In the ever-evolving landscape of business and personal finance, Canadians seek reliable and community-oriented financial institutions that prioritize their needs and promote economic well-being. While banks are one of the key institutions in this landscape, credit unions serve as crucial alternatives. But, what is a credit union, and what differentiates a bank from a federal credit union? This post will explain these distinctions and provide a deeper understanding of what federal credit unions are and what they can do.
Defined in section 2 of Part I – Interpretation and Application of The Bank Act, “federal credit unions” are banks that organize and conduct their business cooperatively. Cooperation, in turn, is defined in s. 12.1(1) “Cooperative basis” of Part I. Combined, these entries provide the foundation for a federal credit union, namely that it is a financial institution in which the majority of its members are natural persons. Additionally, federal credit unions must provide services primarily to their members and have an open, non-discriminatory membership, with each member provided one vote.
The definitions show that federal credit unions are starkly different from traditional banks. Where the latter focuses on maximizing profits for its shareholders, the former concentrates on providing benefits to all of its members, given that each retains the same number of votes in their governance.
Additionally, the Office of the Superintendent of Financial Institutions (OSFI) regulates these credit unions, as they operate under federal jurisdiction. The OSFI ensures compliance with financial regulations and safeguards the interests of both credit unions and their members. This regulatory oversight adds an extra layer of security and accountability, assuring members that their financial well-being is protected.
Yet, there are several vital legislative points worth noting in the definition. For example, while the Bank Act explicitly states in s. 12.1(1) that membership in federal credit unions must be “wholly or primarily open, in a non-discriminatory manner,” ss. 12.1(2) permits federal credit unions to pass by-laws that restrict membership, provided such restrictions comply “with applicable laws with respect to human rights.”
Federally regulated credit unions are just one part of the landscape of financial institutions in Canada, but they provide a much-needed sense of control and choice to Canadian consumers. Rather than being forced to conduct business with banks that are accountable only to their largest shareholders and who work to maximize their profits above all else, credit unions allow consumers to conduct business with a federally regulated body that focuses on cooperation with their members.
To learn more about federally regulated credit unions, banks, and the finer points of the legislative frameworks surrounding them, check out The 2023 Annotated Bank Act (Thomson Reuters, 2022). Inside you can find case law and expert commentary that works to streamline your reading of the Bank Act and and an understanding of how the courts interpret the legislation.