Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
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Snapshot: the regulatory framework for financial services compliance in Canada
Gowling WLG | Michael Garellek | Mar 19, 2021
Regulatory framework
What national authorities regulate the provision of financial products and services?
Financial institutions
The Department of Finance is the government body responsible for federally regulated financial institutions (FRFIs), including banks, trust and loan companies, insurance companies and credit unions. The Department of Finance is principally responsible for proposing changes to legislation and adopting new regulation governing FRFIs.
The Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC) are two key regulatory authorities supervising FRFIs. Generally, OSFI is responsible for prudential regulation and establishing guidelines for capital, reporting and business practices, and FCAC is responsible for consumer protection.
See: Big Changes In Financial Regulation: Dialogue With The OSC 2020
In addition to OSFI and FCAC, each province has regulatory authorities that oversee financial institutions outside of the exclusive jurisdiction of the federal government. These include, among others, the Financial Services Commission of Ontario, the Autorité des marchés financiers (AMF) in Quebec, and the British Columbia Financial Institutions Commission. Recently, amendments to the Bank Act were enacted allowing a credit union incorporated provincially to assume federal jurisdiction provided it amalgamates with an existing federal credit union or with another provincial credit union being continued under the Bank Act.
Deposit-taking institutions are members of the Canada Deposit Insurance Corporation (CDIC) and Payments Canada (formally known as the Canadian Payments Association). CDIC is a statutory corporation that provides deposit insurance for certain types of small deposits to member institutions. Payments Canada operates Canada’s payment clearing and settlement systems. Membership in Payments Canada and CDIC is mandatory for Canadian banks as well as for certain trust and loan companies that accept deposits.
The Canadian Payments Association, known by its business name Payments Canada, is a not-for-profit association responsible for the clearing and settlement infrastructure, processes and rules for Canada’s non-credit card related national payments systems, which are the Large Value System (LVSS) and the Retail System (ACSS). The participant members of Payments Canada are largely regulated financial institutions (ie, banks, authorised foreign banks, trust and loan companies, credit unions and financial cooperative credit associations and caisses). The Minister of Finance must approve all by-laws (other than those that relate to administration of Payments Canada) and can direct that the rules be amended or repealed or that new rules be adopted. The governor of the Bank of Canada also has oversight responsibilities because both the LVSS and ACSS are designated clearing and settlement systems under the Payment Clearing and Settlement Act.
Securities registrants
Securities registrants include securities dealers and advisers, derivatives dealers and advisers, investment fund managers, exchanges and other alternative trading systems, designated ratings organisations and clearing agencies, commodities futures dealers and advisers. It also includes, in certain circumstances, those persons benefiting from an exemption from registration in any of those aforementioned categories.
See: Global Risk Institute Report: Discussing Open Banking Regulation for Canada
Canada does not currently have a federal securities regulator. The securities market is regulated by the provincial and territorial securities commissions (securities regulators). Despite the lack of a federal regulator, the provincial and territorial regulators coordinate the development of national rules and standards through the Canadian Securities Administrators (CSA), which administers a passport system for extra-provincial registration. The most active securities regulators in Canada are the Ontario Securities Commission (OSC), the AMF, the Alberta Securities Commission (ASC), and the British Columbia Securities Commission (BCSC). Investment dealers are regulated by a national self-regulatory organisation, the Investment Industry Regulatory Organization of Canada or IIROC.
Previous attempts to create a national securities regulator in Canada were deemed to improperly fetter the jurisdiction of the provincial legislatures and therefore considered to be unconstitutional (see Reference re Securities Act, 2011 SCC 66, [2011] 3 SCR 837). In August 2014, the provincial governments of British Columbia, Ontario, Saskatchewan, and New Brunswick entered into a memorandum of agreement (MOA) with the government of Canada with respect to the creation of a cooperative capital markets regulatory system. The MOA proposes uniform provincial capital markets acts, complementary federal legislation, and the creation of a federal capital markets regulator. On 9 November 2018, the Supreme Court of Canada ruled that the proposed cooperative regulatory system is constitutional (see Reference re Pan-Canadian Securities Legislation, 2018 SCC 48). Consequently, while the proposed system is not yet in effect, there may be significant changes to the structure of regulation of capital markets in Canada in the near future.
What activities does each national financial services authority regulate?
Financial institutions
OSFI and FCAC both regulate many financial services industries, including the business of banking, acceptance of deposits, the provision of insurance, trust services and mortgage lending by FRFIs. Also, OSFI regulates the administration of pension plans, and FCAC regulates the operation of payment card networks through voluntary codes of conduct. Provincial and territorial financial service regulators regulate financial institutions including provincial trust and loan corporations, credit unions, insurers and the distribution and sale of financial products offered by these financial institutions.
See: Review: Financial Consumer Agency of Canada (FCAC) submission to Advisory Committee on Open Banking
Securities registrants
The securities regulators regulate securities markets, including the activities of trading, advising and dealing in securities, capital raising and the administration of investment funds and marketplaces. They also regulate the creation and trading of derivatives, including over-the-counter (OTC) derivative contracts and commodities futures contracts.
What products does each national financial services authority regulate?
Financial institutions
OSFI or FCAC, or both, regulate the following financial products:
- deposits including term deposits and retail deposit accounts;
- registered investment products and principal protected notes;
- offering of credit;
- contracts of insurance, including life insurance, property and casualty insurance, and mortgage insurance;
- pension plans; and
- payment cards.
Securities registrants
Securities regulators regulate any product that is a ‘security’, which is an open-ended category involving a fact-specific analysis, but which includes bonds, shares, stocks, investment contracts, subscriptions, profit-sharing agreements, income or annuity contracts not issued by an insurance company, options, OTC derivatives and commodities futures contracts. More recently, digital assets, including crypto currencies, have received the attention of securities regulators in Canada. Depending on how these digital assets are offered to the public, many have been characterised by regulators as investment contracts or derivatives, including contracts for difference.
See: Final Report: Ontario Capital Markets Modernization Committee Recommendations
The concept of an ‘investment contract’ is not defined within the Act but has been the subject of substantial consideration by Canadian courts and securities regulators across Canada. The courts in Canada have applied the tests from Pacific Coast Coin Exchange of Canada Ltd v Ontario Securities Commission (1978) 2 SCR 112 to determine whether an instrument is an investment contract in a four-part analysis as to whether the scheme involves:
- an investment of money;
- with an intention or expectation of profit;
- in a common enterprise, in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment of third parties; and
- where the efforts made by those other than the investor are significant, and those managerial efforts affect the failure or success of the enterprise.
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