Office of the Superintendent of Financial Institutions
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Appropriate Minister: William Francis Morneau
Institutional Head: Jeremy Rudin
Ministerial Portfolio: Finance
Enabling Instrument(s): Office of the Superintendent of Financial Institutions Act (OSFI Act)
Year of Incorporation / Commencement: 1987
The Office of the Superintendent of Financial Institutions (OSFI) was established in 1987 by an Act of Parliament: the Office of the Superintendent of Financial Institutions Act. It is an independent agency of the Government of Canada and reports to Parliament through the Minister of Finance.
OSFI supervises and regulates all banks in Canada and all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and private pension plans. OSFI’s mandate does not include consumer-related issues or the securities industry.
The Office of the Chief Actuary (OCA), which is an independent unit within OSFI, provides actuarial valuation and advisory services for the Canada Pension Plan, the Old Age Security program, the Canada Student Loans and Employment Insurance Programs and other public sector pension and benefit plans.
OSFI was created to contribute to public confidence in the Canadian financial system.
Under its legislation, OSFI’s mandate is:
Fostering sound risk management and governance practices
OSFI advances a regulatory framework designed to control and manage risk.
Supervision and early intervention
OSFI supervises federally regulated financial institutions and pension plans to determine whether they are in sound financial condition and meeting regulatory and supervisory requirements.
OSFI promptly advises financial institutions and pension plans if there are material deficiencies, and takes corrective measures or requires that they be taken to expeditiously address the situation.
Environmental scanning linked to safety and soundness of financial institutions
OSFI monitors and evaluates system-wide or sectoral developments that may have a negative impact on the financial condition of federally regulated financial institutions.
Taking a balanced approach
OSFI acts to protect the rights and interests of depositors, policyholders, financial institution creditors and pension plan beneficiaries while having due regard for the need to allow financial institutions to compete effectively and take reasonable risks.
OSFI recognizes that management, boards of directors and pension plan administrators are ultimately responsible for risk decisions and that financial institutions can fail and pension plans can experience financial difficulties resulting in the loss of benefits.
In fulfilling its mandate, OSFI supports the government’s objective of contributing to public confidence in the Canadian financial system.
OSFI works with a number of key partners on the Financial Institutions Supervisory Committee (FISC), which the Superintendent chairs, including the Department of Finance Canada, the Bank of Canada, Canada Deposit Insurance Corporation and the Financial Consumer Agency of Canada. Together, these organizations constitute Canada’s network of financial regulation and supervision, and provide a system of depositor and policyholder protection.
The Office of the Chief Actuary is an independent unit within OSFI that provides a range of actuarial valuation and advisory services to the Government of Canada (see Program 2.1 on page 36 for further details).
Operating Environment and Risk Analysis
The external environment within which OSFI operates is constantly evolving and becoming more complex. Uncertain economic and financial conditions as well as globalization create challenges for financial institutions and a range of risks making OSFI's ability to achieve its mandate and objectives more complex.
In 2015-16, OSFI paid particular attention to two risk areas that are detailed below.
Risk Response Strategy
Link to the Organization’s Program (s)
Cyber security events: Financial Institutions may lack resilience to sustained levels of stress caused by cyber security event.
This risk is of concern given the rapid evolution of cyber attacks, their increasing number, and system interdependencies creating multiple points of vulnerability for institutions.
This risk was identified in the 2015-16 Report on Plans and Priorities (RPP). Risk responses during 2015-16 included:
Program 1.1: Regulation and Supervision of Federally Regulated Financial Institutions
Shared or Harmonization Initiatives:
This risk related to the service and cost implications on OSFI as a result of the centralization and standardization of operations across the Government of Canada. Given its small size, OSFI needs to monitor, plan for, and carefully manage the implementation of shared or harmonization initiatives to minimize business disruption and maintain the flexibility necessary to conduct business effectively.
This risk was identified in the 2015-16 RPP. Risk responses during 2015-16 included:
Additionally, OSFI monitored ongoing sources of risks to the safety and soundness of the Canadian financial system such as domestic household debt, low oil prices, low long-term interest rates and ongoing global financial uncertainty.
In response to these ongoing concerns, OSFI continued to work with its domestic and international partners and undertook a number of initiatives to further strengthen Canada’s system of financial regulation and supervision. OSFI also conducted reviews in several areas including corporate and commercial lending, retail lending, outsourcing, risk management and compliance over the course of the fiscal year. It examined links between regulated financial institutions and the shadow banking sector to better understand potential prudential issues for the Canadian financial system.
Pension plans continued to face challenging economic conditions in 2015. The ongoing challenges of volatile financial markets, generally lower expected investment returns and long-term interest rates, and longevity improvements are seen as the new norm. Over the course of the year, OSFI continued to oversee pension plans in a context where sponsors and administrators are increasingly looking at ways to reduce pension risks (e.g., changing investment strategies, closing existing defined benefit plans to new members, purchasing annuities, using products or contracts designed to protect pension plans from the risk of unexpected increases in the longevity of pension plan members, etc.).
Finally, OSFI is mindful of its internal environment given the important role that its staff and supporting operations play in responding to changes in the business environment. As a result, OSFI has dedicated significant efforts to managing internal risks related to its human resources, systems and processes.
Priority A: Anticipating and Responding to Risks
Internally, OSFI values sound risk management practices that are consistent with the high expectations it places on the regulated entities it supervises. Understanding the external risks that could negatively impact the financial system informs the regulatory and supervisory actions that OSFI undertakes.
Key Supporting Initiatives
Link to the Organization’s Program(s)
Continue to enhance OSFI’s ability to proactively monitor the impacts of changes in the economy on the risk profile of institutions and, where appropriate, adjust OSFI regulatory and supervisory expectations
(Macro stress testing exercises – banking and insurance)
Sub-Programs 1.1.1 and 1.1.2
Deepen OSFI’s understanding of risk factors arising from, and the oversight of, the parts of the financial system that are outside of OSFI’s direct responsibilities (e.g., market based financing, securities financing), but which may affect the safety and soundness of Federally Regulated Financial Institutions (FRFIs) and OSFI’s prudential oversight activities.
(Market based financing emerging risks)
Continue to focus on the following supervisory areas:
(Compensation and corporate governance/risk management oversight)
(Data aggregation and risk reporting – 2015 comparative report completed December 2016; RDARR final report to be completed January 2017)
Progress Toward the Priority
This is an ongoing broad priority with initiatives spanning multiple years in some cases. The focus is modified annually based on OSFI’s response to the external environment.
In 2015-16, steps undertaken towards meeting the priority include: stress testing on reinsurance related risks, DSIB macro stress testing in conjunction with the Bank of Canada, examination of interconnections between regulated entities and the shadow banking sector, issuance of a draft Operational Risk Management guideline, cross-system review of compensation practices and monitoring of the progress of regulated entities with respect to the development of their cyber security programs.
Priority B: Enhancing Supervisory Processes
In order to remain effective as a supervisor, OSFI must continue to evolve and enhance its own supervisory practices and training in response to changes in the economy and the financial system as well as to meet changing international standards.
Support the implementation of updated supervisory methodology and processes with the right enabling technology.
Ensure that the application of guidelines and methodology and the implementation of supervisory activities are risk-based and scaled to the size and complexity of institutions.
Articulate OSFI’s tolerance for the level of risk undertaken by financial institutions and how the allocation of regulatory and supervisory resources will be guided by that tolerance. OSFI’s risk tolerance statement will consider both FRFIs’ need to compete effectively and take reasonable risks as well as the effect that such institution(s) could have on public confidence in the Canadian financial system should they encounter financial difficulties (or failure).
Over the course of the year, OSFI embarked on a project to review its supervisory processes, tools and related technologies. Work continued to review the application of guidelines and methodology to ensure that OSFI’s expectations remain risk-based and scaled to the size and complexity of financial institutions. Work was also initiated to develop a Risk Tolerance Framework to assist in prioritizing supervisory work and to provide guidance in allocating supervisory staff across the office as required.
Priority C: Completing the Post-Crisis Reform Agenda
A number of reforms have been agreed to internationally in the wake of the global financial crisis. It is important that those reforms be understood by OSFI and, to the extent they enhance our domestic supervisory practices, be incorporated into the Canadian regulatory and supervisory frameworks.
Key Supporting Initiatives
(Basel III, role of capital models, large exposures guidance)
(Solo capital requirements)
(Work is ongoing with respect to the review of business models)
(e.g. capital frameworks for life insurance and for P&C insurance.)
Accounting, Auditing and Information Disclosure Reforms:
This priority spans several years. Over the course of the year, progress was made towards meeting the priority through a range of initiatives including the development of a more advanced, risk based capital approach for life insurers, a revised Minimum Capital Test for Federally Regulated Property and Casualty Insurance Companies, the issuance of a final guideline on Margin Requirements for Non-Centrally Cleared Derivatives, and the development of a new capital model for mortgage insurers. With respect to accounting, auditing and disclosure reforms, OSFI issued draft guidelines outlining the expectations for regulated entities regarding the application of IFRS 9Footnote 1 Financial Instruments and Disclosures and for deposit-taking institutions regarding the revised Pillar 3 Disclosure Requirements. Significant consultation with the industry was undertaken to ensure that the reforms introduced were appropriate and effective.
Priority D: Maintaining a High-Performing Workforce
In a context of rapid change, focusing on effective change management, learning and development and efficient staffing practices will facilitate continued success in meeting OSFI’s business goals.
Ensuring regular and timely two-way communication with staff.
(Numerous ongoing activities have been implemented [e.g., town halls, employee surveys])
Actively support employees in becoming more productive through better training and development and more effective knowledge transfer.
(Supervision Training Initiative)
Staff vacant positions more quickly.
(Key performance indicators signal that staffing on a more timely basis is improving. Forecasting of time required to staff is occasionally exceeded and is being addressed.)
Continue to plan for, monitor and support the potential impact of organizational and systems changes to minimize operational disruption while maximizing return on investment.
(Change management processes in place for major IT projects; Outcomes Management policy and process in place and being monitored and measured.)
Continue to enhance OSFI’s ability to effectively deploy our resources and respond to change while demonstrating fiscal restraint.
(Developed a new salary management approach to provide additional flexibility in managing resources within fiscal targets.)
OSFI undertook a number of initiatives in 2015-16 to meet this priority. A review was conducted to determine whether OSFI has the framework, structures, and capacities required to be successful in a high change environment. OSFI also established its Compass for Success, consisting offive orientations to provide direction to OSFI employees in the coming years. Updates to the intranet were completed in 2015-16 to ensure that all employees were kept informed on the latest internal initiatives and regulatory activities being implemented externally. Webcast town halls were introduced to simultaneously communicate with all OSFI staff and to enhance communications across OSFI offices. Work was also conducted on the development of a modular training program to establish core and specialized learning for OSFI employees. As well, OSFI pursued the implementation of a structured approach to managing IT investment outcomes with a focus on accountability and benefits for OSFI.
Priority E: Enhancing OSFI’s Corporate Infrastructure
Continuous strengthening of internal systems, processes, and controls will enable OSFI to work more effectively and efficiently.
Develop and implement a new Information Technology strategy to prepare OSFI to adopt proven technologies to support planned business needs.
(Deferral related to the pending release of the new Government of Canada information technology strategy standards and requirements.)
Complete implementation of enterprise-wide information and data management frameworks to facilitate informed decision making and efficiently manage OSFI corporate records.
(Information Management Access to Information and Privacy Awareness in place)
(Establishment of Enterprise Information Management [EIM] Program)
Define the workplace of the future (physical space, systems, etc.) to enhance efficiencies and effectiveness and develop a plan for achieving this as OSFI enters into new office leases.
(A decision was made to stay primarily in existing office locations and there was no capacity to undertake a significant workplace upgrade project.)
Over the course of the fiscal year, significant efforts were initiated towards the achievement of the priority. They include the migration to OSFI’s new electronic document and records management system and the development and implementation of enterprise information management policy instruments and guidance to better enable OSFI employees to utilize and share information. A new cyber security strategy and action plan was also developed in 2015-16. While a significant portion of the workplace upgrade project was cancelled, it was decided, based on the review of physical space requirements, to move forward with the relocation of the Montreal office to slightly larger accommodations in 2016-17.
For more information on organizational priorities, see the Minister’s mandate letterFootnote 2 on the Prime Minister of Canada’s website.
International Financial Reporting Standards
Return to footnote 1 referrer
Note that OSFI is an agency of the Government of Canada and reports to Parliament through the Minister of Finance. The Minister’s mandate letter focuses on priorities within the Finance portfolio and does not directly link to OSFI’s priorities.
Return to footnote 2 referrer