L. Foreign Banks

• 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: 136-139

Page 136

Prior to the 1980 Bank Act, there were no statutory provisions permitting foreign banks to operate in Canada, although provided foreign banks did not call themselves "banks," there was no legal prohibition against carrying on business in Canada, and some "suitcase banking" was carried on in the commercial, but not the retail, sector.⁴⁷⁹

The 1980 Act permitted foreign banks to provide banking services through incorporated "Schedule I" banks and to provide other financial services through a "non-bank affiliate of a foreign bank" with the approval of the Minister of Finance and subject to a very strict regulatory regime. The parent foreign bank was prohibited from acquiring a substantial investment in a Canadian financial institution but could do so in Canadian entities that did not have as their principal activity a financial service. The 1997 amendments permitted foreign banks to own regulated financial institutions directly, but not through the acquisition of a domestic financial institution, and also permitted non-bank foreign financial institutions to acquire Canadian non-bank financial entities and provide financial services other than deposit taking.

In late 1997, the federal government produced a policy paper⁴⁸⁰ on the future of foreign banks, and many of the ideas in that paper were taken up by the MacKay Task Force. These included enhancing competition by permitting foreign banks to open branches directly in Canada without incorporation, although subject to home jurisdiction regulation and with a prohibition on retail deposit taking; increasing the range of models for doing business in Canada using regulated and unregulated models; reducing regulation significantly, especially where there were few prudential concerns; and relying on home jurisdiction regulation to some extent, a practice allowed under European Union banking policy but not before contemplated by Canadian banking policy. The resulting provisions in Parts XII and XII.1 of the 2001 Act are so extraordinarily complex and labyrinthine that it is difficult to assess how effective they are at enhancing competition while at the same time regulating it. However, a number of foreign banks have taken advan-

Page 137

tage of the 2001 regime, so it remains to be seen whether the Canadian customer will have greater banking choices.⁴⁸¹

Foreign banks may operate in Canada in two ways: as "foreign banks" and as "authorized foreign banks." A "foreign bank" is, essentially, a bank according to the laws of the country other than Canada where it is incorporated and is engaged in banking business such as accepting deposits and lending money in that foreign country.⁴⁸²

Part XII of the Act applies to a foreign bank, although the Minister of Finance has a statutory discretion to exempt a foreign bank from any provision of the Act.⁴⁸³

An "authorized foreign bank"⁴⁸⁴is a foreign bank permitted by the Minister of Finance to establish a branch in Canada, and Part XII.1 applies to such entities. The Act is the charter for, and applies to, all banks in each category as much as to...