March 4, 2008, Interview with Robert Elliott, Partner with legal firm Fasken Martineau
StartaBank (SAB):
Robert Elliott (RE)

SAB: With 20 applications currently with OSFI, do you think the chances of obtaining a charter today are the same as they were 1-2 years ago?

RE: In my view, an applicant for letters patent incorporating a federal deposit-taking institution will improve their chances of success if they have, among other things, a business plan that demonstrates a knowledge of the Canadian market and their opportunities in that market. Most applicants in recent years are not trying to be all things to all people, but rather have identified a market niche in Canada in which they have expertise, or have a product distribution system through which financial services would provide added value.

A potential applicant should have a good understanding of their proposed market in Canada and be able to support their assumptions by their own or third-party research in the market. The Office of the Superintendent of Financial Institutions ("OSFI") is not in the business of restricting competition in the market; their approach to an application is to consider whether the proposed institution has made an appropriate business case and will be operated in a prudent manner.

SAB: What kind of bank is most likely to obtain a charter (private bank, virtual bank…) or would each bank be evaluated based on its own unique criteria?

RE: Each application is considered on its own merits. Applicants need to be realistic about their proposed markets and opportunities. The applicant that seeks to provide general banking services from one or two branches may find it more difficult to demonstrate probability of success in the market compared to an applicant that has a unique product or service, or has identified an under-served market, or has an existing distribution channel and clients.

SAB: Many recent de novos seem to have origins in parents with a large installed base of customers. Examples include Manulife Bank, PC Financial and several others. Is this an important factor for OSFI?

RE: Applicants that have an existing client base and/or distribution channel through which to distribute banking products and services may be able to demonstrate that they have a proposal that will bring something new to the market. For these institutions, an existing client base and distribution network is an advantage. Not all applicants, however, will have this advantage, but bring other forms of innovation to the market. For example, some recent bank entrants were able to introduce novel corporate lending features to the Canadian market that had been available elsewhere but not in Canada, such as the ability to provide much longer-term corporate loans then Canadian banks have offered. This, and demonstrated demand in the market, distinguished them. There is a lot of room for creativity backed by prudent controls.

SAB: From a legal perspective, what are the steps a de novo bank must take from cradle to establishing a charter? (be sure and include effort, time and resource requirements in your response to this question)

RE: Well before starting a formal application process, a potential applicant must do its own homework about the Canadian market and its own capabilities. How feasible is the proposed business model? What competitive advantage can the applicant bring to the marketplace -- what products or services? What distribution channels? Why can they do what they do better than the competition? Doing your homework means conducting your own analysis of the market and or seeking the assistance of third-party consultants, such as Startabank participants, Fasken Martineau DuMoulin LLP and KPMG LLP, to assist in developing and conducting a market study. Usually an applicant is not starting from scratch, but already has experience in Canada in a related area or has experience outside Canada, which they believe they can bring to the Canadian marketplace.

If, based on the research, the potential applicant is still interested in proceeding, the applicant needs to obtain advice about the best entry vehicle for the potential business; in the "banking" sector, options include a regulated bank, trust company, loan company, foreign bank branch (full-service or lending) or an unregulated finance company.

Before making an application to OSFI for the issuance of letters patent by the federal Minister of Finance, the applicant should have a preliminary meeting with OSFI to discuss the applicant's plans. Assuming the applicant chooses to proceed, the applicant would commence the process of preparing a draft application with its accompanying materials. We recommend that applicants identify a team responsible for the application, which may include both employees with the ability to access information within the corporate group and outside consultants to prosecute the application. Generally speaking, it takes three or four months or more to properly prepare the draft application materials.

The draft application is submitted to OSFI for review. OSFI's regulatory approval and supervisory staff will thoroughly review the application. OSFI may ask further questions about the application materials and the applicant may have to prepare further information to respond to requests from the regulator. This review process can take several months, although working with experienced consultants can assist to minimize the need for OSFI to ask for additional information or clarification.

Once OSFI is satisfied with the draft application materials, OSFI will authorize the applicant to publish notice of its intention to make an application to incorporate the institution in the Canada Gazette and in a local newspaper near the head office of the proposed institution. That notice is published once a week for four consecutive weeks. After the date of the last publication, a 30 day period allows for public comment on the application. After that the 30 day comment period has expired, the applicant may make a formal application for letters patent incorporating the institution. The incorporation approval is usually available within a month after the date of the formal application.

Before the incorporated institution can commence business, it needs to be organized and capitalized. The institution must demonstrate to OSFI that it is now capable of carrying on business. OSFI will conduct a pre-commencement review on site and, if all is satisfactory, the Superintendent of Financial Institutions will issue an order permitting the institution to commence and carry on business. If the institution is a trust or loan company, it will have to obtain provincial licenses in each jurisdiction in which it wishes to carry on business before it can start that business.

The application process will generally take nine to 12 months or more to complete, although a well organized and experienced applicant may be able to reduce that time frame somewhat.

SAB: What are typical legal challenges that a potential de novo would want to consider?

RE: If, by legal challenges you mean application challenges, applicants need to consider the statutory criteria for incorporation set out in the financial institutions legislation and ensure that they can meet these requirements. It is not only necessary that an applicant have sufficient initial capital to incorporate or establish its business in Canada, but it must be able to demonstrate that it has sources of continuing financial support that will permit it to easily obtain capital in the future when necessary, whether to deal with institutional growth or losses.

It is also important that the applicant choose experienced senior management to operate the business in Canada and that directors are chosen that have a range of apposite experiences, including Canadian financial services experience -- preferably in a regulated sector. It should be noted that all directors and senior management must obtain a security clearance as part of the application process. To minimize delay, it is important that proposed directors and senior management be identified early in the application process so that the security checks can be completed on a timely basis. An application for incorporation or establishment of a branch will not be approved by the Minister until security checks are completed. Currently, this can take six months or more.

SAB: How can having relationships with OSFI help streamline the process?

RE: Generally hiring advisers and consultants with a good understanding of the Canadian market, and experience dealing with applications and the regulator, can help guide an applicant through the process expeditiously.

SAB: Has the current liquidity crisis had an impact on OSFI's appetite for de novos?

RE: It is unlikely that the asset-backed commercial paper market disruption dating back to August 2007 would impact on an application. Most applications that I have seen do not depend on that market to fund their business activities and, therefore, we would not expect that market disruption to impact on most applications.

Sponsors of StartaBank include KPMG, Fasken Martineau, TELUS and Open Solutions (more)

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