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Financial Review and Highlights

OSFI recovers its costs from several revenue sources. OSFI is funded mainly through asset-based, premiumbased or membership-based assessments on the financial institutions and private pension plans that it regulates and supervises, and a user-pay program for legislative approvals and other selected services.

The amount charged to individual institutions for OSFI’s main activities of risk assessment and intervention (supervision), approvals and rule making is determined in several ways, according to formulas set out in regulations. In general, the system is designed to allocate costs based on the approximate amount of time spent supervising and regulating each industry. Costs are then assessed to individual institutions within an industry based on the applicable formula, with a minimum assessment for smaller institutions.

Staged institutions are assessed a surcharge on their base assessment, approximating the extra supervision resources required. As a result, well-managed, lower-risk institutions bear a smaller share of OSFI’s costs.

OSFI also receives revenues for cost-recovered services. These include revenues from the Canadian International Development Agency (CIDA) for international assistance, revenues from provinces for which OSFI provides supervision of their institutions on contract, and revenues from other federal organizations to which OSFI provides administrative support, and other services.

OSFI collects late and erroneous filing penalties from financial institutions that submit late and/or erroneous financial and corporate returns. These penalties are billed quarterly, collected and remitted to the Consolidated Revenue Fund. By regulation, OSFI cannot use these funds to reduce the amount that it assesses the industry in respect of its operating costs.

The Office of the Chief Actuary is funded by fees charged for actuarial services relating to the Canada Pension Plan, the Old Age Security program, the Canada Student Loans Program and various public sector pension and benefit plans, and by a parliamentary appropriation.

Overall, OSFI fully recovered all its expenses for the fiscal year 2009–2010.

OSFI’s total expenses were $103.3 million, a $10.1 million, or 10.8%, increase from the previous year. Human resources costs, the main driver of OSFI’s expenses, rose by $7.9 million, or 11.5%. This was a result of: staffing supervisory positions in the deposit-taking institutions group, and the market, credit and operational risk areas; adding positions to enhance the Corporate Services Sector; planned growth in employee compensation in accordance with collective agreements, and performance-related pay, which is available to employees at all levels within the organization; and, a 15 basis point increase in the employee benefit plan rate as prescribed by Treasury Board Secretariat.

OSFI’s average number of full-time equivalent employees during the year was 530, a 10.4% increase from the previous year. OSFI ended the year with an actual head count of 551, a 10.0% increase from its head count of 501 as at March 31, 2009.

Federally Regulated Financial Institutions

Revenues

Total revenues from federally regulated financial institutions were $88.8 million, an increase of $8.5 million, or 10.6%, from the previous year. Base assessments on financial institutions, which are recorded at an amount necessary to balance revenue and expenses after all other sources of revenue are taken into account, increased by $7.3 million, or 9.7%, from the previous year.

Revenues for cost-recovered services decreased by $0.4 million, or 30.0% from the previous year due to a reduction in the amount of work performed under Memoranda of Understanding with provinces and certain regulated financial institutions.

Revenues from user fees and charges increased by $1.6 million, or 42.9%, from the previous year due to an increase in the average number of staged institutions throughout the year.

Expenses

Total expenses were $88.5 million, an increase of $8.7 million, or 10.9%, from the previous year. Human resources costs rose as a result of the hiring of additional supervisory staff and staff to enhance the Corporate Services Sector, particularly in Information Management/Information Technology (IM/IT) and Finance. Facilities costs also increased due to the full year impact of the lease extension for OSFI’s Toronto’s office and IM/IT costs rose as work progressed on updating the regulatory financial returns to meet the upcoming requirements of International Financial Reporting Standards (IFRS).

Base Assessments by Industry

Base assessments are differentiated to reflect the share of OSFI’s costs allocated to each industry group (base assessments are the costs allocated to an industry, less user fees and charges and cost-recovered services revenues). The chart below compares the growth of base assessments by industry group over the past five years.

The increase in base assessments on the deposit-taking (DTI) institutions industry during the period from 2004–2005 to 2007–2008 reflects OSFI’s efforts on the New Capital Adequacy Framework (Basel II) implementation, Anti-Money Laundering/ Anti-Terrorism Financing (AML/ATF) activities, and international work on conceptual changes to accounting standards. The expiry in late 2007 of the agreement with major banks related to the implementation of the internal ratings-based approach of the New Basel Capital Accord was a further contributing factor to the increase in 2007–2008 and 2008–2009. In 2009–2010, growth in supervisory staff and the hiring of employees with current industry experience in credit, market and operational risks in order to focus more effort on higher risk institutions and products, the early detection of problem loan portfolios, and meeting the increasing number, frequency and intensity of international commitments were factors contributing to the growth in expenses.

The increase in assessments on the property and casualty (P&C) insurance industry over the past five years reflects the increase in OSFI’s resources during 2004–2005 in response to this sector’s difficult economic conditions at the time, OSFI’s heightened efforts on actuarial and capital adequacy matters effective 2006–2007, and the addition of resources to strengthen OSFI’s actuarial expertise in this industry. The increase in 2009–2010 reflects OSFI’s greater focus on this sector due to weakening industry and market conditions, identification of emerging risks, focus on the IFRS implications for this industry, and its efforts on the Minimum Capital Test (MCT).

The decrease in assessments on the life insurance industry from 2004–2005 to 2005–2006 reflects the impact of consolidation among the major companies in this industry. The increase in 2006–2007 and 2007–2008 was the result of OSFI’s heightened efforts on more frequent reporting on the conglomerate institutions in this sector, AML/ATF activities, and capital modeling. The decrease in 2008–2009 reflects OSFI’s reallocation of resources to higher risk institutions and products within the DTI and P&C industries. The 2009–2010 increase can be attributed to the industry share of incremental OSFI resources to address economic and market conditions and emerging risks.

Base Assessments by Industry: Cumulative Growth Rates from Fiscal Year 2005

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Over the past five years, additional factors caused increases in base assessments on all industries: OSFI’s investments during 2006–2007 and 2007–2008 in large IM/IT projects such as business intelligence for monitoring and analytics; significant shifts in revenue types as a result of the rationalization of the user-pay regime in 2006–2007 and a reduction in surcharge assessments due to the favourable economic conditions at that time; effective 2006–2007, OSFI’s work on International Financial Reporting Standards (IFRS), which affects all regulated financial institutions; and, during 2008–2009 and 2009–2010 increases in systems and services to support growth in supervisory and regulatory sectors within the office. Starting in 2008–2009 and continuing through 2009–2010, prevailing economic and market conditions resulted in a significant increase in the number of staged institutions across all industries, and hence in surcharge assessments.