OSFI Introduces Changes to Modernize the Vested Asset Regime for Foreign Insurance Branches
Foreign insurance companies carrying on business in Canada through a branch should be aware of draft revisions to the Canadian vested asset regime which could reduce their administrative burden.
On March 29, 2021 the Office of the Superintendent of Financial Institutions (“OSFI”), introduced three proposed amendments intended to modernize its Securities Administration and Approvals Reporting Unit (“SAAR”) regime. OSFI has invited stakeholders to provide comments by April 23, 2021. OSFI expects to publish its final amendments and implementation schedule in spring 2021.
Under Part XIII of the Insurance Companies Act, a foreign insurance company is required to vest in trust in a Canadian financial institution a margin of its business assets over its liabilities in respect of its insurance business in Canada. This rule provides assurance that foreign companies are able to meet their obligations to Canadian policyholders. It is one tool used by OSFI to support the stability of the Canadian financial system. OSFI has created a standard form agreement, the Standard Trust Agreement (“STA”), to establish the relationship among OSFI, the foreign company, and the financial institution. The STA consists of two forms: Form 541 - The Standard Form Trust Agreement and Form 542 - The Terms and Conditions of the Standard Form Trust Agreement.
Amendment 1: Eligibility of Investment Grade Debt and Securities from the United States as Vested Assets
OSFI proposes to revise Schedule A to Form 542, the list of assets that foreign insurance branches can vest in trust without pre-approval from OSFI, to include investment grade debt and securities from the United States. While OSFI is prepared to accept requests for vested assets outside of this list, OSFI expects that these requests will be made only “in exceptional circumstances.”
The proposed expanded list of permitted assets will include the following:
1. Cash denominated in Canadian dollars or United States dollars
2. Investment grade (i.e. rated at 'BBB' or higher by Standard and Poor's or ‘Baa3’ or higher by Moody's) bonds, notes, and other obligations of the following entities:
The federal Government of Canada;
Canadian provincial and territorial governments;
Agents of the Canadian Government or a Canadian provincial or territorial government whose debts are, by virtue of their enabling legislation, direct obligations of the Crown in right of such federal, provincial or territorial government;
Federally guaranteed obligations issued directly by the United States government;
Canadian corporations; and
United States corporations
3. Common equities and preferred shares of the following entities:
Canadian corporations listed on the S&P/TSX Composite Index;
United States corporations listed on the S&P 500 Index or the Nasdaq Composite Index
The proposed Schedule A will also specify four criteria that assets must meet in order to be eligible to be vested in trust without pre-approval. The assets:
- may include cash or assets in which the branch may invest its funds pursuant to the branch’s investment and lending policies, standards, and procedures;
- must be free of all liens, charges, and encumbrances and may not be used for securities lending purposes;
- other than cash and obligations of the federal Government of Canada, must be liquid tradeable securities deposited with the Canadian Depository for Securities Ltd. (also known as CDS); and
- must be payable in Canadian or United States dollars.
These changes to Schedule A will better reflect OSFI’s risk tolerance for certain asset classes.
Amendment 2: Changes to Information to be Submitted when Vesting Assets in Trust, or Requesting Release of Assets from Trust
When branches in Canada of foreign insurers request to vest in trust non-preapproved assets to trust accounts, or request to release assets from trust accounts, they must submit OSFI Form 298. In order to more efficiently and effectively collect required information, OSFI’s proposed revised Form 298 includes the following changes from the current version:
- Branches must provide a more fulsome description of the asset in question, including quantity, par value, and maturity or interest rate, as applicable;
- The reason given for net release or vesting of non-Schedule A assets must consider the impact on applicable capital ratios; and
- Insurance branches must confirm that the transaction is in accordance with the financial institution’s risk tolerance and/or investment policy.
Amendment 3: Monthly Regulatory Reporting of Assets Held
On or before the fifteenth of each month, trustees that hold assets in trust for foreign insurance companies are required to file with OSFI a statement of assets held, along with their respective market values. OSFI proposes to standardize these filings by requiring submission via its Regulatory Reporting System, which is still under development and is expected to roll out later this year. Trustees will be asked to report the type of asset held, security description, interest rate, maturity date, issuing currency, price, par value, and market value, which is a material increase over the current monthly disclosures.
As noted above, OSFI has invited the public, including the industry, to comment on these proposals by April 23, 2021 and expects to publish its final amendments and implementation schedule in Spring 2021.