Thank you Mr. Chair, and to the members of the Committee, for the opportunity to appear before you this evening.
I am joined by my colleagues, Judy Cameron and Michele Bridges, both senior staff members at OSFI. Judy is the Senior Director of Legislation, Approvals and Strategic Policy, and Michele is the Managing Director of Finance and Corporate Planning.
The Office of the Superintendent of Financial Institutions Canada (OSFI) is an independent agency of the Government of Canada, established in 1987 to contribute to the safety and soundness of the Canadian financial system. OSFI supervises and regulates federally registered banks and insurers, trust and loan companies, as well as private pension plans subject to federal oversight.
In pursuing our mandate, OSFI works in close collaboration with the other federal agencies and regulators, and the Department of Finance. Parts of this collaboration are formalized through committees:
The Financial Institutions Supervisory Committee (FISC) – is a committee created by statute to facilitate consultations and the exchange of information on all matters relating to the supervision of financial institutions. FISC has also been viewed as a means to strengthen the supervisor’s “will to act,” and is the central mechanism for communication and coordination of actions in a crisis situation. FISC is chaired by the Superintendent of Financial Institutions, and its members are the Deputy Minister of Finance, the Governor of the Bank of Canada, the CEO of the Canada Deposit Insurance Corporation (CDIC) and the Commissioner of the Financial Consumer Agency of Canada (FCAC). At a minimum, it meets once a quarter.
The Senior Advisory Committee (SAC) is an informal (non-legislated) body to facilitate discussion on key financial sector policy issues, including financial stability and systemic vulnerabilities, in order to inform the advice provided by the Department of Finance to the Minister of Finance. SAC ensures coordination among the economic agencies and assesses how policies may affect federally regulated financial institutions and the financial system more broadly. SAC is chaired by the Deputy Minister of Finance, and has the same membership as FISC; it also meets a minimum of once per quarter.
The mandates of these committees and the agencies that participate in them are distinct, and by design there is minimal overlap in responsibilities. Together, they compose an interlocking federal oversight framework for promoting public confidence in a strong, stable and competitive financial system.
We also collaborate with our colleagues in provincial regulatory agencies.
The Heads of Agencies Committee (HOA) is an informal (non-legislated) committee that provides a forum for federal financial sector authorities and provincial securities regulators to exchange information and views on issues related to Canadian capital markets. It brings together the Governor of the Bank of Canada, who chairs the committee, the Superintendent of OSFI, the federal Department of Finance, and the heads of the B.C., Alberta, Ontario and Quebec securities regulators. The HOA also meets quarterly.
As important as these formal committees are, though, it is the close professional relationship that exists at the working level and among senior officials in these organizations. I speak with my colleagues across these agencies on a frequent basis, and our staffs regularly collaborate and consult in the course of carrying out our respective roles.
Regulation and Supervision
OSFI executes its oversight responsibilities through two key activities: regulation and supervision.
Regulation is about setting policy, standards and rules that financial institutions and pension plans must adhere to in the course of carrying on their business. It also involves interpreting and applying the relevant legislation for financial institutions and pension plans, including issuing licenses to carry on business and approving certain transactions.
Supervision is about the ongoing oversight of institutions to ensure they are complying with the regulatory standards and rules we have set, and more broadly to ensure they are conducting their business in a safe and sound manner.
What is important to know about OSFI is that we are, very deliberately, a principles-based regulator. This means that, in most cases, rather than setting very specific and prescriptive rules, we choose to set out clear principles, generally in the form of published guidelines, that we expect institutions to adhere to.
It also means that when we supervise we do not look merely for compliance against a given rule or standard, but rather we look for whether or not an institution is meeting the intent and spirit of the regulatory expectations.
We take this approach for two reasons. The first is that it is consistent with our firm belief that it is the responsibility of a financial institution’s board and senior management to manage the risks in their business in a prudent manner. By setting principles rather than rules, the onus is on the institution to understand their risks, to be proactive in managing those risks, and to provide evidence to our supervisors of how they are doing this.
Second, risks change over time. They change as institutions change, as the economic environment changes, and as the operating environment changes. They are impacted by things like competition, technology and consumer behaviour, for example. A principles-based approach gives OSFI the flexibility to adapt our expectations of institutions to reflect these changes.
Our principles-based approach does not, however, mean that we do not have rules. In some cases, rules are appropriate. In the case of capital and liquidity levels, for example, OSFI sets clear minimum standards that all financial institutions must meet. Indeed, OSFI sets standards for minimum capital and for minimum buffers over and above regulatory requirements that will provide institutions with additional ability to withstand periods of stress.
OSFI also prescribes minimum standards in the area of liquidity. Like capital standards, liquidity standards are set with a view to positioning institutions to withstand stressed conditions rather than normal operating environments.
In addition to being principles-based, OSFI is also very purposely proactive in our regulation and supervision of financial institutions. We think of our job as continually planning for the unexpected, and we encourage financial institutions to do the same. In that sense, much of what we do is not highly visible – we aim to prevent things from happening rather than waiting to respond.
The last thing I think is important to mention about OSFI’s mandate and our approach is that we do not aim to eliminate risk-taking by financial institutions. Risk is inherent in the provision of financial services; for banks to provide Canadian consumers and businesses with the products and services they want and need at competitive prices and in a convenient manner, they necessarily have to take risks. Indeed, the ability of banks and insurance companies to take risks is fundamental to the health and functioning of the Canadian economy.
Our job is not to guarantee the absence of failures in the financial system, but rather to protect the interests of depositors and other creditors of financial institutions. This requires an ongoing balancing to restrain excessive risk-taking while allowing financial institutions to take reasonable risks and compete effectively, both at home and abroad.
Let me now turn to the topic of OSFI’s funding model and budget.
OSFI is almost entirely funded through assessments and fees paid by the entities it regulates. In total, OSFI regulates over 400 banks and insurance companies and 1,200 private pension plans. These entities pay annual assessments, generally calculated as a function of their size, and they also pay for certain services, such as approvals, on a transactional basis. OSFI is also funded by cost recovery for certain services. Together, these funding mechanisms cover more than 99% of OSFI’s costs.
A small portion of OSFI’s funding – less than 1% – is derived from a parliamentary appropriation. This is used to fund the Office of the Chief Actuary, an independent unit within OSFI that provides actuarial valuation and advisory services to various public sector pension and benefit plans.
The OSFI Act stipulates that OSFI must recover its costs, and Section 17 of the OSFI Act provides that the Minister of Finance may spend any revenues collected under the Act to defray the expenses associated with the operation of OSFI. This means that any increase in OSFI’s costs of regulation and supervision is funded by industry, and similarly, any decrease results in a lower charge to industry.
The Act also grants OSFI the authority to draw up to $40 million from the Consolidated Revenue Fund in excess of the total of revenues collected and appropriations granted. Subject to this limit, OSFI may draw from the CRF at any point in time to ensure the availability of funds prior to collecting receivables. This means that OSFI’s cash flow can be supplemented by up to $40 million, if required.
OSFI’s planned spending in 2017-2018 is just slightly more than $150 million, which is consistent with the budget presented in the 2016-2017 Report on Plans and Priorities. Over the three-year planning horizon in the Main Estimates, OSFI’s overall spending is expected to increase slightly to just over $152 million in 2018-2019, and just over $155 million in 2019-2020.
To close, I want to acknowledge the conditions and events that I expect have attracted the interest of the Committee and led to our invitation to appear before you this evening. Record low interest rates, record high consumer debt levels and housing price increases that appear detached from economic fundamentals are all putting pressure on our financial system, and many experts are sounding alarm bells.
I hope our discussion tonight will reassure you that OSFI takes these risks seriously and remains vigilant in executing its mandate to protect the depositors and other creditors of financial institutions and to contribute to the safety and soundness of the Canadian financial system.
Thank you, Mr. Chair; my colleagues and I look forward to your questions.