Office of the Superintendent of Financial Institutions
By legislation, foreign life insurance companies and foreign fraternal
benefit societies are allowed to vest commercial loans to meet the
Office's requirements to maintain assets in Canada (vested assets). This
guideline outlines the Office's requirements and interpretations dealing
with the vesting of commercial loans for these companies and societies.
Companies and societies are not required to make a formal application to
vest these particular assets but must ensure that they do so in accordance
with this guideline.
The Insurance Companies Act defines commercial lending for purposes of
these expanded powers. Companies and societies should review the following
definition of commercial loans ensuring that they have properly classified
their vested assets and respect the quantitative limits stipulated by the
The term "commercial loan" is defined to include not only loans in the
conventional sense but also certain loan substitutes and investments in
debt and equity securities of corporations and unincorporated entities.
The definition does, however, exclude several classes of loans and
investments that are not to be considered commercial loans. These include:
small loans - less than $250,000 to natural persons (these are
essentially consumer loans and will not be subject to portfolio limits
under the Acts);
mortgage loans that are insured or meet certain requirements regarding
certain deposits by a company with another financial institution;
loans and investments in debt obligations directly or indirectly
backed by the guarantee of a government or prescribed international
loans and investments in debt obligations either directly or
indirectly backed by the guarantee of another financial institution or
secured by deposits with any financial institution, including the
investments in debt or equity securities that are widely distributed
within the meaning of the regulations; and
investments in participating shares.
In defining a commercial loan, the Act defines "loan" with a modified
meaning that incorporates close substitutes for loans, such as acceptances
and other guarantees, financial leases, conditional sales contracts,
repurchase agreements, and other similar arrangements.
The current legislation permits foreign companies, when the excess of
vested assets over liabilities is $25 million or less, to have included in
their vested assets a maximum of 5% in commercial loans. Foreign companies
and societies wishing to vest commercial loans must first ensure that
their home jurisdiction grants them commercial lending powers.
The Office is seeking an amendment to the regulation respecting
investments in Canada by foreign companies so that companies' excess of
vested assets over the aggregate of liabilities in Canada and the adequate
margin required under Section 608 of the Insurance Companies Act must
exceed $25 million before companies are permitted to have more than 5% of
their total vesting requirements in commercial loans.
If a company's excess is greater than $25 million, it may have, as part of
its vested assets, total commercial loans in excess of the 5% limit.
However, the company must ensure that its investment and lending policies,
standards and procedures, in respect of its assets in Canada, make
reference to the company's intentions with respect to commercial lending
operations. For example, the company must have in place procedures dealing
with the loan approval process and steps required in dealing with
delinquent accounts. The guideline on the prudent person approach provides
additional direction in this area.
For a company to be permitted to have commercial loans representing more
than 5% of its vested assets, it must maintain, at all times, the
$25 million excess of assets over the aggregate of liabilities and the
adequate margin required under section 608. If a company's excess drops
below the $25 million mark, commercial loans in excess of the 5% limit
will be given a zero value for purposes of adequacy of assets in Canada
(vested assets). If a company's excess drops to zero, a zero value will be
given to all commercial loans that are under the control of the Minister.
In these situations, the Act grants the Superintendent the right to
require that the company or society vest additional assets to meet the
minimum required by the legislation.
As a regulator, the Office will review through the examination and
monitoring process, the commercial lending activities to ensure compliance
with the company's or society's statement of lending policies, standards
and procedures. The lending policies established should be adhered to and
reflect what a reasonable and prudent person would apply in respect of a
portfolio of loans to avoid undue risk of loss and obtain a reasonable