Four proposed sets of regulations would set conditions on how federally regulated financial institutions (FRFIs) use new powers to undertake non-financial activities. Each set would create conditions on the implementation of the Non-Financial Activities (NFA) Amendments for collectively over 400 FRFIs operating under their governing legislation.
Together with the NFA Amendments, the proposed regulations would provide the conditions for responsible innovation by permitting FRFIs to undertake and invest in a broader range of technology and non-financial commercial business opportunities. The four sets of regulations are substantively similar.
LIMITS, REPORTING AND SCOPE
The regulations would establish limits and conditions on use of the expanded business and investment powers, so that FRFIs remain primarily oriented towards financial services. They would also set reporting requirements so that the Department of Finance has enough information to evaluate the policy outcomes and effectiveness of the expansion over time.
The rules are meant to ensure the new powers are used in a measured and incremental way, and that potential risks are understood and mitigated over time. Certain entities that are not classified as FRFIs under this legislation would still be subject to substantively similar conditions under the proposed regulations.
The proposals also seek a balance between these policy objectives and avoiding an excessive regulatory burden. Such a burden may make it more difficult for small and medium-sized FRFIs to benefit from the new powers.
THREE ROUTES TO NON-FINANCIAL ACTIVITY
Under the first route, FRFIs may conduct permitted non-financial activities in-house through business powers. The second lets them invest in a majority financial services entity (MFSE), where the majority of revenues, asset value or aggregate operating expenses comes from financial activities and the remainder can be anything else.
The third route is investment through a subsidiary engaging in a permitted non-financial activity. That subsidiary may be another FRFI or another permitted investment entity that engages in at least one such activity.
FROM THE 1871 BANK ACT TO TODAY
Canada's first Bank Act in 1871 prohibited commercial activities, and the restriction was extended to investments in 1967. The commercial-financial separation is designed to keep FRFIs focused on financial services for prudential reasons and to prevent financial sector control over other areas of the economy.
The FRFI statutes were amended in 1980, 1991 and 2001 to permit specific non-financial technology or information processing activities, including owning and investing in companies that perform them. FRFIs can undertake certain such activities in-house or through a subsidiary, subject to ministerial approval if the activity takes place in Canada. They cannot, however, invest in entities that conduct any non-permitted activities, even where the investment is only a minority share.
The Department of Finance has heard concerns from stakeholders that current statutory limitations prevent or complicate investments by FRFIs in fintech firms and restrict their ability to use technology and other commercial activities in-house. Each, it has heard, may hamper their ability to innovate and serve Canadian consumers. Recent Canadian Bankers Association surveys show that 86% of Canadians trust their bank to offer secure digital banking services and 87% trust it to protect their personal information.
AMENDMENTS AWAIT REGULATIONS
Legislative amendments giving FRFIs greater flexibility to undertake non-financial activities, including financial technology activities, were made in the Budget Implementation Act, 2018, No. 1. Additional technical amendments in 2023 corrected a drafting error that would inadvertently have expanded the business and investment powers beyond the original policy intent.
The NFA Amendments are not yet in force. They remain pending adoption of regulations establishing the necessary terms and conditions governing their use.