Bill C-8: An Act to Establish the Financial Consumer Agency of Canada, and to Amend Certain Acts in Relation to Financial Institutions (LS-387E)

HOUSE OF COMMONS		SENATE
Bill Stage	Date	Bill Stage	Date
First Reading:	7 February 2001	First Reading:	3 April 2001
Second Reading:	13 February 2001	Second Reading:	25 April 2001
Committee Report:	22 March 2001	Committee Report:
Report Stage:	28 March 2001	Report Stage:
Third Reading:	2 April 2001	Third Reading:

Royal Assent: Statutes of Canada N.B. Any substantive changes in this Legislative Summary which have been made since the preceding issue are indicated in bold print.

BILL C-8: AN ACT TO ESTABLISH THE FINANCIAL CONSUMER
AGENCY OF CANADA, AND TO AMEND CERTAIN ACTS
IN RELATION TO FINANCIAL INSTITUTIONS

On 1 June 1992, the federal government proclaimed its new legislative framework for federally regulated financial institutions: banks, trust and loan companies, insurance companies, and the national organization of the credit union movement. The new legislation changed the landscape within which federally regulated financial institutions operate by introducing new powers, making changes to the ownership regimes, and instituting new prudential safeguards.

On 18 December 1996, the Minister of Finance announced the mandate and composition of the Task Force on the Future of the Canadian Financial Services Sector. The Task Force was asked to advise the government on what needed to be done to ensure that the Canadian financial system remains strong and dynamic. It examined a number of substantial policy issues not dealt with by the 1996 White Paper on Financial Institutions.

In September 1998, the Task Force released its final report, which contained 124 recommendations dealing with four major themes: enhancing competition and competitiveness; improving the regulatory framework; meeting Canadians’ expectations; and empowering consumers.

Two parliamentary committees – the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce – scrutinized the Task Force’s report. Both committees conducted extensive public hearings and, in December 1998, issued their respective reports.

Following these reports, in late June 1999, the Minister of Finance released the federal government White Paper, Reforming Canada’s Financial Services Sector: A Framework for the Future, outlining the government’s vision for the future of the financial services sector.

The predecessor to this Bill, Bill C-38, was given first reading on 13 June 2000. It died on the Order Paper when the November 2000 general election was called. The Act was reintroduced on 7 February 2001 with some minor, mostly technical changes. This legislative summary updates the LS for C-38.

Overall, Bill C-8 proposes significant changes to the structure of the financial services sector. It expands access to the payments system and significantly blurs the distinctions between the different kinds of financial institutions.

On the consumer side, Bill C-8 institutes a variety of consumer-protection measures, most notably the creation of the Financial Consumer Agency of Canada.

Bill C-8 also changes the ownership structure of financial institutions by allowing the creation of bank holding companies, and by instituting a new size-based ownership regime for banks and converted life insurance companies. This Bill is accompanied by policy guidelines that set out the conditions under which mergers would be allowed as well as the conditions under which existing Schedule I banks could be recategorized according to the new size-based ownership rules.

This legislative summary, which provides an analysis of Bill C-8, is organized according to the following themes:

Under the current rules (Bank Act, Part VII, s. 372-408), no individual may own more than 10% of any class of shares in a Schedule I bank, regardless of its size. Accordingly, Schedule I banks are always widely held. No such limits apply to Schedule II banks, provided the owner has the prior approval of the Minister of Finance to acquire shares exceeding this limit. However, a shareholder of a domestic bank may have holdings in excess of the 10% limit for the first ten years of the bank’s existence; after that time the bank becomes a Schedule I bank, subject to the widely held regime. The purpose of this rule is to encourage the formation of new domestic banks. The rule does not apply to foreign banks, which may establish Canadian subsidiaries and hold them indefinitely. Originally, these Canadian subsidiaries were limited in the amount of Canadian assets they could hold; however, as a result of Canada’s participation in various international trade agreements, these restrictions have been progressively eliminated. Despite the elimination of these restrictions, Canadian subsidiaries of foreign banks continue to account for only a small portion of all Canadian bank assets.

Mutual insurance companies also have been allowed to wholly own Canadian banks, on the grounds that these insurance companies are themselves widely held because of their mutual status.

There are two main policy reasons for the “widely held” requirement. First, the absence of a controlling shareholder facilitates the continued Canadian control of banks, regardless of ownership. Previously, foreigners could hold no more than 25% of the share issue of federally regulated financial institutions; however, successive international trade agreements have led to the elimination of this restriction. Canadian control of strong domestic financial institutions is considered important because it:

Second, the widely held requirement is believed to facilitate the separation of financial and commercial activity; without this separation, dominant shareholders with commercial interests could influence a bank to make lending decisions that were not in the best interests of depositors or other shareholders. Of particular concern in a system of deposit insurance, this view was given some credence by the failure of many trust and loan companies owned by dominant shareholders in the 1980s and early 1990s. This concern led to the introduction of much more restrictive related-party transaction rules in the 1992 legislation; it was also a factor in the 35% public float requirement for larger trust and loan companies and shareholder-owned insurance companies, introduced at that time.

The changes proposed by the new ownership rules aim to balance the desire for increased competition in the banking and insurance sector and the promotion of international competitiveness, while at the same time maintaining the financial system’s safety and soundness. The current 10% restriction may preclude the use of stock as acquisition currency for potential transactions requiring the granting of a position in excess of 10% to a major shareholder in the target company. In an industry increasingly dominated by consolidated institutions, and in which many transactions are made through share exchanges, this inflexibility is thought to seriously constrain the range of potential strategies available to domestic banks.

Under the proposed changes, most of Part VII of the Bank Act would be replaced. The current “Schedule I” and “Schedule II” classifications would be eliminated. The new ownership regime for banks would be based on equity:

Large banks would still be required to be widely held (s. 374). However, to provide additional flexibility for large banks to enter into alliances or joint ventures, the definition of “widely held” would be expanded: a widely held bank would be one in which no person owns more than 20% of any class of voting shares or 30% of any class of non-voting shares(2) (clause 36, s. 2.2 and 2.3). Medium-sized banks would be allowed to be closely held, although a “public float”(3) of 35% of voting shares would be required (s. 385). Small banks would not be subject to any ownership restrictions other than the “fit and proper”(4) test.

Commercial entities would be permitted to own banks with less than $5 billion of equity. Subject to the fit and proper test, large banks would be permitted to have strategic investors owning up to 20% of voting shares or 30% of non-voting shares. Ownership would be permitted based primarily on the size of a particular bank: banks with equity of $5 billion or more would be required to be widely held,(5) banks with less than $5 billion of equity could be closely held.(6) A widely held bank that controls a bank which passes the $5 billion threshold only after the new law comes into force would be allowed to retain its shares in the bank (s. 374; see below for similar exemptions applying to widely held insurance holding companies governed by the Insurance Companies Act). This would permit a large bank or other eligible institution that establishes a bank subsidiary to retain its interest in the bank despite the fact that the bank has grown through the $5 billion threshold.

The new law would permit banks to own other banks. This is designed to introduce greater organizational flexibility; for example, a bank could be restructured into a number of smaller banks, each held by a widely held bank, with some or all of the subsidiary banks having outside strategic investors.

Banks with equity of $5 billion or more would not be permitted to have any major shareholder (s. 374).(7) For banks with equity under $5 billion, some restrictions would continue to exist (s. 382); however, a single shareholder could entirely own such a bank with the prior approval of the Minister (s. 377.1).

Although the National Bank of Canada, Laurentian Bank of Canada and Canadian Western Bank all have equity of less than $5 billion, the new legislation would treat these banks as entities with equity of more than $5 billion (s. 378(1)). Under the new Act, as long as these banks’ equity remains below $5 billion, the Minister could revoke this treatment, in which case the bank could be closely held (s. 378(2)). The Government’s current policy is that the widely held requirement would not be revoked unless the Minister received an application from a bank in question along with indications that the interests of the particular region served by the bank would be enhanced by changing the bank’s status.

The current rule requiring certain Schedule II banks to publicly trade a portion of their shares would continue to apply. Under the proposed system, once a bank exceeded $1 billion in equity, at least 35% of the bank’s shares would have to be listed on a stock exchange in Canada and held by persons who are not major shareholders of the bank. The Minister could make exceptions to this public float requirement. This requirement would not apply to large banks because, being widely held, they would not be permitted to have major shareholders.

This proposed more liberal ownership regime gives rise to new supervisory issues, such as what to do if a bank is owned by a conglomerate. The Minister would continue to have broad discretion in deciding who would be a suitable owner for a bank, and the new law would set out a number of factors that the Minister could consider when making a decision. This list (s. 396) of factors is substantially the same as that set out in the current Act; however, two new elements would be added to the Minister’s authority. First, the Minister would be authorized to consider the Superintendent of Financial Institution’s opinion as to whether the corporate structure of a particular applicant would impede the proper supervision and regulation of the bank. Second, the Minister would be authorized to order the assets of any closely held bank to be frozen should the Superintendent voice concerns about the institution. The order could be lifted upon the conglomerate organizing its affairs to comply with the holding requirements of the law. This provision’s apparent objective is to warn potential applicants that, in the case of a conglomerate, an applicant might not be permitted to acquire an interest in a bank unless it was prepared to bring its financial services into line with the requirements of the Act, i.e, under a regulated holding company. The Minister also would be entitled to consider the impact of any proposed integration of the operations and businesses of the applicant with those of the bank.

For large banks, the new Act would instruct the Minister to consider the character and integrity of an applicant wishing to acquire an interest at the 20% or 30% limit, although the Minister would not be precluded from considering control issues. In addition to prohibitions against holding in excess of 20% of voting shares or 30% of non-voting shares, the new Act would specifically prohibit anyone from having a controlling interest in a large bank.

The new law proposes two new anti-avoidance rules aimed at ensuring that no one shareholder is able to exert influence over a large bank. The “tainting rule” would prohibit anyone from being a major shareholder of any bank in Canada that is a subsidiary of a large bank. If a shareholder insists on remaining the major shareholding in the subsidiary bank, then the large bank would be required to divest itself of the subsidiary. To provide large banks with some flexibility to establish joint ventures, this rule would not apply to bank subsidiaries with equity of less than $250 million.

The second rule, known as the “cumulative voting rule,” would provide that a person could only have a significant interest (ownership of more than 10% of a class of shares) at one level in any group of banks related to a large bank. If a person received approval to exceed the 10% limit with respect to the parent large bank, the person could not exceed that level in any subsidiary bank of the large bank. Similarly, if a person exceeded the 10% limit with respect to any subsidiary bank, the person could not apply for approval to acquire more than 10% interest in the large bank.

Under the current law, the Superintendent of Financial Institutions can exempt a class of non-voting shares of a Schedule II bank from the ownership regime if the class amounts to not more than 10% of the bank’s equity. As such, a person can acquire more than 10% of the shares of that class without first obtaining the Minister’s approval. Further, the holder is deemed not to be a related party of the bank for the purposes of the self-dealing rules(8) in the Act, despite the fact that the shareholder would hold more than 10% of a class of shares of the bank. Under the new law, the Superintendent would be able to exempt a class of shares in a bank with equity of less than $5 billion provided that the class accounted for not more than 30% of the aggregate book value of all the outstanding shares of the bank.

Under the current law, banks face restrictions in terms of what they may invest in or hold as a subsidiary. For example, certain financial services – such as credit card issuing and consumer lending – must take place within the bank itself. The new law would expand the permitted types of subsidiaries so that both a holding company and a parent-subsidiary structure would be permitted a broader range of investments than is currently available to banks. The purpose of expanding permitted investment activities is to give banks greater choice and flexibility with respect to structuring in order to carry out their activities in-house, under a holding company, or through a parent-subsidiary structure, without facing significantly different permitted investment constraints. Permitted investments for trust and loan companies and insurance companies would be similarly expanded.

The ability to have additional subsidiaries would also permit the creation of new special-purpose entities as well as facilitate alliances and joint ventures through these entities, thereby enhancing the banks’ flexibility to meet the increasing technological and competitive challenges from sources such as unregulated and “monoline” firms specializing in a single line of business. The new rules would be based on defined categories of eligible investments and a number of key parameters. Permitted investments would be composed of five broad categories:

Control requirements, approvals and other rules would be based on the category of investment.

The widely held rule for banks could also be met by having the bank held by a holding company(9) (s. 374), providing the holding company was itself widely held. The same ownership regime that applied to banks would apply to bank holding companies. Similarly, permitted investment rules would be similar for both banks and bank holding companies. Rules relating to insolvency, related-party transactions, governance, use of name, and regulatory intervention powers would be different for bank holding companies, reflecting the fact that the bank holding company would be required to be non-operating, and that the Office of the Superintendent of Financial Institutions (OSFI) would not be responsible for its creditors.

Only the holding company created to hold the shares of the bank would be entitled to the exception, i.e., another widely held bank holding company would not qualify to own that bank. The holding company option is designed to provide financial services providers with greater choice and flexibility in structuring their operations, and would allow them to compete more effectively in the global market by giving them new latitude for raising capital and forming strategic alliances. The holding company regime would enhance domestic competition by providing a structure for institutions to come together under a common ownership structure without having to enter into a parent-subsidiary relationship. This would allow them to maintain their separate identities to an extent not possible under an acquisition or merger. For example, a bank, an insurance company and a mutual fund company might find they could realize economies of scale and scope if they were to work together within a corporate group.

A bank holding company structure would be an incorporated entity under the Bank Act. Banks would have the choice of moving certain activities that are currently conducted in-house, or in a subsidiary of the bank, to an affiliate outside the bank. Depending on the risk that the affiliate poses for the holding company’s bank, the affiliate could be subject to lighter regulation than that of the bank. However, the entire group would be overseen in order to safeguard regulated affiliates. The supervision of the holding company parent and its downstream holdings would be “risk-based,” i.e., supervision would focus on those group activities that may pose material risks to the bank and other affiliated federally regulated financial institutions. The OSFI:

As well, the Bill would permit other corporations to be interposed between the bank and the holding company, provided that the holding company controlled all of the corporations above the bank in the chain of ownership. Accordingly, up to 49% of the voting shares of the bank or of the intermediate corporation might be held by an entity other than the holding company.

In contrast to the banks’ ownership regime, there is currently no widely held rule for federally regulated trust and loan companies or insurance companies owned by shareholders. For these companies, as with the Schedule II banks, the Minister of Finance must approve any shareholding in excess of 10%; currently, there are no legislative restrictions or directions on the exercise of this authority. The one exception to the global 10% restriction relates to the four former mutual life companies that demutualized(10) during 1999 and 2000. For these companies (like the current Schedule I banks), the current Insurance Companies Act and regulations do not permit anyone to acquire more than 10% of any class of shares of the company. Under the new rules, demutualized companies would have a two-year transition period from the time of demutualization, during which they would be required to remain widely held; no mergers or acquisitions of demutualized firms would be permitted. Following the transition period, the requirement that large demutualized insurers be widely held would continue. Medium-sized demutualized companies would automatically be subject to the new size-based ownership rules after the transition period. Unlike banks, they would not need to apply to the Minister for recategorization.

Three of the demutualized companies established holding companies under the Act at the time they demutualized; as such, the ownership restriction applies at the holding company level. No one other than the holding company is permitted to own any voting shares of the demutualized company. The new rules clarify the transitional nature of the widely held requirements: for companies with equity of less than $5 billion at the time they demutualized (i.e., Canada Life Assurance Company and Clarica Life Insurance Company), the widely held requirement would continue to apply, but only until 31 December 2001, after which time the two companies could be closely held. The two companies with equity of more than $5 billion at the time they demutualized (Manufacturers Life Insurance Company and Sun Life Assurance Company of Canada) would have to remain widely held until the Minister withdraws the requirement.

The widely held rule applying during the transition period to the two larger companies would differ from that applying to the two smaller companies. The two larger companies would be subject to the same rule as the large banks (i.e., no major shareholders); moreover, as with the large banks, holding more than 10% of any class of shares would require the Minister’s prior approval. For the two smaller companies, during the transition period, no one could own more than 10% of any class of shares of each company.

For the three companies that have established holding companies, the widely held requirement would continue to apply at the level of the holding company. Again, though, only the holding company that was created for the purpose of holding the shares of the particular demutualized company would qualify, i.e., the demutualized company could not be acquired by another widely held holding company.

The rules for holding companies would be somewhat relaxed from the current rule in that the holding company would only need to control the demutualized company in fact. A person has “control in fact” where the person has direct or indirect influence that, if exercised, would result in the person controlling the company. The Act does not draw a direct correlation between control in fact and ownership of shares.

In addition, as with banks, it would be possible under the new rules to interpose other corporations between the ultimate widely held holding company and the demutualized company, again provided that the holding company controlled all of the corporations above the demutualized company in the chain of ownership.

As is the case under the current Bank Act, a new insurance holding company regime would be incorporated into the Insurance Companies Act. Consequently, exceptions from the widely held requirements would also be made to permit demutualized insurers to establish insurance holding companies, subject to the same ownership requirements that would apply to the three existing holding companies. A provision has also been included to allow the one company that did not establish a non-operating life insurance company holding company at the time it demutualized (Clarica Life Insurance Company) to establish a holding company as a non-operating life insurance company under the Act after the new ownership regime comes into force.

Under the new rules, the Minister could decide to suspend the widely held requirement for the demutualized companies. In so doing, the Minister would be authorized to consider the opinion of the Superintendent of Financial Institutions as to whether the corporate structure of a particular applicant would impede the company’s proper supervision and regulation. Again, as with banks, the Minister would have the authority to order that the assets of a demutualized company be frozen if the Superintendent expressed concern about the conglomerate to which the company would be affiliated. The order could be lifted if the corporate structure of the conglomerate were suitably reorganized.

The Minister would also be permitted to consider, in respect of the acquisition of any company, the effects of any possible integration of the operations and businesses of an applicant with those of the company that the applicant seeks to acquire. This would permit the Minister to consider the impact of the acquisition on Canadian jobs.

As with large banks, if a purchaser were to seek to acquire an interest up to the 20% or 30% limit for the large demutualized companies, the new Act would instruct the Minister to consider only the character and integrity of an applicant wishing to acquire the interest.

The new system would also contain two anti-avoidance rules, similar to the banking rules, aimed at ensuring that no one shareholder could exert influence over a demutualized company. The “tainting rule” – as it would apply to the two large demutualized companies – would prohibit anyone from becoming a major shareholder in a life insurance company that is a subsidiary of the demutualized company. If a shareholder wished to remain the major shareholder in the subsidiary, the company would be required to divest the subsidiary. In the case of the two smaller demutualized companies, the rule would apply to anyone acquiring more than 10% of any class of shares of the subsidiary. The rule would not apply to life insurance company subsidiaries having equity of less than $250 million. As with the banks, the apparent intent of this provision is to provide the companies with flexibility to establish strategic investments.

The “cumulative voting rule” would allow a person to have a significant interest only at one level in any group of federal life insurance companies related to a large demutualized company. A person receiving approval to exceed the 10% limit in a demutualized company could not exceed that level in any subsidiary federal life insurance company. Similarly, if a person exceeded the 10% limit for any subsidiary, the shareholder could not acquire an interest in excess of 10% in the demutualized company itself. Because it would not be permitted to acquire more than 10% of any class of shares of the two smaller demutualized companies prior to 1 January 2002, applying the cumulative voting rule to these companies or their subsidiaries would not be necessary.

Apart from the demutualized companies, the new ownership rules for insurance companies would not be based on size. Unlike banks under the Bank Act, an insurance company with equity above $5 billion (or one that passed that threshold after the legislation came into force) would not be required to be widely held.

The current rule requires that companies with equity of more than $750 million publicly trade a portion of their shares. This “public float” rule would still apply; however, under the new rules, this requirement would apply only after the company’s equity exceeded $1 billion. At that point, at least 35% of the company’s shares would have to be listed on a stock exchange in Canada and held by persons who were not major shareholders of the company. Unlike the Bank Act (under which the Minister has broad discretion to grant exceptions), the Minister could only exempt a company from the public float requirement under the Act if the company were controlled by one of the listed eligible shareholders. For the most part, these shareholders are other financial institutions that have similar public float requirements. Also, unlike the large banks (to which the rule does not apply), the four widely held demutualized companies would be subject to the public float requirements.

Under the current rules, the Superintendent of Financial Institutions may exempt a class of non-voting shares from the ownership regime if the class amounts to not more than 10% of the company’s equity. In the case of a mutual company, both the equity and the surplus of the company would be taken into account. Based on this exemption, a person could acquire more than 10% of the shares of the exempted class without seeking the Minister’s approval. The holder would be deemed not to be a related party of the company for the purposes of the self-dealing rules of the Act. The new rules would permit the Superintendent to exempt a class of shares (other than those of a demutualized company that is required to be widely held or one of its holding companies), provided that the class accounted for not more than 30% of the aggregate book value of all the company’s outstanding shares.

BANK HOLDING COMPANIES

A. Context

Banks are heavily regulated because of their retail deposit-taking activities, which are typically subject to deposit insurance. Regulations are designed to help protect the integrity of that system of deposit insurance as well as maintain the safety and soundness of the financial system. Other financial institutions which do not take deposits are less regulated, and sometimes not regulated at all. This has competitive implications when a non-bank subsidiary of a bank competes in a market segment with unregulated or less regulated financial services providers. Indeed, the subsidiaries of a bank are affected by the capital and other requirements of bank regulation, even though they are not directly involved in deposit-taking activities.

For example, trust and loan companies, which also take deposits, have the additional structural flexibility to organize via an unregulated holding company. These companies do not face the same structural restrictions as banks, as they are permitted to disaggregate functions between regulated and unregulated affiliates. This was considered by the Task Force on the Future of the Canadian Financial Services Sector:

The Task Force felt that two institutions performing the same functions should be regulated in the same way with respect to these functions.

Canada has a constitutional division of powers between the federal and provincial governments over financial services. The federal government has exclusive jurisdiction over banking and the incorporation of banks. Provincial governments have exclusive jurisdiction over property and civil rights in the provinces and the incorporation of companies with provincial objects. This suggests that the activities of trust and loan companies, insurance companies, securities dealers, and co-operative financial institutions that are “provincial” in scope do not fall within federal banking jurisdiction. Therefore, a truly “functional approach” to regulation is, in practice, hard to implement.

Although regulation must continue to be based on institutions, it is possible to move closer to a “functional approach” by allowing more flexible organizational structures for regulated financial institutions. Allowing for the creation of financial holding companies would accomplish this by helping banks to better compete with unregulated financial institutions, form joint ventures, and reorganize their activities to better tackle and take advantage of innovations in financial markets.

B. Incorporation and Continuance of a Bank Holding Company

The Bank Act is being amended to allow for the creation of bank holding companies. Before issuing letters patent incorporating a bank holding company, the Minister would assess the suitability of the business plan and the prospective applicants. The Minister would consider:

However, if a proposed bank holding company was a subsidiary of a foreign bank, letters patent could not be issued unless the Minister was satisfied that, if the application was made by a non-member of the World Trade Organization (WTO), a domestic bank holding company would obtain an equivalent treatment in the jurisdiction in which the foreign bank principally carries on business (s. 673).

Existing banks could convert to a bank holding company structure. On the bank’s request,(11) subject to the approval of the Minister, shares of the bank holding company could be issued, on a share-for-share basis, to all shareholders of the bank in exchange for all the issued and outstanding shares of the bank (s. 677(1)). The shares exchanged would be subject to the same designation and restrictions and carry on the same rights, privileges and liability as the shares of the bank for which they are exchanged (s. 677(2) and (3)). The ownership structure of the bank would automatically become the ownership structure of the bank holding company.

Existing corporations could also form a bank holding company(12) (s. 682). Where a corporation would be continued as a bank holding company, its existing property, obligation, liability, prosecution, conviction, ruling and by-laws would continue as the responsibilities and rights of the holding company (s. 687). Moreover, the holder of a security issued by the corporation would not be deprived of any right or privilege in respect of the security, nor be relieved of any liability (s. 687(f) and s. 703(4)).

Shares of a bank holding company would be in registered form and would be without nominal or par value (s. 703(2)). Moreover, where a corporation (including a bank) was continued as a bank holding company, shares with nominal or par value issued by the corporation before it was so continued would be deemed to be shares without nominal or par value (s. 703(3)). Where voting rights were attached to any series of a class of shares, the shares of every other series of that class would have the same voting rights – either one vote per share or no vote per share (s. 706(3) and s. 707).

Unless permitted by the regulations, or with the consent of the Superintendent, a bank holding company would not hold its own shares or the shares of a controlling body. Moreover, the bank holding company would have to preclude any of its subsidiaries from holding any of its shares or the shares of a controlling entity (s. 714).

The bank holding company would maintain a separate stated capital account for each class and series of shares it issues (s. 710). It also would maintain adequate capital and liquidity, subject to the regulations of the Governor in Council and the Superintendent’s guidelines (s. 949).

D. Name

A bank holding company would not be permitted to adopt a name that is substantially similar to that of a bank unless the name contains words that, in the opinion of the Superintendent, indicate to the public that the bank holding company is distinct from any bank that is its subsidiary (s. 695). Moreover, every bank holding company would have as part of its name the abbreviation “bhc” or “spb”(13)(s. 696(2)).

E. Business, Powers and Investments

The bank holding company would be required to be non-operating. Its permitted activities would include acquiring, holding and administering permitted investments as well as providing management, advisory, financing, accounting and information processing services to entities in which it has a substantial investment(14)(s. 922(1)(a) and (b)). The bank holding company could also conduct any other prescribed business (s. 922(1)(b) and (c)). It would not be permitted to undertake any core banking or financial services functions such as credit assessments.

No bank holding company would acquire control of, or increase a substantial investment in, any entity other than a permitted entity (s. 928(1)). Permitted entities, which would require the Minister’s prior written approval (s. 930(5)), would be defined as:

The bank holding company also would be required to own a majority of the shares of its bank subsidiary (or a bank holding company subsidiary), which would result in both de jure control and control “in fact” of the bank subsidiary (paragraph 930(4)(a)). Other regulated affiliates would be subject to control “in fact,” where a minority of shares could be held, but control could nevertheless be exercised by direct or indirect influence (paragraph 930(4)(b)). The same control restrictions would apply to affiliates that engage, as part of their business, in any financial activity that exposes the entities to material or credit risk (e.g., credit cards, small business loans, consumer loans) (paragraph 930(4)(c)).

unless the entity was engaged in the business of accepting deposit liabilities, or any activity that a bank was not permitted to engage in (s. 930(3)).

Finally, a bank holding company and its subsidiaries could only acquire shares or ownership interests of an entity, other than permitted investments, up to a point that the aggregate value of those ownership interests, plus the value of its interests in or improvement to real property, did not exceed the prescribed percentage of its regulatory capital (s. 938, 939 and 940).

Bank holding companies would be divided into three main classes: ones with equity of $5 billion or more; ones with equity of between $5 billion and $1 billion; and ones with equity of less than $1 billion.

A bank holding company with equity of $5 billion or more would have to be widely held, i.e., no shareholder could hold more than 20% of any class of voting shares, and no more than 30% of any class of non-voting shares (s. 876 and 2.2). Shareholders wishing to hold more than 10% ownership would have to obtain the approval of the Minister. In determining whether to approve a transaction, the Minister would review the applicant’s character and integrity as a businessperson (s. 906).

Moreover, the widely held requirement would apply to the total direct and indirect ownership of a bank subsidiary that is itself controlled by a widely held bank holding company with equity of $5 billion or more. Other than the controlling bank holding company, no other shareholder could hold more than 20% of any class of voting shares of the bank subsidiary, and no more than 30% of any class of non-voting shares (s. 879). No sharehol