OSFI to fast-track new entry regime for fintechs and credit unions

 
On February 12, OSFI formally announced ambitious changes to the new entry regime for fintechs and provincial credit unions, which could be transformative. These changes were previewed by Superintendent Peter Routledge in a fireside chat¹ at the TD Securities Canadian Financial Services Conference on January 30, where he noted that OSFI is “working to shorten approval timelines, provide more transparency on expectations, and make the path to a federal license easier to navigate for institutions that want to compete nationally” and “intends to launch a pilot for the fast-track framework in June 2026 to test our approach”.

In Budget 2025, the federal government noted that “small- and medium-sized banks, as well as provincial and federal credit unions, are critical for consumer choice across Canada”², signaling the need for additional competition in the banking sector. The new OSFI initiative appears to be a direct response to that policy objective.

Background

The time period for a fintech to incorporate a new bank or trust company (collectively a “bank” for ease of reference) or for a provincial credit union to continue as a federal credit union (an FCU, but also referred to herein as a “bank” for ease of reference) has been taking 3-5 years or longer (depending on whether you measure the starting date from the time of initial discussions with OSFI or the filing of a formal application), and this has for some been a significant deterrent to pursuing a federal charter.

The applicable legislation contemplates a two-phase bank incorporation process in which the applicant first seeks approval for the issuance of Letters Patent of Incorporation (Letters Patent) from the Minister of Finance (Canada) (MoF), and then the incorporated bank obtains an order to commence and carry on business (OCCB) from the Office of the Superintendent of Financial Institutions (OSFI) within one year following the date of the Letters Patent³.

The pre-application phase and its unintended consequences

Notably, about 12-14 years ago, OSFI established a pre-application phase in which a potential applicant would provide a streamlined package of materials, including a business plan, and OSFI would review and provide a letter setting out its expectations on what needed to be addressed in a formal application prior to obtaining a recommendation from OSFI to the MoF for the issuance of the Letters Patent.

This pre-application phase was established in response to criticism that OSFI had received from applicants who had spent several years (and millions of dollars) in the application process developing policies, procedures, controls, etc. to satisfy OSFI’s expectations, but then received feedback late in the process that would not be feasible to implement (e.g., the required leverage and capital ratios or other constraints that OSFI decided it would need to impose on the new bank). While very well intended, this pre-application phase ended up increasing the timeline for incorporation by at least another year.

As a result, numerous fintech clients have chosen not to contact OSFI or commence the process because the nature of their business (and the environment in which they operate) cannot tolerate waiting 3-4 years or longer for a banking license. Instead, many fintechs have opted to offer financial products and services through other means, such as partnerships with licensed financial institutions.

The lengthy time period is similarly problematic for a number of provincial credit unions that have likely grown too large and complex for their regulatory environment (including their respective deposit insurance funds) and would be much better positioned as an FCU⁴. Relatedly, the need for scale to be able to cover the costs of new technologies has become problematic for credit unions as they seek to attract the next generation of members—a federal charter allows expansion beyond provincial borders and enables mergers with other federal credit unions headquartered (and with primary operations) in another province, diversifying the customer base and the risk profile.

What does OSFI plan to do?

OSFI’s proposal today was less about revolutionary change (i.e., no statutory amendments will be made) and more focused on a streamlined process whereby OSFI would be more agile and take a more risk-based approach to dealing with new applications. In particular, OSFI intends to commit to more aggressive deadlines for providing feedback and moving an applicant through the process. For example, in phase one of the application process, OSFI intends to target a predictable four-week turnaround for feedback on the business model and to provide preliminary observations and expectations.

OSFI also indicated that it will be taking a more risk-based approach (and will take a more calibrated approach to prudential reviews) during the phase two process. We expect this risk-based approach will be more focused on the nature of the business to be carried on by the institution. Therefore, different regulatory expectations and constraints should apply to different risk profiles (e.g., a bank that does not plan to take any deposits vs. a bank that plans to take retail deposits to facilitate its payments business but intends to place the funds in high quality liquid assets, such as government securities, vs. a bank which plans to take deposits to loan money on an unsecured basis).

Moreover, OSFI seems to be moving away from a “no bank failure” approach to regulation and supervision—the OSFI Act has, since OSFI’s mandate was first established 1996, contemplated that, while regulation and supervision may reduce the risk that financial institutions will fail, it must be carried out having regard to the fact that boards of directors are responsible for the management of financial institutions, financial institutions carry on business in a competitive environment that necessitates the management of risk, and financial institutions can experience financial difficulties that can lead to their failure⁵. Consequently, OSFI will now require a clear and credible exit plan, particularly for fintechs, which allow the institution to surrender its banking license and cease operations with limited impact on the industry and its customers if the new bank is not able to successfully implement its business plan.

OSFI will now aim to send its recommendation for approval to the MoF within 12 months of the submission of the application “where dependencies permit”. We expect these dependencies relate to items beyond OSFI’s control, such as the quality of the submission, the timing and quality of responses to OSFI’s questions on the application, and/or the willingness of the applicant to make commitments or accept restrictions and constraints on the business activities of the applicant and its newly incorporated bank.

The increased focus on integrity and security over the last several years means that the timing of the processing of security clearances will become even more important, and it will be critical (in order to meet the aggressive timeline) for the senior management team and the proposed members of the Board of Directors of the bank to be identified and cleared early in the process—CSIS sometimes takes six months or longer to process security clearance forms, particularly when other international agencies need to be involved given the background (or the foreign work history or travels) of the person being put forward for the role.

After the Letters Patent are issued, OSFI proposes that the phase three process for the issuance of the OCCB should be completed within three months and/or be aligned with the “go live” plans of the new entrant⁶. It is expected that these OCCBs will include restrictions or constraints to address any residual risks that remain at the time of the commencement business, and that there will likely be supervisory plans and milestones clearly outlined for lifting these restrictions over time.

To increase transparency and accountability for both OSFI and the applicant, OSFI is proposing to establish a public dashboard for tracking the status of all applications.

What should potential applicants do?

We expect this change will result in a significant increase in the number of applications to OSFI, and therefore it will be crucial for proposed applicants to move quickly to get into the queue. It will be critically important for applicants to ensure that they retain experienced legal counsel and other advisors with a history of dealing with OSFI on matters of this nature.

Further thoughts related to credit unions

We were pleased with the decision to fast-track the continuance of provincial credit unions federally. These credit unions have a long track record of successfully carrying on business for decades; a loyal customer base; already have policies, procedures, and controls that generally align with OSFI’s expectations; and have been subject to oversight from provincial prudential regulators. However, we were disappointed that OSFI did not announce any tailored amendments to the capital regime to address the unique nature of credit unions, as proposed in our earlier bulletin. In particular, we believe that non-viable contingent capital (NVCC) features on non-common share equity capital instruments are not necessary for FCUs; that OSFI should, instead, follow Australia’s lead to allow Tier 2 capital to replace additional Tier 1 capital requirements for FCUs; that a supplemental leverage ratio can be applied to total capital of an FCU (in addition to a Tier 1 based leverage established close to the Basel maximum of 3%); and that existing Tier 1 qualifying capital should not be required to amortize 10% per year upon continuance if the instrument satisfies the minimum requirements for capital treatment federally other than the NVCC requirements.