Backgrounder: Guideline E-23 – Model Risk Management

Overview

The Office of the Superintendent of Financial Institutions (OSFI) is releasing the final version of Guideline E-23 – Model Risk Management, which sets out OSFI's expectations for how federally regulated financial institutions should manage risks associated with the use of models. This includes traditional actuarial models as well as emerging technologies such as artificial intelligence (AI) and machine learning.

Model risk refers to the potential for adverse outcomes resulting from the design, development, implementation, or use of models. These risks can affect decision-making, financial stability, and consumer protection.

Why it's important

Models are increasingly central to how financial institutions operate, from established actuarial tools to advanced AI. As institutions adopt more complex and innovative modeling techniques, OSFI is updating its guidance to ensure model risks are managed effectively.

Guideline E-23 introduces a principles-based framework that applies to all types of models, regardless of the technology used. It does not prohibit any specific modeling approaches, allowing institutions to innovate while maintaining sound risk management practices.

By strengthening governance and oversight of models, the Guideline supports a stable financial system and helps protect Canadians from potential harms associated with model failures or misuse.

Implementation

Guideline E-23 will come into effect in May 2027, following an 18-month transition period. This phased approach gives institutions time to assess their current practices, make necessary adjustments, and implement the Guideline effectively. Once implemented, Guideline E-23 will apply to all federally regulated financial institutions.

OSFI will provide support throughout the transition to help institutions understand and apply the principles in a manner that is proportionate to their size, complexity, and risk profile. Notably, pension plans are excluded from the scope of this Guideline due to their distinct supervisory framework.