In February 2018, the Canadian federal government had indicated, as part of its budget plan, that it intends to modernize the financial sector framework and this modernization could include giving greater flexibility to financial institutions to undertake and leverage broader FinTech activities. On March 27, 2018, the government published Bill C-74 that includes proposed amendments to the federal financial sector legislation (Bank Act, Insurance Companies Act and Trust and Loan Companies Act). Although the details on how these amendments would work in practice need to be developed (in regulations yet to be published), these amendments are consistent with the government’s previously stated objective of giving more flexibility to financial institutions in their technology-related activities.
Expanding the scope of permitted activities
Approval requirement for certain technology activities removed: Under the current legislation, financial institutions require the approval of the Minister of Finance before they can engage in certain technology-related activities such as collecting, manipulating and transmitting information. The proposed amendments have removed the approval requirement and allow such activities to be conducted subject to compliance with the regulations (as noted above, the regulations remain to be published).
Technology related activities permitted: In addition, the proposed amendments also allow financial institutions to design, develop, manufacture, sell and otherwise deal with technology if such activities relate to activities permitted to be carried on by the financial institutions or the provision of financial services by any other entity. Although details of how these amendments would work remain to be provided in regulations, compared to status quo, these amendments considerably expand the scope of technology activities that may be carried on by financial institutions.
Identification, authentication and verification services permitted: The amendments also expressly allow financial institutions to provide identification, authentication or verification services. This change is also helpful in addressing any ambiguity that may have existed under the current legislation as to whether such services may be provided by financial institutions.
Networking: The proposed amendments also expand the scope of the type of networking arrangements that financial institutions may enter into with third parties. For example, under the proposed arrangements, financial institutions may act as agents for, and enter into arrangements with, any person in respect of services that relate to financial services or the carrying on of any activity or refer any person to another person (current rules allow referrals only to financial institutions or permitted entities). We expect more details on such networking arrangements will be set out in regulations.
Canadian financial institutions are permitted to make investments in other entities only if such entities are “permitted entities” under the financial legislation. The current legislation includes a number of restrictions and some limited exceptions. The proposed amendments purport to give financial institutions some flexibility in making investments in entities that may not otherwise be permitted under the existing rules. The proposed amendments would allow financial institutions to acquire control of, or a substantial investment (i.e., more than 10% voting interest) in, an entity if the “majority” of the entity’s business consists of financial service activities that the financial institution is permitted to engage in (“majority” will be defined in regulations).
Use of words “bank,” “banker” or “banking”
In 2017, the Office of the Superintendent of Financial Institutions (OSFI) had published some guidance on the restrictions on the use of the words “bank,” “banker” or “banking.” This guidance was subsequently withdrawn in wake of criticism from a number of stakeholders, primarily from credit unions, who argued that the use of the word “banking” should be permitted for their products. The proposed amendments amend the Bank Act to allow trust companies, credit unions and co-operatives to use these words provided that they disclose the type of entity they are, their jurisdiction, whether they participate in a deposit insurance system and any other information that regulations may prescribe. The proposed amendments also give additional powers to the Superintendent of Financial Institutions to enforce these requirements.