consolidated supervision assured?

Global regulatory bodies have regulatory impact on Canadian financial institutions. Both the Office of the Superintendent of Financial Institutions (OSFI) and the Bank of Canada participate in the Basel Committee on Banking Supervision (BCBS) as part of their role as members of the Bank for International Settlements. While the BCBS does not issue binding regulation, it has influence internationally through its role in standard setting for prudential regulation of banks, including capital adequacy and liquidity requirements. The BCBS's recommendations are generally implemented in Canada by OSFI and the Bank of Canada.

In addition, prudential regulators such as OSFI publish guidelines and advisories for the purpose of ensuring compliance with requirements under federal financial institution legislation. The guidelines and advisories fall into four general categories:

• capital adequacy requirements (ie, Tier 1 and 2 capital and liquidity and leverage ratios);
• limits and restrictions on lending;
• accounting and disclosure; and
• sound business and financial practices.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers (including sanctions) do they have?

OSFI and the Financial Consumer Agency of Canada (FCAC) are the primary regulatory bodies for banks. OSFI is responsible for prudential regulation and conducts regular reviews of banks regarding compliance with the guidelines it establishes for capital, reporting and business practices. FCAC is responsible for consumer protection and oversees banks' compliance with certain voluntary codes of conduct.

Both OSFI and FCAC have the power to impose administrative monetary penalties for violations of their enabling legislation - that is, the Financial Consumer Agency of Canada Act and the Office of the Superintendent of Financial Institutions Act, respectively. OSFI can also enforce penal sanctions under the Bank Act: the sanctions for contraventions include fines of up to C$5 million (C$1 million for a natural person) and imprisonment for up to five years. The sanctions will vary depending on the severity of the infraction and the size of the bank.

In addition to imposing monetary sanctions, the two regulators often require banks to improve their internal controls and governance, and have even required that directors and officers be replaced if they were involved in the wrongdoing or failed in their supervisory duties.

Several other regulatory bodies are also involved in enforcing the laws and regulations that apply to banks in Canada. The Department of Finance (Canada) is the government body responsible for banks; it proposes changes to the legislation and adopts new regulations that govern banks. Banks are also reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, subject to reporting and compliance obligations relating to anti-money laundering and terrorist financing . These requirements are enforced by the Financial Transactions and Reports Analysis Centre of Canada.

1.4 What are the current priorities of regulators and how does the regulator engage with the banking sector?

The current priorities of the OSFI and FCAC are to monitor and address the evolving economic situation with COVID-19. As a result both regulators are taking a number of steps to reprioritise their work and requirements to allow banks to focus on their resilience efforts.

OSFI is engaging with the banking sector by maintaining frequent contact with banks to assess their operational capacity and actions to address the current environment. It is also publishing various notices to the sector on its website.

These notices indicate the changes that OSFI is implementing to its regulatory requirements during this time as it reprioritises. For example, OSFI has suspended all of its consultations and policy development on new or revised guidance until conditions stabilise. Further, OSFI has adjusted a number of regulatory reporting requirements, and has encouraged banks to use their capital and liquidity buffers as appropriate. OSFI has also prioritised supporting the efforts of the BCBS to provide additional operational capacity for banks and supervisors to respond to the immediate financial stability priorities, outlining how these will be implemented domestically to ensure they are fit for purpose in the Canadian context.

Similarly, FCAC is engaging with the banking sector by publishing and updating an online notice adjusting its regulatory expectations in the current environment. FCAC has committed to working closely with banks to minimise the impact of regulatory requirements on their efforts to deliver essential services to Canadians.

2 Form and structure

2.1 What types of banks are typically found in your jurisdiction?

There are three types of banks in Canada:

• Schedule I banks: domestic banks, authorised under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canadian Deposit Insurance Corporation;
• Schedule II banks: foreign bank subsidiaries, authorised under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canada Deposit and Insurance Corporation Foreign bank subsidiaries are controlled by eligible foreign institutions; and
• Schedule III banks: foreign banks that have been authorised under the Bank Act to operate branches in Canada. The activities of a branch may be restricted to lending or may be 'full service', which includes the offer of retail deposit accounts.

2.2 How are these banks typically structured?

Schedule I and Schedule II banks are structured as corporations.

Any acquisitions of significant interest - that is, of a level that is greater than 10% of a class of shares - in a bank must be approved by the minister of finance.

2.3 Are there any restrictions on foreign ownership of banks?

Foreign ownership is generally permitted under the Bank Act. However, it will be taken into account by the Office of the Superintendent of Financial Institutions (OSFI) in applications to acquire a significant interest or more in a bank.

If the applicant is a national of a country that is not a member of the World Trade Organization, prior to granting approval for the applicant to acquire more than 10% of the shares of a bank, the minister of finance must be satisfied that reciprocal treatment would be available for Canadians under the laws of that jurisdiction. Additionally, no foreign government, political subdivision of a foreign country or agent of a foreign government or entity controlled by a foreign government may be issued shares of a bank.

2.4 Can banks with a foreign headquarters operate in your jurisdiction on the basis of their foreign licence?

Banks with a foreign headquarters must obtain authorisation under the Bank Act to have a financial establishment in Canada . This includes establishing a Canadian subsidiary or a bank branch as well as other permitted entities in Canada.

A foreign bank may also apply to OSFI to register a representative office in Canada and - with the approval of the governor in council and subject to any terms and conditions that are attached to the approval - locate its head office in Canada and, from that office, issue directions and do all other things reasonably necessary for the conduct of its banking business outside Canada.

3 Authorisation

3.1 What licences are required to provide banking services in your jurisdiction? What activities do they cover?

No bank or bank branch can carry on the business of banking in Canada without first obtaining the approval of the minister of finance and the Office of the Superintendent of Financial Institutions (OSFI). In order for a bank to be authorised under the Bank Act, it requires both:

• the issuance of letters patent by the minister of finance and
• the making of an order by OSFI.

The Bank Act provides that a bank can carry on only those activities that are considered to be the 'business of banking' and business generally related to banking. These activities include:

• taking deposits and making loans;
• providing any financial service;
• acting as a financial agent;
• providing investment counselling services and portfolio management services;
• issuing payment, credit or charge cards; and
• operating a payment, credit or charge card plan in cooperation with others (including other financial institutions).

3.2 What requirements must be satisfied to obtain a licence?

OSFI assesses applications for the incorporation of banks and makes recommendations to the minister of finance, who makes the ultimate determination. To do so, the minister of finance takes into account a number of factors, including:

• the nature and sufficiency of the financial resources of the applicant(s)...