In this issue:
The OSFI Pillar is published by the Communications Division of the Office of the Superintendent of Financial Institutions Canada.
For more information on the articles in this issue, or to provide feedback, please e-mail OSFI Communications at: communications@osfi-bsif.gc.ca.
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Proactive DisclosureOn September 30, 2014, Jeremy Rudin delivered his first speech as Superintendent to the Economic Club of Canada in Toronto. He spoke on the challenges inherent in maintaining a strong and stable financial system. Below is an excerpt from his remarks:
In Canada, the financial services industry and the public are partners. And my job, just like those of all of my colleagues at OSFI, is to look after the public's interest in our partnership.
We do this largely by restraining risk-taking that would be excessive from the public‘s point of view. Our actions help to prevent disruptions in the provision of financial services and to protect individuals and businesses who have entrusted funds to federal financial institutions. Moreover, we always aim to act well before a situation becomes dire.
Like so many things in life, the key challenge is striking the right balance. There are many dimensions to this problem.
Our first challenge is how to restrain excessive risk-taking while encouraging responsible risk-taking. At OSFI, we believe the best way to achieve this balance is:
In our approach, it is the boards and management of financial institutions, and only they, who are responsible for taking reasonable risks and managing those risks. Indeed, much of our guidance requires institutions to undertake risk management activities and to report on them.
A major strength of our approach is that it aims to ensure that regulatory compliance does not become a substitute for risk management. Indeed, financial institutions cannot comply with our expectations unless they actively measure and manage their own risks.
The second challenge is to balance attention to international standards with attention to the particulars of Canadian circumstances and experience.
Canada has been, and will continue to be, a strong supporter of international standards in financial sector regulation. International agreements on minimum norms are the best way for us to be able to impose prudent standards on our globally active financial institutions without impeding their ability to compete with foreign institutions.
At OSFI, we look carefully at the Canadian situation and Canadian needs before deciding how, and how closely, to adhere to each international standard. At times, we have chosen to impose standards above the international minimums.
OSFI's third challenge is how to promote financial stability across the institutions under OSFI's watch, when they vary widely in their systemic importance and their capabilities.
We recognize that, in the wake of post-crisis regulatory changes, we need to find new and better ways to listen to the perspectives of regulated entities, particularly the smaller institutions. At the end of the day, we may not agree to everything we are asked to do. But all institutions are looking – quite rightly -- for evidence that, at a minimum, they have been heard and understood.
Click here to view the full text of the Superintendent’s remarks.
On October 1, 2014, OSFI published its Annual Report for 2013-2014. The report is a key component of OSFI’s accountability framework and provides a summary of performance against annual priorities and achievements related to ongoing responsibilities. Following is an excerpt from the report.
The current global economic environment remains far from normal. Interest rates are still at historically low levels and growth in several advanced economies is still not at pre-crisis levels. Potential vulnerabilities in the global financial system remain a source of uncertainty. While the Canadian financial system continues to benefit from approaches taken in Canada, OSFI and domestic banks and insurance companies need to avoid complacency.
In 2013-2014, OSFI introduced or finalized several guidelines intended to promote and maintain confidence in Canada’s financial system. These included: Liquidity Adequacy Requirements that reflect internationally agreed minimum standards for the measurement of short-term liquidity under a stress scenario; Own Risk and Solvency Assessment and Regulatory Capital and Internal Capital Targets to strengthen the insurance industry’s enterprise-wide risk management process; and, a Guideline on Mortgage Insurance Underwriting as a follow-up to the Guideline on Residential Mortgage Underwriting Practices and Procedures issued in 2012.
The financial services industry also faces increasing operational risks from ongoing cyber threats. In response, OSFI released Cyber Security Self-Assessment Guidance in October 2013 to assist institutions in assessing their own cyber risk and preparedness. Cyber security will be an issue of continuing focus for OSFI going forward.
In 2013, Canada’s financial sector, including OSFI, was subject to an International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP) review. The FSAP report identified OSFI’s close touch supervision, our clear and straightforward mandate, and our ability to attract and retain financial sector specialists as some of the factors that helped Canada withstand the crisis well. The FSAP team noted that stress tests OSFI conducted in 2013 show that major financial institutions would continue to be resilient to credit, liquidity, and contagion risks arising from a severe stress scenario. The FSAP assessors also concluded that OSFI continues to be effective with a high level of compliance with international standards. OSFI believes there is always room to improve and will be considering the recommendations made in the FSAP report and how we may be able to address them.
In 2013-2014, OSFI continued its involvement in the development of international rules that contribute to a strong and stable global financial system. OSFI also looked inward, to strengthen its high-performing and effective workforce by providing more focus on teams responsible for managing domestic systemically important banks, while at the same time creating a staff position that will focus on the requirements of the smaller financial institutions under OSFI’s purview. Strong cooperation and communication with our federal partners, such as the Bank of Canada, the Department of Finance, Canada Deposit Insurance Corporation and the Financial Consumer Agency of Canada, was also a contributing factor in allowing OSFI to meet its goals in 2013-2014.
Click here to view the complete report.
On September 29, 2014, Deputy Superintendent Mark Zelmer made a speech to the Risk Oversight Program Global Risk Institute in Toronto. He spoke about the importance of corporate governance. Below is an excerpt from his remarks:
The Canadian experience
Unlike some other industrialized countries where financial institutions come and go on a regular basis, there have not been very many outright financial institution failures in Canada recently. Not many – but there have been a few rather notable failures in Canada.
OSFI’s approach
It is important to note that according to the OSFI Act, OSFI’s mandate explicitly allows for financial institution failures. This is an occasional, and sometimes necessary, outcome of a competitive and relatively easy-to-enter financial services market.
OSFI’s overall approach is to have in place strong and effective supervision of financial institutions ex ante, and to have a system of early intervention, to promote good governance and risk management practices and controls prior to any serious problems arising. We have, for example, a well-developed system of ‘staging’ with heightened monitoring and escalating actions that are tailored to the circumstances surrounding a troubled institution.
The importance of corporate governance
The root cause of financial institution failures is usually poor corporate governance and weak internal controls.
The board of directors of a financial institution plays a particularly important role in this regard. OSFI views the Board as a critical line of defence and makes every attempt to highlight any problems with the Board early on so that they can be rectified. In our view, conditions in the economy and financial markets are a given – something that all competing financial institutions face. Financial institutions should, therefore, have effective risk management strategies to weather any storms.
A key message here is that focusing exclusively on the capital and liquidity levels of financial institutions – a temptation for all solvency regulators – is simply not enough. Clearly enunciated expectations for sound risk management practices at financial institutions, coupled with effective supervision, are also essential for maintaining a strong and stable financial system.
Click here to view a text of the complete remarks.
On November 6, 2014, OSFI issued the final version of Guideline B-21 Residential Mortgage Insurance Underwriting Practices and Procedures. The Guideline sets out principles that promote and support sound residential mortgage insurance underwriting. It delivers on OSFI’s commitment to seek public consultation on a separate guideline applicable to mortgage insurers, which was made following publication of OSFI Guideline B-20 Residential Mortgage Underwriting Practices and Procedures in 2012.
The Guideline is based on findings from OSFI’s own internal reviews and international work undertaken by the Financial Stability Board and the Joint Forum. It provides clarity about best practices in residential mortgage insurance underwriting, which contribute to a stable financial system. As such, it complements the Government of Canada’s mortgage insurance guarantee framework by focusing on mortgage insurers’ insurance underwriting governance, internal controls, and risk management.
Click here to view a text of the complete guideline.
On September 24, 2014, OSFI released a revised Minimum Capital Test (MCT) guideline for property and casualty insurers. The purpose of the revision was to create a more robust, risk-based capital framework that better aligns capital requirements to the risks faced by property and casualty insurers.
“This new version of the Guideline represents a more robust, risk-based test that more accurately aligns capital requirements to the risks faced by the property and casualty insurance industry. The Guideline would not have been possible without the industry’s significant cooperation over the past few years,” said Deputy Superintendent Mark Zelmer.
Click here to view a text of the complete guideline.
On August 11, 2014, OSFI released a draft revised version of the Minimum Continuing Capital and Surplus Requirements (MCCSR) guideline for life insurers, which will come into effect on January 1, 2015. The draft guideline reflects input received following the first consultation period in 2013. The proposed changes include, among others:
The final guideline is now available here.
On August 20, 2014, the 12th Old Age Security Program Actuarial Report was tabled in Parliament.
The report presents the results of an actuarial examination of the status of the Old Age Security (OAS) Program as at 31 December 2012, and includes projections of future experience through the year 2060. This report is prepared in compliance with the timing and information requirements of the Public Pensions Reporting Act.
Some of the key observations and findings of the report are:
Click here to view a text of the full report.
On October 27, 2014, Jean-Claude Ménard, Chief Actuary of Canada, made a presentation at the Annual Meeting of the Society of Actuaries, in Orlando, Florida, on the topic of “Living to 100…will the Canada Pension Plan be sustainable?”
“The most recent CPP Actuarial Report cautions that if life expectancies continue to increase at the current rate, especially for ages 75 to 89, it could put additional pressure on the minimum contribution rate causing the rate to increase above 9.9%.”
Click here to view a text of the complete remarks.
On October 7, 2014, the Department of Finance Canada announced that OSFI has registered five Pooled Registered Pension Plans (PRPPs). This was the final step necessary for the plan administrators to make federal PRPPs available to Canadians.
Click here for the list of the pooled registered pension plans and other related information.
On October 1, 2014, OSFI issued a draft revised Guideline B-7 on Derivatives Sound Practices. The draft guideline includes updates to reflect the over-the-counter (OTC) derivatives market reforms initiated by G-20 leaders and reflects OSFI’s expectations for central clearing of standardized OTC derivatives and for reporting derivatives data to a trade repository. The guideline has also been updated to reflect current best practices for risk management of derivatives activities.
Click here to view a text of the complete guideline.
On September 12, 2014, OSFI issued the final version of Guideline E-20 on CDOR Benchmark-Setting Submissions following a review of industry comments. The Guideline outlines OSFI’s expectations for the governance and internal controls surrounding the rate submission processes within Canadian banks that are involved in setting the CDOR benchmark rate. It is part of an enhanced benchmark oversight framework by Canadian public sector authorities and contributes to the transparency of our regulatory expectations.
Click here to view a text of the complete guideline and related documents.
In August and September, the Chief Actuary of Canada issued one actuarial report and two actuarial studies as follows:
The OSFI Pillar is published by the Communications Division of the Office of the Superintendent of Financial Institutions Canada.
For more information on the articles in this issue, or to provide feedback, please e-mail OSFI Communications at: communications@osfi-bsif.gc.ca.
To subscribe to the OSFI Pillar, click here.