Role of the Principal Officer and Record Keeping Requirements

Document Properties

  • Type of Publication: Guideline
  • Date: November 2005
  • No: E-4B
  • Audiences: FBB

Introduction

This guideline describes OSFI’s expectations with respect to the role of the Principal Officer (PO) of an authorized foreign bank Footnote 1. The guideline applies to the Canadian Branch operations of foreign banks. For the purposes of this guideline, these entities will be referred to collectively as foreign bank branches (FBBs). It also discusses OSFI’s expectations with respect to records and documents to be maintained at branch offices in Canada. The guideline does not address all legislative and regulatory obligations and requirements; therefore, POs are expected to refer to relevant provisions in the legislation and regulations. The guideline should also be read in conjunction with a number of other guidelines applicable to authorized foreign banksFootnote 2 including OSFI’s Guide to Foreign Bank Branching which addresses the process for establishing a FBB in Canada including the criteria that must be met and the information that must be submitted as part of the application.

As part of its risk-based supervisory framework, OSFI evaluates FBBs against the expectations of this guideline and other guidelines applicable to FBBs.

1. Role of the Principal Officer

Authorized foreign banks establishing a branch in Canada are required to appoint a POFootnote 3. As noted in the Corporate Governance Guideline, OSFI looks to the PO to oversee the management of the branch, including matters of a corporate governance nature that relate to the branch. As such, OSFI expects that the PO will be accountable for the FBB’s operations. However, OSFI recognizes the nature, scope, complexity, and risk profile of FBBs may affect how the PO carries out his or her role with respect to the expectations set out in this guideline.

It is recognized that the PO may delegate various branch responsibilities to branch employees. Alternatively, he/she may enter into arrangements with the home office, another entity within the corporate group, or a third party. OSFI would expect all situations where the PO does not have direct responsibility for a significant function (e.g., oversight of loan underwriting centralized at the home office) to be documented either in written mandates/policies or service level agreements of the FBB. Such arrangements made with the home office, another entity within the group, or a third party would be considered outsourcing under OSFI’s Guideline B-10 on Outsourcing of Business Activities, Functions, and Processes. This guideline sets out OSFI’s expectations for the management of various types of outsourcing arrangements, including the areas to be addressed by a written outsourcing agreement. Guideline B-10 includes specific expectations for arrangements where the service provider is a related party of an FBB.

While the PO may not conduct all responsibilities or activities directly, OSFI expects the PO to retain his or her overall accountability for the operations of the FBB. Regardless who conducts the various functions, OSFI expects the PO to:

  • ensure that business objectives, strategies, and plans set for the FBB are prudent in the context of the FBB. Recognizing that FBBs are not legal entities but rather an extension of the home office, the PO is expected to advise the home office should any planned activities for the FBB not be considered suitable;
  • be satisfied that appropriate policies and procedures (i.e. control systems) are in place to manage the risks regardless of where the controls may reside;
  • receive sufficiently comprehensive and frequent reports to understand and monitor the business of the FBB; and
  • undertake or obtain, periodically, an independent assessment of the adequacy and effectiveness of the controls. Independent assessment may be obtained from individuals or groups designated with that role, such as internal audit or risk management (either at the branch or home office), or qualified third parties.

The PO is expected to ensure that there are robust policies and procedures Footnote 4 to manage the assets and liabilities recorded on the FBB’s books and records and related accounts (e.g. deposit, loan, investment, vested in trust, etc.). With respect to assets and liabilities and their related cash flows, OSFI expects the PO to be able, on demand, to provide timely information on their location.

The FBB’s accounts at banks and/or trust companies should only be accessible with the signature of the PO or his/her formally appointed designate(s).

The PO should ensure the FBB is in compliance with applicable legislation and regulations, and is conducting its business and affairs in a manner that is consistent with applicable OSFI guidelines. For example, OSFI would expect the PO to have ultimate responsibility for ensuring the FBB has sufficient assets vested in trust to cover the capital equivalency deposit and any assets required to be maintained in Canada pursuant to section 617 of the BA. Additional information on compliance issues can be found in OSFI’s Guideline E-13: Legislative Compliance Management.

While the PO may delegate responsibility for day-to-day management to others, OSFI expects the PO to be in a position to verify the annual return. Therefore, OSFI would expect the PO to have, or to ensure the individuals undertaking activities with respect to the FBB have, a good understanding of applicable legislation, regulations and guidelines, as well as the activities and related records of the branch, including its assets, liabilities, revenues and expenses. OSFI would also expect the PO should be satisfied with any work performed by others (e.g., home office or another entity within the group) and should ensure any deficiencies are corrected.

2. Record Keeping Requirements

OSFI’s mandate includes the periodic examination of and inquiry into the business and affairs of each FBBFootnote 5. FBBs are required to maintain all records at their principal office Footnote 6. In addition, FBBs are required to maintain and process in Canada information and data relating to the preparation and maintenance of these records unless they obtain an exemption from the Superintendent.Footnote 7 OSFI’s expectations in evaluating a request for approval to process records outside Canada are set out in Section VIII of Guideline B-10, Outsourcing of Business Activities, Functions and Processes Footnote 8. Furthermore, regardless of whether such an exemption has been obtained, an FBB will continue to be required to maintain records in Canada as specified in the Appendix.

Where processing of records related to the FBB’s business occurs at a location other than the principal office, it is critical that they are backed up as appropriate and provided to the FBB to ensure that records maintained in Canada are up to date at the end of each business day. Footnote 9 While OSFI recognizes some accounting records may only be available on a monthly or quarterly accounting cycle, this does not override the foregoing requirement with respect to other records.

OSFI expects records maintained in Canada will be of sufficient detail to:

  1. enable the PO to fulfill his or her accountabilities with respect to the FBB’s business;
  2. enable OSFI to conduct an examination and inquiry into the business and affairs of the FBB; and
  3. enable OSFI to administer the FBB’s business should the Superintendent take control of the FBB’s assets.

Where sufficient information is not available, OSFI may request it as necessaryFootnote 10.

The Appendix contains additional guidance with respect to the type and form of records OSFI expects FBBs to maintain in Canada.

Appendix: Records Maintained by FBBs

i) Type of Records

OSFI expects the records maintained by an FBB in Canada would include a complete set of accounting records, ledgers, journals and trial balances related to the FBB’s business in Canada, with sufficient detail to understand and verify the assets, liabilities, revenue and expenditures recorded in the regulatory returns and to enable supervisors to assess the risk profile of the FBB. This would be supported by supervisory access to individuals to whom the PO may have delegated responsibility within the branch or through an arrangement with the home office, another entity within the corporate group, or a third party.

Records in respect of an FBB’s business that should be held pursuant to paragraph 597(1)(b) and (c) of the BA would include:

  • complete accounting records; and
  • for each customer, records showing, on a daily basis, particulars of each transaction with that customer and the balance owing to or by the FBB to that customer;

In support of the above records, OSFI expects the FBB to maintain the following records:

  • details of investments, derivatives, pledged assets, etc;
  • working papers, with properly referenced audit trails, to support the financial statements/regulatory returns;
  • bank statements, cheque registers, monthly bank reconciliation, vouchers and receipts pertaining to the Canadian operations, and adequate documentation to confirm the amounts due in respect of business in Canada;
  • records supporting amounts due to or from the home office and affiliated entities (if any);
  • taxation documentation;
  • listing of loans, by type, allowance for impairment and analyses of changes thereto, and a summary of interest and fee income;
  • details of any guarantees and acceptances;
  • securities ledgers for securities held for investment and trading purposes both inside and outside Canada, together with a summary of interest and dividend income due and accrued, with supporting documentation; and
  • deposit records, by type, together with a summary of interest expense.
  • analysis of home office account

Additional records that could enable the PO to fulfill his/her responsibilities and/or to facilitate the supervisory process of an FBB would include:

  • a description of the accounting system;
  • copies of all agreements, including outsourcing agreements with home office and affiliates;
  • signed copies of all contracts, material to the FBB, that relate to the administrative operation of the FBBFootnote 11;
  • copies of policies and practices governing the FBB’s Canadian operations;
  • current organization chart, showing reporting lines within the FBB and to home office and/or other affiliates;
  • human resource and payroll information;
  • details of any current litigation matters;
  • identification information obtained at the time each individual became a depositor, or customer of the FBB and current contact information; and
  • detailed credit files having sufficient information to enable PO to fulfill his or her accountability and supervisors to perform an asset quality review (borrower and security information, location of borrower and security, encumbrances on security, etc).

ii) Form of Records

An FBB has the option of preparing and maintaining records in hard copy or electronically, provided that electronic records can be reproduced, “in intelligible written form within a reasonable period of time” Footnote 12. OSFI would expect to be able to obtain such information without incurring additional costs and using readily available commercial applications. For certain types of information, such as detailed credit files or files on more complex activities, reproduced electronic records may not be sufficient for OSFI’s review. OSFI may request that the hard copy, original information be available at the branch in Canada, as needed. The FBB’s information systems should be capable of providing appropriate reports having adequate, relevant information for management decision-making and to provide and maintain an audit trail to verify regulatory returns.

Footnotes

Footnote 1

Pursuant to section 2 of the Bank Act (BA), an authorized foreign bank means a foreign bank in respect of which an order under subsection 524(1) of that Act has been made.

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Footnote 2

Refer to OSFI’s Internet Web site at http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=526 for other guidelines.

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Footnote 3

Pursuant to section 2 of the BA, PO in relation to an authorized foreign bank means the person appointed under section 536. Pursuant to subsection 536(1), an authorized foreign bank shall appoint an employee who is ordinarily resident in Canada to be its PO for the purposes of Part XII.1 of the BA. Pursuant to subsection 536(2), the authorized foreign bank shall provide the PO with a power of attorney expressly authorizing the PO to receive all notices under the laws of Canada from the Minister or Superintendent.

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Footnote 4

It is recognized that the home office may have established some of these policies and procedures. Where this is the case, OSFI would expect the PO to concur with their appropriateness and recommend amendments where necessary to suit the FBB's activities.

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Footnote 5

Pursuant to section 613 of the BA.

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Footnote 6

Pursuant to subsection 597(2) and (3) of the BA, authorized foreign banks may keep records in Canada at a location other than the principal office, so long as the Superintendent is informed of such location.

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Footnote 7

Pursuant to subsection 245(1) of the BA.

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Footnote 8

See also OSFI’s Transaction Instruction DA No. 10 on “Processing Information outside Canada” (http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guides/transaction/trans10_e.pdf) on the OSFI’s Internet Web site.

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Footnote 9

Downloading of records to the Canadian operation is only required when the records have changed from the previous day.

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Footnote 10

Section 600 and subsection 605 (1) of the BA.

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Footnote 11

OSFI expects that these contracts will bear the signature of the PO or a person with signing authority at the home office to bind the FBB. A list of those persons with such signing authority should be available at the principal office and available to OSFI on request. Where persons at the home office enter into contracts on behalf of the FBB, OSFI would expect the PO to be aware of these contracts and for the FBB to maintain a copy of these contracts at the principal office in Canada.

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Footnote 12

Subsection 597(7) of the BA.

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