K. Bank Holding Companies

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 132-135

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The MacKay Task Force recommended that a new, regulated holding company regime be implemented in relation to the financial services sector in Canada, and the 2001 Act introduced a regulated, non-operating bank holding company regime permitting bank holding companies

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to hold banks and other corporations in the same financial institutions group. Before 2001, financial institutions could be organized in two ways: a parent-subsidiary model and an unregulated holding company model. The latter was prohibited for banks and mutual insurance companies because both were required to be widely held, but the former was permitted by the 1991 Act, which for the first time, authorized Canadian banks to own insurance and trust companies and investment dealers as subsidiaries, provided the parent bank was widely held. The parent bank was essentially the holding company.

The MacKay Task Force suggested four reasons for a new holding company regime: (i) to provide greater flexibility to banks to set up separate entities devoted to a particular activity and to enter strategic partnerships to pursue that activity; (ii) to provide more nuanced regulation for each specific entity; (iii) to permit entities operating in foreign countries to establish local partnerships without being subject to significant regulatory burdens in both countries; and (iv) to provide a vehicle for creating economies of scale and scope in an assimilating financial institutions sector. The Task Force also recommended that the ownership requirements for bank holding companies be identical to those for banks, so that they would be widely held, although they could wholly own a regulated financial institution.

Comparison of Part XV of the Bank Act, which relates to bank holding companies, with Parts III to VI demonstrates how closely the corporate structure of a holding company reflects that of a bank. The 302 sections in Part XV largely replicate the earlier provisions in the Act relating to incorporation,⁴⁵³capital structure,⁴⁵⁴corporate governance,⁴⁵⁵capital adequacy,⁴⁵⁶ownership,⁴⁵⁷and supervision.⁴⁵⁸

However, the provisions relating to the business and powers of bank holding companies are entirely new and reflect the new policy of the Act in permitting a holding company regime.

Section 922(1) emphasizes the non-operating status of bank holding companies by providing that they may not engage in any business other than: (i) acquiring, holding, and administering investments permitted by Part XV; and (ii) providing management, advisory, financial,

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accounting, information processing, and other permitted services to entities in which it has a substantial interest. The entities in which a bank may have a substantial investment,⁴⁵⁹that is, entities they may wholly own, include a bank, a bank holding company, a trust and loan company, an insurance company, a co-operative, a securities dealer, or a foreign financial institution engaged in these businesses.⁴⁶⁰

In addition to holding these more traditional financial institutions, a bank holding company may also have a substantial investment in entities engaged in related financial services such as data processing, computerized information management services, credit cards, mutual funds, and so on.⁴⁶¹

On the other hand, a bank holding company is prohibited from holding entities engaged in financial services...