Canada: OSFI Ruling On Credit Card Activities Clarifies Restrictions On Foreign Banks Carrying On Business In Canada

Last Updated: November 7 2011

Article by Stephanie M. Robinson and Maggie VanderMeulen, Articling Student

The Office of the Superintendent of Financial Institutions ("OSFI") recently confirmed that foreign banks undertaking activities in Canada in support of a foreign credit card program are not engaging in or carrying on business in Canada for the purposes of Part XII of the Bank Act (Canada) (the "Act"). OSFI Ruling No 2011-02 (the "Ruling") is helpful because it provides some assurance to foreign banks that under the right conditions, credit card programs they offer to clients outside of Canada may be offered to Canadian customers without contravening the Act. The Ruling is significant because it describes some of the factors that OSFI may consider to determine whether an activity will result in a foreign bank being engaged in or carrying on business in Canada.

The Ruling was issued in response to an application from a foreign bank that proposed to extend the credit card program that it offers to U.S. corporate clients to include their Canadian affiliates. Under the extended program, employees of the Canadian affiliates would receive Canadian dollar credit cards produced and issued by the foreign bank from outside Canada. The foreign bank sought clarification on the question of whether the activities undertaken in Canada in support of the credit card program would be subject to Part XII of the Act, which governs the entry into and operations in Canada of foreign banks.

Restrictions on foreign banks carrying on business in Canada

Subsection 510(1) in Part XII of the Act contains a general prohibition against a "foreign bank" engaging in or carrying on business in Canada except as specifically authorized by the Act. "Foreign bank" is broadly defined to include any entity that is called a bank or that is regulated as or like a bank in any jurisdiction in which it carries on business. The definition also includes any entity that controls a foreign bank and any entity that provides financial services and is affiliated with a foreign bank.

Under the Act, a foreign bank may not engage in or carry on business in Canada except as authorized by the Act (i.e., through a foreign bank subsidiary or an authorized foreign branch or some other approved entity, or pursuant to an approval or an exemption order obtained from the Minister of Finance). However, the Act does not provide guidance on the factors that OSFI should or could take into account in determining whether a foreign bank is engaging in or carrying on business in Canada. Whether a foreign bank would be considered to be engaging in or carrying on business in Canada will depend on the circumstances that surround the activity in question. OSFI will assess the facts and circumstances of each particular case to determine whether there is a sufficient connection between the foreign bank, or the entity associated with a foreign bank, and Canada.

the ruling

In this case, OSFI considered the following factors to be relevant to its determination that the foreign bank was not engaged in or carrying on business in Canada:

1. Where the elements leading to the formation of the agreements would take place

  • The negotiation, decision to enter into, execution and delivery of the agreements would take place outside of Canada.

2. Where the operations would be carried out

  • The foreign bank would have no office or other establishment in Canada.

3. Where the services would be delivered and paid

  • Services would be performed outside of Canada with the exception of certain limited functions to be performed by a third party Canadian credit card issuer (which would include processing, clearing and settlement services as well as reception of card payments). Visits to Canada would be occasional and for the limited purpose of providing customer support.

4. Where the credit card program would be marketed

  • The program would be promoted outside of Canada only.

5. The relationship between the activities in Canada and outside Canada

  • The activities carried on in Canada would merely be to assist the foreign bank in fulfilling obligations undertaken entirely in the context of its credit card business outside of Canada.

Since the Act does not contain guidance to help entities determine whether they are engaged in or carrying on business in Canada, the factors considered in this Ruling help clarify how the prohibition in the Act will be interpreted. The Ruling is also helpful because it is consistent with the widely-held view that, generally, where substantially all business functions and processes relating to an activity by a foreign bank take place outside Canada, the foreign bank would not be considered to be engaging in or carrying on business in Canada solely by reason of that activity.

OSFI rulings generally

Rulings describe how OSFI has applied or interpreted certain provisions of the Act, and the regulations or guidelines thereunder. Rulings may provide guidance for other similar transactions where the relevant facts are the same as or similar to those of the transaction or type of transaction that OSFI considered for the purposes of issuing a particular ruling. However, subsequent transactions may raise additional or different considerations that were not addressed in a previous ruling. Accordingly, rulings are not necessarily binding on OSFI's consideration of subsequent transactions.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2011 McMillan LLP

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