Office of the Superintendent of Financial Institutions
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In 2014-15, OSFI continued to contribute to a safe and sound Canadian financial systemby maintaining robust regulatory and supervisory frameworks and diligently applying them to the institutions and pension plans it oversees. The effectiveness of services provided is attested by the performance results attained.
This program involves regulating and supervising federally regulated financial institutions (FRFIs) to determine whether they are in sound financial condition and are complying with their governing statute law and supervisory requirements; monitoring the financial and economic environment to identify issues that may impact these institutions negatively; and intervening in a timely manner to protect depositors and policyholders from undue loss, while recognizing that management and boards of directors are ultimately responsible, and that financial institutions can fail.
Costs for this program are recovered through base assessments and user fees and charges paid by the federally regulated financial institutions covered under the Bank Act, Trust and Loan Companies Act, Insurance Companies Act and Cooperative Credit Associations Act. The Office of the Superintendent of Financial Institutions also receives revenues for cost-recovered services to provinces, for which it provides supervision of their institutions on a fee for service basis.
Budgetary Financial Resources (dollars)
Human Resources (FTEs)
Protect depositors and policy holders while recognizing that all failures cannot be prevented.
Three key international assessments of Canada’s regulatory and/or supervisory frameworks were completed during 2014-15, each resulted in an overall “compliant” rating:
Program Performance Analysis and Lessons learned
In 2014-2015, high levels of domestic household indebtedness, exceptionally low interest rates, and falling oil prices continued to be seen as sources of potential systemic vulnerability. OSFI took action to address the possible impact of these challenges and achieve its strategic priorities by communicating its expectations for risk management to FRFIs and conducting significant reviews in several areas, including stress testing, cyber security, risk data aggregation, outsourcing, and internal audit. We continued to develop supporting guidance for OSFI’s Supervisory Framework and initiated a review of our supervisory processes and tools.
In 2014-15, the Regulation and Supervision of Federally Regulated Financial Institutions program and its sub-programs met all performance targets. This, in combination with strong industry opinions that OSFI is effective in monitoring and supervising FRFIs (Source: 2014 Financial Institutions Survey), shows progress toward the Strategic Outcome 1: A safe and sound Canadian financial system.
OSFI regulates and supervises financial institutions to determine whether they are in sound financial condition and are complying with their governing statute law and supervisory requirements. This program involves the administration and application of an effective supervisory process to assess the safety and soundness of regulated financial institutions by evaluating an institution’s risk profile, financial condition, risk management processes, and compliance with applicable laws and regulations. This program includes activities to monitor and supervise financial institutions; monitor the financial and economic environment to identify emerging issues; and intervene on a timely basis when a financial institution’s business practices may be imprudent or unsafe, by exercising supervisory powers to take, or require management or boards to take, necessary corrective measures as rapidly as possible to protect depositors and policy holders, while recognizing that all failures cannot be prevented.
Issues in institutions are identified and acted on at an early stage.
Performance Analysis and Lessons Learned
The Composite Risk Rating (CRR) represents OSFI’s overall assessment of an institution's safety and soundness. Beginning in 2013-14, a Branch Risk Rating (BRR) was assigned to Foreign Bank Branches (FBBs) operating in Canada, rather than a CRR, reflecting OSFI’s limited access to the information needed to assess the FBB’s safety and soundness. There are four possible risk ratings: ‘low’, ‘moderate’, ‘above average’ and ‘high’. The CRR is reported to most institutions at least once a year (certain inactive or voluntary wind-up institutions may not be rated). The Supervisory Information Regulations for both banks and insurance companies prohibit institutions (or OSFI) from publicly disclosing their rating. As at the end of March 2015, OSFI had assigned CRR ratings of low or moderate to 91% and above average or high to 9% of all CRR-rated institutions. These percentages are unchanged from the previous year.
Financial institutions are also assigned an intervention (stage) rating, as described in OSFI’s guides to intervention for FRFIs, which determines the degree of supervisory attention they receive. Broadly, these ratings are categorized as: normal; early warning (stage 1); risk to financial viability or solvency (stage 2); future financial viability in serious doubt (stage 3); and non-viable/insolvency imminent (stage 4). As at March 31, 2015, there were 23 staged institutions. With a few exceptions, most of the staged institutions were in the early warning (stage 1) category.
OSFI continued updating internal guidance and processes to support its risk-based Supervisory Framework, which considers an institution’s inherent business risks, risk management practices (including corporate governance) and financial condition. OSFI also initiated the discovery phase of renewing systems and tools to support supervisory processes.
In 2014-15, OSFI focused on various reviews concerning risk management practices at financial institutions, including:
Feedback received from the Financial Institution Survey is being considered in ensuring that our supervisory practices are appropriate to the size and complexity of smaller financial institutions.
This program involves advancing and administering a regulatory framework of rules and guidance that promotes the adoption by regulated financial institutions of sound risk management practices, policies and procedures designed to plan, direct and control the impact on the institution of risks arising from its operations. This program encompasses the issuance of regulations and guidance, input into federal legislation and regulations affecting financial institutions; contributions to accounting, auditing and actuarial standards; and involvement in a number of international regulatory activities.
Performance Analysis and Lessons Learned
OSFI provides a regulatory framework of guidance and rules that meets or exceeds international minimums for financial institutions. In addition to issuing guidance, OSFI provides input into the development of federal legislation and regulations affecting FRFIs and comments on accounting, auditing and actuarial standards development, which includes determining how to incorporate them into the regulatory framework governing FRFIs. OSFI also participates in a number of international and domestic rule-making activities.
The following represents a list of key regulatory guidance issued and policy development undertaken during 2014-15.
Capital related guidelines, advisories and policy work:
Accounting/Disclosure related guidelines, advisories and policy work:
Sound Business Practice related guidelines, advisories and policy work:
OSFI continued work with the Department of Finance, Canada Deposit Insurance Corporation and the Bank of Canada on issues of recovery and resolution as they would relate to individual financial institutions as well as the control of systemic financial risks. These measures are designed to increase the safety and soundness of the financial system, but also to ensure that timely and effective measures can be taken should the need arise.
Federally regulated financial institutions are required to seek regulatory approval for certain types of transactions. This program: evaluates and processes applications for regulatory consent; establishes positions on the interpretation and application of the federal financial institutions legislation, regulations and guidance; identifies precedential transactions that may raise policy or precedent-setting issues and develops recommendations that recognize the need to allow institutions to compete effectively while undertaking reasonable risks that do not unduly impact the Office of the Superintendent of Financial Institution’s primary stakeholders, the policyholders and depositors of FRFIs.
Provide transparent and timely decisions on regulatory approvals.
OSFI administers a regulatory approval process that is prudentially effective, responsive and transparent.
The soundness of the process is supported by performance results showing that a vast majority of knowledgeable observers understand the basis upon which OSFI makes its decisions. OSFI also has performance standards establishing timeframes for processing applications for regulatory approval and for other services, all of which were surpassed during 2014-15. More information on service performance standards can be found on OSFI’s website.
In 2014-15, OSFI processed 223 applications of which 200 were approved. Individual applications often contain multiple approval requests. The 200 approved applications involved a total of 371 approvals, 286 of which were granted by the Superintendent and 85 by the Minister. This represents an increase relative to last year, when 199 applications were processed. Most applications processed during 2014-15 related to property and casualty insurers (47%) and banks (41%).
In keeping with the objective of enhancing the transparency of OSFI’s legislative approval process and promoting a better understanding of our interpretation of the federal financial institution statutes, OSFI develops and publishes legislative guidance including advisories, rulings, and transaction instructions. In 2014-15, OSFI made revisions to the following guidance documents:
During 2014-15, OSFI monitored the impact of the government’s initiative to promote entry and growth of small financial institutions. While there was a marginal increase of new entry applications, new processes were introduced during the year and their full impact on the government’s initiative may not be fully measureable for one or two more years. In addition, OSFI introduced a new process for approving reinsurance with unregistered related party reinsurers, which resulted in an increase of applications.
This program involves regulating and supervising federally regulated private pension plans to determine whether they are meeting minimum plan funding requirements and are complying with their governing law and supervisory requirements. This program provides risk assessments of pension plans covering employees in federally regulated areas of employment; timely and effective intervention and feedback to protect the financial interests of plan members and beneficiaries from undue loss, while recognizing that plan administrators are ultimately responsible, and that plans can fail; a balanced relevant regulatory framework; and a prudentially effective and responsive approvals process. This program incorporates risk assessment and intervention, regulation and guidance, and approvals and precedents related to federally regulated private pension plans under the Pension Benefits Standards Act, 1985. The costs for this program are recovered from pension plan fees based on the number of members in each federally regulated pension plan.
Given the improved financial position of pension plans at the end of 2013, in 2014-15 OSFI consulted with various stakeholders to understand whether plan administrators and employers are considering making major changes to their risk management strategies (risk transference and investment strategies as well as plan design changes). OSFI also discussed what barriers exist to the adoption of risk management solutions. In general, OSFI has observed that plan administrators and employers are paying closer attention to their pension plans’ underlying risks, and to how these risks can be managed.
Highlights of other activities completed by OSFI to support and strengthen the Regulation and Supervision of Federally Regulated Private Pension Plans include:
In 2014-15, OSFI continued to contribute to maintaining a financially sound and sustainable Canadian public retirement income systemthrough the provision of high quality expert actuarial valuation and advice to the Government of Canada and to provincial governments that are Canada Pension Plan (CPP) stakeholders. The soundness of services provided is attested by the performance results attained.
The federal government and the provinces, through the Canada Pension Plan (CPP), public sector pension arrangements and other social programs have made commitments to Canadians and have taken on emanated responsibility for the financing of these commitments. Some are long-term and it is important that decision-makers, Parliamentarians and the public understand these and the inherent risks. This program plays a vital and independent role in this process. It provides checks and balances on the future costs of the different pension plans under its responsibilities.
This program provides a range of actuarial services, under legislation, to the CPP and some federal government departments. It conducts statutory actuarial valuations of the CPP, Old Age Security (OAS) and Canada Student Loans programs, and pension and benefits plans covering the Federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police (RCMP), federally appointed judges, and Members of Parliament.
The Office of the Chief Actuary (OCA) is funded by fees charged for its actuarial valuation and advisory services and by an annual parliamentary appropriation.
Stewards of Canada’s public retirement income system receive accurate, high quality and timely professional actuarial services and advice.
In 2014-15, the OCA continued to provide independent, accurate, high quality and timely actuarial reports, professional actuarial services and advice. This claim is supported by a third party assessment of the OCA’s expertise and its compliance with professional standards.
With the view of maintaining high quality services, and as recommended by the CPP independent peer review panel, the OCA continued to maintain its programs of research on subjects relevant to the preparation of future actuarial reports.
Increasing longevity affects the sustainability of pension plans. The impact of this trend, coupled with high uncertainty with respect to the evolution of future mortality rates, makes the development of appropriate mortality assumptions of paramount importance. As stated by Chief Actuary Jean-Claude Ménard during his appearance at the House of Commons Standing Committee on Public Accounts in May 2014, the expected future mortality improvements are embedded in actuarial valuations of the pension plans prepared by the OCA. Throughout the year, the Chief Actuary and his staff delivered presentations addressing these topics to a range of national and international audiences. In 2014-15, the OCA published two mortality studies that address mortality assumptions: Actuarial Study No. 12 Mortality Projections for Social Security Programs in Canada and Actuarial Study No. 14 Pension Plan for the Public Service of Canada Mortality Study.
This program involves the conduct of statutory actuarial valuations of the Canada Pension Plan (CPP) and Old Age Security (OAS) Program. These valuations estimate the financial status of these plans and programs as required by legislation. This program estimates long-term expenditures, revenues and current liabilities of the Canada Pension Plan and estimates long-term future expenditures for Old Age Security programs. Pursuant to the Canada Pension Plan and the Public Pensions Reporting Act, the Office of the Chief Actuary prepares statutory triennial actuarial reports on the financial status of these programs, as required by legislation.
Provide accurate, high quality and timely actuarial valuations informing CPP and OAS stakeholders and Canadians of the current and projected financial status of the Plan and Program.
In 2014-15, the OCA continued to provide high quality services under its CPP and OAS sub-program, as demonstrated by performance results.
Tabling of the 12th Actuarial Report on the OAS Program
The OCA is required by law to produce an actuarial report on the OAS program every three years or whenever an amendment is made that affects the cost of benefits. The triennial 12th Actuarial Report on the OAS Program as at December 31, 2012 was tabled on August 20, 2014. This actuarial report provides information on future expenditures until 2060. The report facilitates a better understanding of the status of the OAS program and the factors that influence its costs, thereby contributing to an informed public discussion of issues related to it.
The report’s key findings show that, over the long term, the ratio of total OAS expenditures to GDP is projected to reach a high of 2.8% by 2033 and then decrease slowly to a level of 2.4% by 2050.
External Peer Review of the 26th CPP Actuarial Report
In May 2014, the OCA released the findings of an external peer panel commissioned to review the 26th Actuarial Report on the CPP. The independent panel’s findings confirm that the work performed by the OCA on the 26th CPP Actuarial Report meets all professional standards of practice and statutory requirements and that the assumptions and methods used are reasonable. The panel also stated that the report fairly communicates the results of the work performed by the Chief Actuary and his staff.
The peer review resulted in eight recommendations dealing with various aspects of the report including data, methodology, communication of results, and other actuarial issues. The OCA has either taken or plans to take action on these recommendations. In particular, the OCA will continue to broaden its sources of information before setting assumptions. The work performed by the Chief Actuary as Chairman of the International Social Security Association, Commission on Statistical, Actuarial and Financial Studies, as well as the OCA inter-disciplinary seminar planned for September 2015, are aimed at gathering opinions from national and international experts. The OCA will also continue to obtain expert advice from various fields such as demographics, economics, statistics and investments.
This program involves the conduct of statutory actuarial valuations of various federal public sector employee pension and insurance plans. These valuations estimate the financial status of these plans as required by legislation. Pursuant to the Public Pensions Reporting Act, this program involves preparing statutory triennial actuarial reports on the financial status of federal public sector employee pension and insurance plans covering the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police, the federally appointed judges and Members of Parliament. This program supports plan members, thereby serving the public interest, by ensuring good governance of the plan, appropriate disclosure in the actuarial reports and contributing to the overall accountability of the plan sponsor to members. This program also involves the provision of sound actuarial advice that assists different government departments in the design, funding and administration of these plans. As part of this program, the Chief Actuary submits the actuarial reports to the President of Treasury Board.
Provide accurate, high quality and timely actuarial valuation reports on Public Pension and Insurance Plans to departments to assist with design, funding and administration of the plans.
In 2014-15, the OCA continued to provide high quality services under its Public Sector Pension and Insurance Programs sub-program, as demonstrated by performance results.
Public Sector Insurance and Pension Plans
In 2014-15, the OCA completed four actuarial reports with respect to public sector insurance and pension plans, which were submitted to the President of the Treasury Board for tabling before Parliament. The Actuarial Report on the Pension Plan for the Members of Parliament as at March 31, 2013 and the Actuarial Report on the Regular Force Death Benefit Account as at March 31, 2013 were tabled on October 31, 2014, and the Actuarial Reports on the Pension Plans for the Canadian Forces – Regular Force and Reserve Force as at March 31, 2013 were both tabled on November 21, 2014. These reports provide actuarial information to decision makers, Parliamentarians and the public, thereby increasing transparency and confidence in Canada’s retirement income system.
Comments and recommendations identified in an Ernst & Young Report from fall 2014 regarding the actuarial reports review for Public Accounts purposes will be reflected – within the scope and influence of the OCA – in future valuation reports.
Pursuant to the Student Financial Assistance Act, as amended by the Budget Implementation Act, 2009, Employment Insurance Act, and Department of Human Resources and Skills Development Act this program involves the conduct of statutory actuarial valuations of the Canada Student Loans Program (CSLP) and performing the statutory actuarial forecasts and estimates necessary to set the Employment Insurance premium rate under Section 66 of the Employment Insurance Act. As part of this program, the actuarial reports are submitted to the Minister of Employment and Social Development.
Provide accurate, high quality and timely actuarial valuation reports on the CSLP and Employment Insurance (EI) to inform stakeholders and Canadians of the future costs and rates for these programs.
In 2014-15, the OCA continued to provide high quality services under its Canada Student Loans and Employment Insurance Programs sub-program, as demonstrated by performance results.
CSLP Actuarial Report
The CSLP Inter-Valuation Report as at July 31, 2013 was provided to the CSLP in June of 2014 to support Employment and Social Development Canada’s (ESDC) accounting requirements as well as partners’ needs, including the Office of the Auditor General, Treasury Board Secretariat, Department of Finance, and the Office of the Receiver General. The report includes a forecast of the costs and revenues of the Program for 25 years, which is through loan year 2037-38.
The statutory Actuarial Report on the CSLP as at July 31, 2014 will be submitted to ESDC in June 2015.
Actuarial Report on the Employment Insurance Premium Rate
In 2014-15, the OCA presented the Canada Employment Insurance Commission with the 2015 Actuarial Report on the Employment Insurance Premium Rate that was tabled before Parliament on September 24, 2014. This report provides the forecast break-even premium rate for the upcoming year and a detailed analysis in support of this forecast.
Internal Services are groups of related activities and resources that are administered to support the needs of programs and other corporate obligations of an organization. These groups are Management and Oversight Services, Communications Services, Legal Services, Human Resources Management Services, Financial Management Services, Information Management Services, Information Technology Services, Real Property Services, Materiel Services, Acquisition Services, and Travel and Other Administrative Services. Internal Services include only those activities and resources that apply across an organization and not those provided to a specific program.
During 2014-15, OSFI continued to focus on delivering effective and efficient internal services in support of business sectors, including undertaking various enhancements as evidenced by the following key achievements.
During 2014-15, OSFI communicated its plans and activities to a wide range of stakeholders via its website and other means. As in previous years, OSFI received many requests to address external conferences and events. The Superintendent and senior OSFI officials delivered presentations across Canada and internationally. The Superintendent appeared before the Senate Standing Committee on Banking, Trade and Commerce, and the Chief Actuary appeared before the House of Commons Standing Committee on Public Accounts.
Coinciding with Jeremy Rudin’s first public address as Superintendent, in September 2014, OSFI began using Twitter to broadcast content to a larger audience. OSFI tweets from two accounts: @OSFICanada (English) and @BSIFCanada (French).
Renewing Technology and Systems
2014-15 marked the successful completion of a five-year Information Technology Renewal program. By the end of the fiscal year, the last three projects concluded as planned and the new systems are providing OSFI with updated business data management capability. OSFI now uses the federal government’s shared SAP platform for its financial and contracting processes; a modern HR Management System enables self-serve transactions; and a Correspondence and Enquiry Management system manages inquiries received from Parliament, federally regulated financial institutions, pension plan members, media and the general public. System upgrades delivered over the preceding four years include: on-line filing for regulatory data; business intelligence analytics tools; a new website; a risk assessment system for the Pension Plans Division; and modernized networking and technology tools. The overall result is significantly fewer applications and rationalized data, and a strong emerging focus on enterprise information management across the Office.
Managing Human Resources
In 2014-15, ongoing risks posed by the current environment, both at the level of the economy and within the financial sector, as well as internal factors, continued to have an impact on how we do our work. To mitigate these risks, a number of priorities were identified through the Human Resources (HR) planning process and the following actions were taken to address gaps:
This measure is a proxy for whether OSFI intervened early enough to protect depositors and/or policyholders. Estimated recovery is the amount on the dollar per claim each policyholder or depositor would receive upon the completion of the liquidation. Expectation ≥ $0.90. The measure is provided annually, based on the updates on the estimated recoveries received from the agent or liquidator. Liquidation may span several years (e.g. life insurance) and affect a number of annual updates to the estimated recovery. As such, an annual update is made to the actual result for this indicator, regardless of whether any FRFI’s failed that year or not.
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Any supervisory rating increases that are two or more levels within a rolling three month period may indicate that risk assessment and/or intervention activities were not timely. As such, a result of 0% exceeds the target (i.e., tolerance) of 20%.
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