In 2017, the Office of the Superintendent of Financial Institutions (OSFI) announced that the rules of the Bank Act would also apply to all non-bank financial service providers, meaning credit unions and unregulated financial service providers would no longer be allowed to advertise themselves as “bank.”
Essentially, the only institutions that were allowed to continue to use the term “bank” are listed in Schedule I and Schedule II of the Bank Act. Foreign banks are listed in Schedule III.
This act was fully brought into law in June of 2019.
Why Did the Regulator Make Changes?
Although credit unions in Canada are legally authorized deposit-taking financial institutions, they are not banks. OSFI became aware of an increased use of the words “bank”, “banker” and “banking” by non-bank financial service providers, and ruled that a change of classification was required in order to protect consumers.
How Are Credit Unions Different From Banks?
1 – Profits
Credit unions are financial cooperatives, so any money leftover at the end of the year is returned to members in the form of dividends or donated to communities as scholarships and other member initiatives.
Banks, on the other hand, have a responsibility to their shareholders to make a profit. Profits are then distributed to the shareholders, not the banks’ depositors.
2 – Interest and Loan Rates
At credit unions, everyone is entitled to the best rates and offers available. Credit unions are taxed at a lower rate than banks because of their non-profit status and they receive tax benefits banks don’t qualify for. For this reason, low interest loans, including mortgages, are common at credit unions.
With banks, you might only qualify for preferred rates and promotional offers if you have had sufficient business dealings with the bank over several years. Additionally, banks run incentives with their staff to sell promotional products to select customers in order to maximize their corporate profits.
Unlike credit unions, interest and borrowing rates will fluctuate from one customer to another and can be affected by the bank rate set by the federal government.
3 – Deposit Protection
Credit unions obtain insurance from the Deposit Insurance Corporation of Ontario (DICO), which provides the same or higher deposit protection to chartered bank customers. DICO also provides unlimited insurance for each registered savings plan or contract.
By contrast, banks register for deposit insurance through the Canadian Depository Insurance Corporation (CDIC). The CDIC covers only the first $100,000 in very specific categories of accounts, with a term-to-maturity period of five years or less.
4 – Charter and Regulators
Banks are federally chartered corporations, approved and regulated by OSFI. They may operate all across Canada, and are subject to any applicable provincial laws.
Credit unions in Ontario are provincially incorporated and regulated; their regulators are the provincial Ministry of Finance, FSCO, and DICO. They oversee compliance with solvency rules and insures eligible deposits. DICO have the authority to issue bylaws to ensure that insured credit unions operate within prudent business and financial practices.
What Impact did the Regulatory Change Have?
The public have seen little difference in terms of the actual service that they receive from their banks and credit unions. The biggest change has been that credit unions have had to discontinue their long-time practice of using the term “banking” to describe their business activities, and all non-bank institutions now have to use language that clearly distinguishes their status.
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