Office of the Superintendent of Financial Institutions
Parts XI of the Bank Act, the Trust and Loan Companies Act
and the Insurance Companies Act and Part XII of the Cooperative
Credit Associations Act define who are related parties of federally
regulated financial institutionsFootnote 1
(FRFIs), and set out rules for undertaking transactions with related
parties. Subject to a limited number of exceptions, FRFIs cannot directly
or indirectly enter into a transaction with a related party. One of these
exceptions permits FRFIs to enter into a related party transaction if the
value of the transaction is nominal or immaterial to the FRFI when
measured by criteria established by the FRFI's Conduct Review Committee
(CRC) and approved in writing by the SuperintendentFootnote 2.
The Materiality Criteria for Related Party Transactions Guidelines
(the E-6 Guidelines) establish criteria for determining whether a
transaction with a related party is nominal or immaterial for the purposes
of the legislation.
FRFIs that adopt materiality criteria at least as stringent as the
criteria set out in their respective sector Guideline are deemed to have
obtained OSFI approval.
The need for the October 2001 Guidance Note to the life insurance
Guideline suggests that the current E-6 Guidelines could be clearer with
respect to the types of transactions included in each category. At the
time the Guidance Note was issued, OSFI indicated that it intended to
initiate a comprehensive review of the E-6 Guidelines.
Unclear guidance can pose a number of risks. First, there is a risk that
FRFIs may be undertaking non-permitted self-dealing transactions. Second,
FRFIs may misinterpret the Guidelines as permitting prohibited related
party transactions, which could result in losses. Third, FRFIs could also
be exposed to reputational risk if they undertake inappropriate
transactions because they have misinterpreted the guidance.
OSFI is committed to ensuring that its guidance remains relevant.
Significant legislative changes to the self-dealing regime mean that the
materiality categories in the Guidelines should be reviewed and amended.
For example, prior to the 1997 legislative changes, the CRC was required
to approve all related party transactions (even those permitted by the
legislation), and to satisfy itself that each transaction was on terms and
conditions at least as favourable to the FRFI as market terms and
conditions. However, CRC approval was not required for immaterial related
party transactions. Therefore, to reduce the burden on the CRC, OSFI
included in the Guidelines some permitted related party
transactions undertaken in the normal course of business. Under the
current legislation the CRC is only required to review procedures for
compliance with the self-dealing regime. Therefore, there is no longer a
need to have materiality criteria for permitted related party
OSFI is committed to providing a level playing field for all FRFI sectors
(which entails the consistent interpretation and application of FRFI
legislation). While the Guidelines applicable to each financial sector
achieve the same objectives, the use of different industry specific
terminology and slightly different threshold values suggests that the
In modifying the materiality criteria, OSFI seeks to:
reduce the risk that FRFIs may be undertaking inappropriate or unsafe
related party transactions, and
ensure its guidance is current, clear, relevant and supportive of
OSFI’s commitment to a level playing field.
Under this option OSFI would continue to deal with case-by-case
misinterpretations of the E-6 Guidelines through the approval and
This option would not address the objectives listed above, which poses a
potential cost to FRFIs and depositors or policyholders. Under this option
there would be no additional benefits to FRFIs, depositors, policyholders
Under this option, OSFI supervisors would be required to conduct
supervisory reviews of each FRFI to ensure that the policy intent of the
regime and the application of the E-6 Guidelines are being correctly
followed by the FRFIs. These focused reviews could identify specific
common misinterpretations of the Guidelines that could be addressed
through the issuance of further guidance notes.
Under this option, depositors and policyholders would benefit because
FRFIs that were misinterpreting the Guidelines and, as a consequence,
possibly undertaking inappropriate related party transactions, would be
identified and appropriate remedial actions taken. Moreover, this option
would benefit FRFIs because they would be receiving specific tailored
input from OSFI regarding their procedures.
However, this option would require OSFI to devote additional time and
resources to complete on-site examination work. The reduced reliance OSFI
would be placing on FRFI management and boards for ensuring compliance
with applicable legislation and guidelines runs counter to its overall
reliance-based regime. Further, the introduction of mandatory supervisory
reviews would deviate from OSFI’s risk-based supervisory approach, with
the result that supervisory focus could be diverted from large risk issues
to compliance issues. This option would result in additional costs to OSFI
that would be passed on to the FRFIs.
Finally, this approach would likely lead to the issuance of additional
guidance, which would require additional OSFI resources to produce.
The revised Guidelines would be clarified and updated with respect to
changes in the FRFI legislation. This would cause some categories to be
eliminated and, to improve clarity, some new, more descriptive categories
to be introduced. The industry specific Guidelines would be consolidated
into a single Guideline and harmonized for all institutions, which would
create some minor changes for each sector.
This option would require FRFIs to modify their procedures to varying
degrees to comply with the new regime. OSFI is of the view that these
costs should be minimal.
This option will benefit the interests of depositors and policyholders of
FRFIs that have been misinterpreting the Guidelines by reducing the
likelihood of undetected inappropriate related party transactions that
could affect the safety and soundness of the FRFI.
The materiality criteria would be clarified while maintaining OSFI’s
risk-based supervisory approach and reliance-based regulatory regime.
Moreover, FRFIs would benefit from a level playing field, as each industry
sector would be subject to the same criteria.
OSFI sought the views of selected FRFIs representing all industry sectors
and having various sizes and ownership structures prior to preparing an
initial Draft Guideline. These discussions provided insights into the
areas of common misunderstanding that required additional clarity. The
initial Draft Guideline was discussed with the same group on an informal
basis and appropriate changes were made. Subsequently, broad industry
consultation was undertaken through industry associationsFootnote 3. Appropriate changes were
made to the Guideline as a result of these consultations.
Option 3 addresses all objectives outlined above and provides the most
effective means of safeguarding depositor and policyholder interests while
permitting FRFIs to undertake limited nominal or immaterial related party
transactions. This option would be less resource intensive than Option 2
and would more appropriately align with OSFI’s framework of risk-based
supervision and reliance-based regulation.
Directors of FRFIs are required to report to OSFI annually on the CRC’s
activities during the year with respect to carrying out its
responsibilities to establish and review procedures for complying with the
self-dealing regime.Footnote 4 When the revised
Guideline is issued, OSFI will recommend that it be referred to the CRCs
of FRFIs for review. The CRC’s review would be evident in its annual
report to OSFI and would be further evidenced in the minutes of the CRC.
Through examination of the CRC annual report to OSFI as well as selected
CRC minutes, OSWI would be able to evaluate if FRFIs have taken into
consideration the revised E-6 Guideline and to ensure that appropriate
revised procedures have been implemented.
Canadian banks, trust and loan
companies, life insurance companies, property and casualty insurance
companies, and cooperative credit associations incorporated or formed
under an Act of Parliament
Return to footnote 1 referrer
The exception for nominal or
immaterial value transactions is found in section 490 of the Bank Act,
section 478 of the Trust and Loan Companies Act, section 522 of
the Insurance Companies Act and section 414 of the Cooperative
Credit Associations Act.
Return to footnote 2 referrer
The industry associations
consulted were the Canadian Bankers Association, the Canadian Life and
Health Insurance Association, and the Insurance Bureau of Canada.
Return to footnote 3 referrer
ICA S.204(6), BA S.195(6), TLCA
S.199(6), CCAA S.200(6).
Return to footnote 4 referrer