On March 27, Bill C-74 1 introduced a number of proposed amendments to the Bank Act, the Trust and Loan Companies Act and the Insurance Companies Act (collectively, the Acts) which, if enacted, will provide greater flexibility for banks, trust and loan companies and insurance companies governed by the Acts (collectively, financial institutions) to undertake and leverage broader fintech activities.
The Acts currently permit financial institutions to enter into networking arrangements with other financial institutions and “permitted entities,” and they are interpreted restrictively such that “permitted entity” means an entity for which a financial institution would have received any necessary approval to hold. In addition, financial institutions are currently unable to collect referral fees from entities that are not financial institutions or “permitted entities.”
Proposed amendments would clarify that a financial institution may enter into networking arrangements with “permitted entities” regardless of whether the financial institution had received approval to acquire such entity, and would include a broad new power to provide referrals of the financial institution’s customers to other entities, regardless of whether they are permitted entities. The current powers under the Acts are restrictive from both the perspective of the financial institutions and the perspective of fintech companies, and therefore the proposed broadened power could help increase competition in the fintech and other sectors by expanding the networks available to these companies. However, it is possible that regulations may be made under these provisions which could limit some of the broad new powers, and as a result, potential new regulations will need to be monitored closely.
In addition to the power to carry on the business of banking with respect to banks, and the power to carry on business which appertains to the business of providing financial services with respect to other financial institutions, the Acts currently permit financial institutions to carry on certain other activities. These activities include engaging in the collecting, manipulating and transmitting of information that is primarily financial or economic in nature with the prior written approval of the Minister of Finance when the activity occurs in Canada, and, with the prior written approval of the Minister of Finance, to develop, design, hold, manage, manufacture, sell or otherwise deal with data transmission systems, information sites, communication devices or information platforms or portals that are used to provide information that is primarily financial or economic in nature.
Proposed amendments would provide a power to engage in the collection, manipulation and transmission of information (not limited to “information that is primarily financial or economic in nature”) without the approval of the Minister of Finance. In addition, it is proposed that financial institutions may, without the approval of the Minister of Finance, design, develop, manufacture, sell and otherwise deal with technology to the extent those activities relate to activities that the financial institution or its affiliates are engaged in, or to the provision of financial services by any other entity.
Technology is not defined in the proposed amendments, and we believe it should be given a broad interpretation to include both computer hardware and software. In addition, there is no specific grandfathering of activities currently carried on under the provisions which are being replaced, and we believe that these provisions should be interpreted as broad enough to encompass those activities—as a policy matter, we believe these proposed amendments are intended to expand and not restrict activities.
Finally, the financial institutions will have new powers to engage in any activity that relates to the provision of financial services by the financial institution and its affiliates. This is an important new power in connection with the investment regime, as it should allow in-house activities that the financial institutions engage in to be commercialized in subsidiaries and used outside of the financial services industry.
We expect that the new powers under these provisions will be subject to new regulations that have yet to be drafted, but these regulations will still permit a significant expansion of the current powers and greater flexibility for financial institutions.
Identification, Authentication and Verification Services
Proposed amendments would add a paragraph to each Act which would specifically provide that a financial institution may “provide identification, authentication or verification services.” While we believe that there were already strong arguments that the provision of identification, authentication and verification services falls within the scope of the business of banking with respect to banks, and the power to carry on business which appertains to the business of providing financial services with respect to other financial institutions, this proposed amendment will ensure that there is no longer any ambiguity when these services are applied outside of the financial services sector.
The Acts currently provide that if a substantial investment by a financial institution is not made in a regulated financial institution, the business of the entity being acquired must be limited to certain enumerated permitted activities.
One of the major concerns about investing in fintech companies under the current versions of the Acts relates to the fact that if, in addition to its primary business, the entity carries on activities that are not permitted activities for financial institutions (e.g., a fintech company that also has a food delivery app), a financial institution is not permitted to invest in the entity, even where the entity’s primary business is a permitted investment for a financial institution. A proposed amendment to the Acts would allow for financial institutions to make substantial investments in entities that engage in non-permitted activities so long as the “majority” of the activities of the entity’s business consists of financial service activities. New regulations are expected to be drafted to define the meaning of “majority” and may impose other restrictions. We would note, however, that this proposed expansion would not apply in respect of the “Additional Powers” discussed above and the current additional powers permitted under the Acts (i.e., a financial institution would continue to be restricted to investing in entities whose activities are limited to activities falling with the additional powers).
Blair Keefe is partner and co-head of the firm’s Financial Institutions Practice. Eli Monas is a senior associate who recently returned to the firm after a six-month secondment to the Legislation and Approvals Division at the Office of the Superintendent of Financial Institutions.
1An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures.