Canada’s federal banking regulator releases advisory on the use of the Bank Words: Implications for FinTechs, credit unions and other financial services providers

On June 30, 2017, the Canadian banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), issued an advisory (the Advisory) that sets out how OSFI interprets and administers (a) the Bank Act restrictions on the use of the words “bank,” “banker” and “banking,” and (b) the exception to these restrictions that applies where the use of these words is not in relation to a financial services business. The Bank Act restrictions apply to all non-bank financial services providers, including both federally regulated trust and loan companies and provincially regulated institutions. They also apply to unregulated financial service providers. A breach of such Bank Act restrictions is an offence and exposes the relevant entities (and their directors, officers and agents) to material fines and imprisonment (see below for more detail).

Background

In Canada, the Bank Act and related regulations set out the federal legislative requirements that apply to banks and federal credit unions doing business in Canada.  In addition, the Bank Act also restricts non-bank entities and persons from conducting certain banking activities. These include restrictions on the use of words “bank,” “banker” and “banking.”

OSFI has released the Advisory in light of OSFI’s observation of an increase in the use of the words “bank,” “banker” and “banking” by non-bank financial services providers. The Advisory is intended to provide clarity regarding OSFI’s interpretation of the restrictions and the exceptions in the Bank Act. Although OSFI advisories are not law, such advisories describe how OSFI administers and interprets provisions of existing legislation, regulations or guidelines, or provide OSFI’s position regarding certain policy issues. Accordingly, OSFI advisories are very important from a compliance perspective.

Implications for non-bank entities and businesses

The Advisory emphasizes the regulators’ renewed focus on enforcement of Bank Act restrictions on the use of Bank Words (defined below). Credit unions are not exempt from the Bank Act restrictions and are required to comply. Similarly, FinTech companies (e.g., companies that provide a financial service through a technology solution) will also need to keep in mind the Bank Act restrictions. They will need to make sure that their corporate and trade names, marketing materials, customer communications, websites, mobile apps and other descriptions of their business activities fully comply with the Bank Act restrictions. As mentioned above, a breach of such Bank Act restrictions is an offence and exposes the relevant entities (and their directors, officers and agents) to material fines and imprisonment.

Transition period for compliance

Although the Advisory is in effect immediately, OSFI recognizes that immediate compliance may not be practical and certain adjustments may require a transition period. As a result, OSFI expects the non-banks to make all necessary adjustments within the following timelines:

Restrictions on the use of the Bank Words

The Bank Act contains two restrictions on the use of the Bank Words (defined below):

1. First, every Non-bank Entity (defined below) is restricted from acquiring, adopting or retaining a name that includes the Bank Words to indicate or describe a business in Canada or any part of a business in Canada (the Name Restriction). As per the Advisory, in OSFI’s view, the Name Restriction applies to both corporate and trade names.
2. Second, every Non-bank Person (defined below) is restricted from using the Bank Words to indicate or describe a business in Canada or any part of a business in Canada (the Business Description Restriction).

Bank Words refers to the words “bank”, “banker” and “banking”, either alone or in combination with other words, including (a) any of those words in any language, and (b) any word or words, in any language, that are equivalent to any of those words. As per the Advisory, words – including words not found in dictionaries, and compound words and contractions containing parts – that resemble, in writing or phonetically, any of the words “bank,” “banker” or “banking” are Bank Words (e.g., “banc,” “mybank” and “bancorp”).   

“Non-bank Entity” refers to an entity that is not a Canadian bank (i.e., either a bank listed in Schedule I or II of the Bank Act).

“Non-bank Person” refers to a person that is not a Canadian Bank, including a Non-bank Entity.

OSFI guidance on the meaning of the phrase “to indicate or describe”

In OSFI’s view, both for Name Restriction and Business Description Restriction, Bank Words indicate or describe a Non-bank Entity’s or Non-bank Person’s business (or any part of its business) where these words are (i) acquired, adopted or retained in a name (in case of the Name Restriction), or (ii) used in a manner (in case of Business Description Restriction), that could reasonably suggest to the public the nature of the entity’s or person’s business (or any part of its business). 

The Bank Act contains certain exceptions that allow bank subsidiaries to use the names of the parent bank in certain contexts. Absent such exceptions, the Advisory provides certain examples where a Non-bank Entity would be prohibited from adopting any of the trade names, or from using any of the phrases, set out below in connection with its business, or any part of its business, in Canada (whether in a logo, slogan, advertisement or otherwise).  In OSFI’s view, each of these trade names and phrases could reasonably suggest to the public the nature of the entity’s business or a part of its business, and therefore the entity would be adopting or using them “to indicate or describe” its business or a part of its business. Here are some examples of such trade names and phrases:

• [Non-bank Entity’s name] Co-operative Banking
• [Non-bank Entity’s name] Banking Centre
• “Own your bank”
• “Welcome to Canada’s newest online bank”
• Commercial Banking Centre
• Better Banking/Convenient Banking
• Mobile Banking/Telephone Banking/Branch Banking
• Bank accounts/Bank services
• Automated Banking Machine
• “[Non-bank Entity’s name] offers business / personal banking…”
•  “…for all your banking needs”
•  “Come do your banking with us”
•  “Bank at your convenience”

Absent the Bank Act exceptions mentioned above, OSFI views the Business Description Restriction as generally prohibiting a Non-bank Entity from advertising under the “banks” heading of a Canadian directory. OSFI has indicated that the Name Restriction and the Business Description Restriction apply regardless of the medium used to communicate the Bank Words, including webpages, web addresses, apps, signage, print and radio.

OSFI guidance on the meaning of the phrase “a business”

As it relates to the phrase “to indicate or describe a business,” in OSFI’s view, (1) the term “business” means the carrying on of a serious occupation, and, as a result, the Bank Words restrictions also apply to not-for-profit entities, and (2) the concept of “a business” refers to a business engaged in or carried on by the Non-bank Entity or Non-bank Person that acquires, adopts or retains a name that includes – or by the Non-bank Person that uses, directly or indirectly – the Bank Words to indicate or describe its business.

Non-financial exception to the Name Restriction and the Business Description Restriction

The Bank Act contains an exception to the Name Restriction and the Business Description Restriction that allows the use of Bank Words “in relation to a business that is not engaged in financial activities, unless the business is carried out by a prescribed entity” (the Exception). In OSFI’s view, the Exception may be used if the use of the Bank Words is not in relation to any part of the person’s financial activity business, but in no case may a “prescribed entity” resort to the Exception. A “prescribed entity” includes, among other entities, an entity in which a Canadian bank has a substantial investment, and a provincially or federally regulated financial institution.

The Advisory includes the following examples of when the use of Bank Words may or may not be permitted depending on the nature of the entity and activity. 

• An entity that is not a prescribed entity, whose sole business is to collect and stock food, and give it to persons in need, could adopt the trade name “Food Bank.”
• An entity that is not a prescribed entity, whose sole business is to purchase and sell real estate, could adopt the trade name “Land Bank.”
• An entity that is not a prescribed entity, whose businesses are to purchase and sell real estate and to provide financing to purchasers, could not adopt the trade name “Land Bank.”
• An entity that is not a prescribed entity, whose business is to develop and make available software or apps that persons may use to carry out financial transactions, could not adopt the trade name “Tech Bank.”
• An entity that is a prescribed entity, whose sole business is genetics-based research and development, could not adopt the trade name “Gene Bank.”

Punishment for offences

Fines and imprisonment

Under the Bank Act, a person who is guilty of an offence relating to the unpermitted use of Bank Words is:

1. in the case of a natural person, liable: (i) on summary conviction, to a fine of not more than $100,000 or to imprisonment for a term of not more than 12 months, or to both, or (ii) on conviction on indictment, to a fine of not more than $1,000,000 or to imprisonment for a term of not more than five years, or to both; and
2. in the case of an entity, liable (i) on summary conviction, to a fine of not more than $500,000, or (ii) on conviction on indictment, to a fine of not more than $5,000,000.

In addition, the court may, if it determines that the convicted person acquired any monetary benefits as a result of the offence, impose an additional fine in an amount equal to three times the court’s estimation of the amount of those monetary benefits.

If a person has been convicted of an offence under the Bank Act, the court may, in addition to any punishment it may otherwise impose, order the person to comply with the provisions of the Bank Act or the regulations in respect of which the person was convicted.

Liability of officers, directors, etc.

From a compliance perspective, it is important for businesses to pay careful attention to their use of any Bank Words because their officers, directors or agents could be exposed to similar fines and imprisonment. Under the Bank Act, if an entity commits an offence, any officer, director, agent or principal officer of the entity who directed, authorized, assented to, acquiesced in or participated in the commission of the offence is a party to and guilty of the offence and liable on summary conviction or on conviction on indictment to the punishment described above for the offence, whether or not the entity has been prosecuted or convicted.