Office of the Superintendent of Financial Institutions
This interview was first published in the 2022 Starling Compendium, May 2022.
The Coronavirus pandemic has reoriented regulatory priorities. For instance, there is heightened concern for business resilience and risk governance in the hybrid work context. What changes to regulatory priorities do you expect will persist into the future? What additional priorities do you expect this to promote?
Our priorities as a regulator are, first and foremost, derived from our mandate to contribute to public confidence in the Canadian financial system. To achieve that mandate, we must continuously monitor, assess and respond to risks on the near and long term horizon.
At the onset of COVID-19, extraordinary measures by financial regulators and governments across the globe focussed on lessening the financial risks for financial institutions (i.e., liquidity pressures, mortgage loan defaults, etc.) to help maintain a resilient financial system. These were generally quite effective, but not comprehensive in addressing emerging risks in the midst of the pandemic.
Beyond the traditional financial and operational risks related to the COVID-19 pandemic, broader societal shifts emerged more clearly. By that, I mean an increase in the public consciousness of Environment, Social, and Governance (ESG) issues and risks, here in Canada and abroad. Several international and national events – the murder of George Floyd in the U.S., the discovery of unmarked graves at former residential schools in Canada, and the “#MeToo” movement across the globe – had direct impacts on how OSFI-regulated institutions approached the Social component of ESG risks.
Canada’s social fabric is unique, given a highly diverse and multicultural populace, which is driven primarily by significant immigration from all corners of the globe. Financial institutions operating in Canada, for example, must have a business model and approach that not only recognizes diversity, equity, and inclusion, but also incorporates those values into their corporate practices and culture. This is foundational to business success in Canada because these financial institutions’ clients and employees expect demonstrable commitments to diversity, equity, and inclusion.
The past year has focused attention on a need for ESG related disclosures. To date, much of this has focused on Environmental and Social Interest disclosures. Do you anticipate an increase in focus on Governance disclosures in 2022? If so, on which topics do you expect these disclosures to focus?
Shareholders, consumers and employees want to support organizations whose values resemble their own. The increase in environmental and social interest disclosures allow people to better understand the ethical and environmental repercussions of their investments and transactions.
Accountability of financial institution Boards and their responsibility for oversight of strategy, innovation, and value creation continues to be a critical focus area in our supervision. Advancing governance disclosures to keep pace with growing market appetite for transparency will be a journey.
OSFI’s recently released consultation on culture risk management contemplates related disclosures to support prudential outcomes. Leaders are the beacons of an organization’s culture, shaping and reinforcing behaviors and mindsets throughout the organization. Disclosures support accountability for actions, decisions and norms that should reflect organizational purpose and values. Clear, credible and comparable disclosures create sustained attention and monitoring for systemic change.
Proportionality is also an important consideration when dealing with financial institutions of various size and complexity, as there is no clear pass/fail on many of the evolving disclosures.
I think financial institutions’ first concern is that of meeting the expectations of their shareholders and the public, both of which expect more and better disclosures. OSFI is happy to support work that results in better risk-based decisionmaking by all participants in the market, but the pace and outcomes of those disclosures is in the hands of many and not OSFI’s alone.
You have stated that
OSFI intends to focus on its own internal diversity “obsessively.” How do you think this will help OSFI to achieve its goals, in practical terms? Will diversity among the firms you oversee be a matter of supervisory priority? Some note that diversity is merely statistical without commensurate inclusion and equity. What are your views?
Diversity is not only a matter of having targets, or meeting a moral imperative. Diversity is a strategic imperative in building a more resilient organization, navigating change, and arriving at better decisions. We think commitment to diversity requires recognizing and liberating talent, and gaining value from a broader spectrum of perspectives.
The current risk environment is full of complex and evolving issues where we need a more diverse understanding of risks and their related impacts. Decisions in this are not well served by narrowing the source of expertise available to address those risks. We, as a Canadian federal financial regulator, must hold ourselves accountable to higher standards for diversity.
OSFI Blueprint, published in December 2021, includes the notion that culture is a core element of our successful organizational transformation, and at the heart of culture is the strategic need for diversity.
To truly benefit from diversity, we must imbed a culture of equality and inclusion. Embracing our differences lays the groundwork for such a culture through collective learning, personal growth and behavioral change.
This can be easy to say and sometimes hard to practice, which is why our approach recognizes the need for psychological safety for employees where it is safe-to-fail and safe-to-bedifferent. We need to challenge our own assumptions and biases, and acknowledge that we all have blind spots. By building an organization that seeks the best from its people we will better be able to serve our mandate.
December 2021 letter to Federally Regulated Financial Institutions, OSFI announced intent to issue a consultative document regarding culture and reputational risk. What led to this and where do you hope this initiative to lead?
We see the strategic advantage of diversity. We look at culture and diversity as part of the composition of financial institution Boards but are also examining how that diversity exists in the rest of the organization.
Boards of financial institutions in Canada have become commendably more diverse. However, we are questioning why we are not seeing as robust a trend at the senior management level at those same institutions. As the Board is ultimately responsible for an institution’s culture, these are the kinds of questions that should be on the minds of the Boards of OSFI-regulated financial institutions.
Our Culture & Compliance Risk Division has been leading the development of our approach to culture supervision, to better understand how institutions assess and manage their behavioural risks, and assure effective promotion of desired culture.
In the culture taxonomy that we have created, diversity of thought, leadership and group dynamics are examples of areas where we can begin to assess effective culture practices. Future work includes looking more closely at senior executive compensation structures and related measurement to support and reinforce a culture of integrity and effective risk management at all levels.
Our recent letter proposes issuing principles-based, outcomes-focused culture risk management guideline for consultation by the end of the year.
Lastly, as you are relatively new in your current role, perhaps you might share a bit about what led you to OSFI. Can you share any initial learnings achieved since becoming Superintendent? What else would you like to share?
A calling to the public service had been in my mind for the first 25 years of my career, and I finally listened to that calling five years ago. The job I now have requires transformational leadership at a heretofore tremendously successful organization. I was more relieved than surprised to find a shared appetite and desire among my colleagues for a transformative risk environment.
The greatest risk for a regulator in fulfilling their mandate is to not act, or to act too slowly. The costs and consequences of not acting can erode our credibility, public confidence, as well as the financial stability we seek to achieve.
Prudential financial regulation has often been accomplished away from the public policy spotlight. Many issues like climate change, digitalization, and housing in Canada are in the media daily, and very much a part of the public discourse. These discussions can benefit from OSFI’s views. We continue to seek better ways to communicate and engage the public on such issues, as well as others.
Our focus is always on serving our mandate. This necessarily requires tough decisions about individual financial institutions, and choices on broader public policy, that are not always easily understood by the public or popular. We, however, need to show leadership to maintain a strong and healthy financial system. Peter Routledgeis Canada’s Superintendent of Financial Institutions. He previously served as the President and Chief Executive Officer of Canada Deposit Insurance Corporation (CDIC).