Office of the Superintendent of Financial Institutions
The Office of the Superintendent of Financial Institutions (OSFI) examines the culture practices of federally regulated financial institutions (FRFIs) and how the risks created, perpetuated, or magnified by a FRFI’s culture can affect their safety and soundness.
Building upon this work, OSFI plans to issue a principles-based, outcomes-focused culture risk management guideline for consultation in late 2022. This letter seeks comments on proposed outcomes of effective culture risk management that will form the basis of OSFI’s future guidance and supervisory expectations.
OSFI is also seeking comments on how culture risks can affect federally regulated pension plans (FRPPs) to inform its prudential approach. While this letter refers to FRFIs throughout, FRPPs often face similar risks and the themes raised in this letter may apply to FRPPs as well.
Globally, financial regulators recognize that organizational culture can have a material impact on the health of financial institutions and the broader financial system.Footnote 1 Similarly, some financial institutions are starting to proactively disclose culture risk management information in their published annual reports.
Culture risks—or the widespread behaviours and mindsets that can threaten sound decision-making, prudent risk-taking, and effective risk management—can weaken an institution’s financial and operational resilience. When culture risks, such as complacency or groupthink, are not proactively identified, managed, and monitored, they can erode a FRFI’s ability to effectively manage its financial and non-financial risks and achieve its strategic business objectives. In turn, this can create the conditions that allow for incidents ranging from near misses to—in severe cases—the insolvency of a FRFI.
OSFI is enhancing its assessment of culture risks beyond corporate governance effectivenessFootnote 2 to form a more comprehensive view of the adequacy and effectiveness of FRFI culture risk management. This approach aligns with and supports OSFI's prudential mandate to contribute to public confidence in the Canadian financial system.
In recent years, OSFI has increased its culture risk supervisory activities, including conducting industry scans and incorporating culture risks in supervisory reviews. This work highlighted the need for OSFI to be transparent about its expectation that FRFIs proactively identify and manage culture risks.
As part of its future guidance, OSFI will expect FRFIs to establish and maintain a robust approach to manage and oversee culture risks. OSFI is proposing six prudential outcomes that FRFIs should achieve to support effective culture risk management. These outcomes will serve as the basis of this guidance and related supervisory expectations.
Culture Risk Management & OversightThere is a robust approach to identify, measure, assess, monitor, and report on culture risks.
Leadership: Leaders, at all levels, consistently promote and reinforce the desired culture through their words, actions and decisions.
Compensation, People Management & Incentives: The FRFI acquires, develops, retains, compensates, and incentivizes executives, material risk-takers and all other employees to promote and reinforce its desired culture, effective culture risk management, and achieve sound financial and non-financial outcomes.
Accountability & Ownership: Individuals have a clear understanding of their roles and responsibilities, have capacity and autonomy to fulfill them, take ownership of their decisions and actions, and are held accountable for them.
Risk Mindsets & Behaviours: Risk mindsets and behaviours within the FRFI align with and support the structures in place to ensure financial and non-financial risks are effectively managed.
Group Dynamics & Decision-Making: The work environment enables individuals to feel safe to speak up, openly communicate and work together to make sound decisions and achieve financial and non-financial outcomes.
Resilience: Individuals are vigilant towards known and unknown threats, notice and effectively respond to problems and opportunities, and continuously learn, improve, and adapt to changing conditions.
OSFI recognizes that each FRFI’s culture is unique and determined by the institution. These proposed outcomes are principles-based to acknowledge that how a FRFI manages its culture risks and achieves these outcomes will vary with its size, nature, scope, and complexity of operations. The annex articulates additional details on the proposed outcomes.
OSFI is seeking comments on the following questions:
Stakeholders can submit comments to
Culture@osfi-bsif.gc.ca by May 31, 2022.
Financial Stability Board issued supervisory guidance in 2014 and the
International Association of Insurance Supervisors issued an exploratory paper in 2021. Regulators in several jurisdictions have also issued information papers on the topic and have incorporated culture into their supervisory activities (e.g.,
De Nederlandsche Bank,
Australian Prudential Regulation Authority, and
Monetary Authority of Singapore).
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OSFI’s current expectations of FRFI culture are set out in its
Corporate Governance Guideline. In particular, the Board of Directors (Board) plays an influential role in the FRFI’s culture through its roles and responsibilities. Further, OSFI expects the Board and Senior Management to promote a risk culture that stresses integrity and effective risk management throughout the FRFI.
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