Document Properties
- Type of Publication: Guideline Impact Analysis Statement
- Date: February 2008
- Audiences: Banks / BHC / FBB / T&L / Co-op / Life / P&C / IHC
I. Background
The suitability and integrity of individuals who are responsible
for the management of federally regulated entities (FREs) are important
prudential concerns, as institutional stability, financial soundness
and reputation can be negatively affected by the actions of those
individuals.
Currently, OSFI assesses the suitability and integrity of directors
and senior officers of FREs upon authorization.
OSFI performs background checks for criminal records and investigations
and uses curriculum vitae provided by applicants to evaluate whether
their skills and experience are commensurate with the proposed position
of the individual within the FRE. Post authorization, OSFI relies
on the FREs’ own internal processes and, where warranted, applies
a risk-based approach to assessing the FREs’ processes.
II. Problem Identification
The Core Principles for Effective Banking Supervision Methodology,
issued by the Basel Committee on Banking Supervision in October
2006, indicate that banking supervisors should, as part of their
licensing process, evaluate directors and senior managers of banks
as to expertise and integrity. Further, the criteria for issuing
licences are consistent with those applied in ongoing supervision.
The Insurance Core Principles, issued by the International Association
of Insurance Supervisors in October 2003, state that the significant
owners, board members, senior management, auditors and actuaries
of an insurer should possess the appropriate integrity, competency,
experience and qualifications. Finally,
Recommendation 2 of the Financial Action Task Force Recommendations
on Money Laundering states that
authorities should take necessary measures to prevent criminals
or their associates from holding a significant controlling interest
or holding a management function in a financial institution. These
core principles provide an internationally accepted benchmark of
minimum supervisory standards against which the quality of a country’s
prudential supervision system will be measured and assessed.
It is important that OSFI and FREs meet minimum international
standards and that OSFI aligns its practices with those of comparable
supervisory regimes, in order to contribute to the long term stability
and competitiveness of the federally regulated financial services
industry.
Currently, OSFI verifies that directors and senior officers of
FREs, including principal officers of foreign bank branches and
chief agents of insurance company branches (collectively, Responsible
Persons) meet minimum standards of suitability and integrity when
the FRE is established in Canada and follows up as warranted on
an ongoing basis using a risk-based approach.
OSFI recognizes that FREs already have various policies and procedures
in place to regularly assess the suitability and integrity of their
Responsible Persons to satisfy their own internal requirements (e.g.,
hiring policies or code of conduct) or to satisfy other regulatory
requirements (e.g., public listing requirements). OSFI expects that
such policies and procedures differ among FREs in order to reflect
the particular circumstances of each FRE. OSFI seeks to clarify
expectations with regard to fundamental aspects of such policies
and procedures across institutions to minimize safety and soundness
concerns, including prudential and reputation risk.
III. Objectives
Based on the foregoing, OSFI seeks to:
- Reduce FREs’ exposure to reputation and other prudential risks
that could result from mismanagement or misconduct by identifying
minimum expectations regarding the assessment of the suitability
and integrity of Responsible Persons;
- Align OSFI’s practices with those of comparable supervisory
regimes; and
- Ensure that OSFI meets minimum international standards.
IV. Options and Assessment
Option 1 - Status Quo
In the short term, this option would not present incremental costs
to either OSFI or FREs, and could be seen as minimizing the regulatory
burden, but would not address the objectives listed above. This
approach would also lead to a continuation of inconsistent assessments
of Responsible Persons across FREs. This poses a potential risk
to FREs, depositors and policyholders. Under this option there would
be no additional benefits to FREs, depositors, policyholders or
OSFI.
Option 2 - FREs to Assess Suitability and Integrity of Responsible
Persons against Guidance issued by OSFI
Pursuant to this option, OSFI would issue guidance expecting FREs
to develop policies and procedures to perform assessments of the
suitability and integrity of their Responsible Persons. As such,
FREs would be responsible for ensuring that their Responsible Persons
meet minimum standards of suitability and integrity. OSFI would
only become involved when it has material concerns about a Responsible
Person. This framework is supported by a legislative provision enabling
OSFI to remove directors and certain senior officers who do not
meet the minimum standards of suitability and integrity. While policies
elaborated by FREs should not permit a person who does not meet
minimum standards of suitability and integrity to be a Responsible
Person, OSFI and FREs may from time to time disagree about the risk
posed by a particular individual and the FRE will not or cannot
take action to overcome the problem. In the most serious circumstances,
OSFI may exercise its removal powers or take other remedial actions
as appropriate.
This approach would ensure that all FREs benefit from clear expectations
and are informed about minimum assessment parameters, and would
reduce the FREs’ exposure to reputation risks and other prudential
risks that could result from mismanagement or misconduct. Moreover,
this approach would result in OSFI and FREs being generally compliant
with minimum international standards.
OSFI would incur costs in developing guidance, including conducting
consultations and effecting implementation. This option will benefit
the interests of depositors and policyholders because it reduces
the FREs’ exposure to reputation and prudential risks.
Option 3 - OSFI to Assess whether Responsible Persons meet Minimum
Standards of Suitability and Integrity
This approach involves OSFI identifying standards it would use
to assess Responsible Persons of financial institutions on an ongoing
basis. Under this approach, FREs would provide information to OSFI,
who would then determine whether Responsible Persons meet minimum
standards of suitability and integrity.
This option would benefit the interests of depositors and policyholders
because it reduces the FREs’ exposure to operational and reputation
risks. However, this option would require additional OSFI resources
because of the time required to conduct ongoing assessments. This
approach deviates from OSFI’s overall reliance based regime, as
less reliance would be placed on the management and board of the
FREs for ensuring compliance with applicable legislation and guidelines.
Also, the introduction of mandatory supervisory procedures would
deviate from OSFI’s risk based supervisory approach. Supervisory
resources would need to be increased. This option would result in
additional costs to OSFI that would be passed on to the FREs.
V. Consultations
OSFI consulted internally and with a number of FREs to confirm
the extent of current practices. OSFI also contacted a number of
international prudential regulators to gain an understanding of
international approaches. OSFI also conducted external consultations
by posting the draft Guideline for comment on its external website.
VI. Recommendations
Option 2 addresses all objectives outlined above and provides
the most effective means of safeguarding depositor and policyholder
interests by guiding FREs in the development policies and procedures
for the assessment of Responsible Persons. This option would be
less resource intensive than Option 3 and would be more aligned
with OSFI’s framework of risk-based supervision and reliance based
regulation.
VII. Implementation & Evaluation
OSFI reviewed comments received on the draft Guideline and revised
the Guideline as appropriate.
There is a one year transition period for compliance with the final
guideline. As such, all FREs are expected to be compliant by January
31, 2009.
To assess whether the minimum requirements of the Guideline have
been achieved, OSFI will undertake a targeted one-time post-implementation
review of FREs’ policies and procedures for assessing the suitability
and integrity of their Responsible Persons.