Important Changes to Financial Institutions Statutes in the Budget Implementation Act

On October 22, 2013, Bill C-4 (the Budget Implementation Act) was introduced to implement certain provisions of the budget tabled in Parliament on March 21, 2013¹. The Budget Implementation Act included the following important proposed amendments to the Bank Act, the Trust and Loan Companies Act and the Insurance Companies Act:

Crown Corporation Directors Eligible to Sit on Financial Institution Boards

Section 160 of the Bank Act (and the corresponding provisions of the Trust and Loan Companies Act and the Insurance Companies Act) will be amended by removing subsection (g), which currently prohibits federal and provincial Crown agents and federal and provincial government employees from being directors of a federally regulated financial institution.

This section of the Bank Act was interpreted by the Office of the Superintendent of Financial Institutions (OSFI) to generally prohibit a director from a Crown corporation from serving on the board of directors of a federally regulated financial institution². The result of this ruling was that a large number of people were prevented from being directors of both a federally regulated financial institution and a Crown corporation.

It is important to note that the prohibitions relating to directors of a federally regulated financial institution included in Sections 160(f) and (i) of the Bank Act (and the corresponding provisions of the Trust and Loan Companies Act and the Insurance Companies Act) continue to apply. Officers, directors or full-time employees of a Crown corporation that owns shares of a federally regulated financial institution continue to be prohibited from being directors of that federally regulated financial institution, and any agents or employees of a foreign government are still prohibited from being directors of a federally regulated financial institution.

It should also be noted that while the amendment technically allows government employees to act as directors of federally regulated financial institutions, we understand that government employees are prohibited under government conflict-of-interest rules from serving on these boards.

Mandatory Approval of All Foreign Financial Institution Acquisitions and
Incorporations³

Section 466 of the Bank Act (and the corresponding provisions of the Trust and Loan Companies Act and the Insurance Companies Act) will be amended with a new subsection (5.1), which will require either OSFI or Ministerial approval for all acquisitions of a foreign financial institution, regardless of size.

Before 2001, the Minister of Finance approved all financial institution acquisitions of foreign-regulated financial institutions, and following amendments in 2001, only OSFI was required to approve such acquisitions⁴. However, under OSFI’s interpretation of Section 466(2) of the Bank Act in its Advisory 2003-05—Substantial Investments —Banks and Bank Holding Companies⁵ (the Advisory), OSFI determined that if an acquisition was made through another regulated financial institution (which would include, for example, a securities dealer), such an acquisition did not need to be approved by OSFI. As discussed in the Advisory, OSFI took the position that because those regulated financial institutions are subject to regulatory oversight, deference should be given to the regulator of such financial institution and the institution’s ability to compete with its peers should not be hindered. As a result of the change included in the Budget Implementation Act, the Advisory will need to be updated once the amendment is in force.

The proposed amendment pursuant to the Budget Implementation Act signals a change in that all foreign financial institution acquisitions, regardless of whether or not they are made through another financial institution, will now be subject to regulatory approval in Canada. It is relevant to note, though, that the amendment does not affect other incorporations or acquisitions made by non-OSFI regulated financial institutions.

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¹ This is the second budget implementation act. Bill C-60 was introduced in April 2013.

² Ruling No. 2009-1: Directors of Federally Regulated Entities - Agents of a Crown Corporation.

³ References to "acquisitions" in the subsequent paragraphs include "incorporations".

⁴ However, an amendment made in November 2011 re-introduced Ministerial approval for large foreign financial institution acquisitions. See Torys’ November 2011 Bulletin for more details.

⁵ OSFI also published Advisory 2003-07 Substantial Investments - Insurance Companies and Insurance Holding Companies, which contains a similar interpretation of the corresponding section of the Insurance Companies Act.