Archived — Research Summaries: Working Paper 2008-01: Investment Restrictions in the Financial Services Sector

by Edwin Neave

This paper attempts to assess the formal and the informal dimensions of Canada's policy toward foreign direct investment (FDI) in financial services. After examining both customary approaches and Canada's legislation, the paper concludes that historically the most important formal FDI restrictions have affected the banking industry. While most of the formal restrictions have now been removed, differences in past policies mean Canada's banking and insurance industries currently differ in structure. Canada has a banking industry with a large domestic component and a fringe of foreign-owned, mostly small banks, while the insurance industry is considerably more international in both ownership and the types of business it conducts.

Canada's current legislation still requires that the shares of large banks and the two largest, recently demutualized insurance companies, be widely held. While the widely held limitation is not regarded by the Organisation for Economic Co-operation and Development as a deviation from national treatment, and while it does not discourage foreign portfolio investment up to legally permitted maxima, it does limit the possibility of acquiring a controlling voice in institutional affairs. There have been no foreign applications for acquiring a significant degree of ownership in a large Canadian bank, possibly indicating either a lack of investor interest or a belief that a proposal to acquire a block of shares might not receive welcoming treatment in the required ministerial approval processes.

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