OSFI Issues Draft Guideline Updating Governance and Supervision of Foreign Financial Institutions Operating in Canada on a Branch Basis
On October 27, 2020, the Office of the Superintendent of Financial Institutions (“OSFI”), Canada’s federal regulator of financial institutions, released its draft Guideline E-4, Foreign Entities Operating in Canada on a Branch Basis (the “Draft Guideline”) and launched a public consultation relating to the Draft Guideline. Comments are due by December 18, 2020. OSFI expects to issue the final Guideline E-4 in the spring of 2021.
This updated guidance sets out OSFI’s expectations for the governance and supervision of Canadian branches of foreign banks and foreign insurers (collectively, “Branches”).
When enacted, the Draft Guideline will replace the existing guidelines E-4A Role of the Chief Agent and Record Keeping Requirements (applicable to foreign insurers) and E-4B Role of the Principal Officer and Record Keeping Requirements (applicable to foreign banks).
The Draft Guideline is intended to better reflect the responsibilities of the foreign entity and its management in overseeing the day-to-day operations of its business in Canada. The Draft Guideline also reflects new amendments to the requirements in Canada’s Insurance Companies Act (“ICA”) and Bank Act (“BA”) relating to location of records. These amendments are consistent with the Canada-United States-Mexico Trade Agreement and are set to come into force in July 2021.
The Draft Guideline sets out OSFI’s expectations in three substantive areas: branch management, administration of the business in Canada, and supervision of branches.
Existing Guidelines E-4A and E-4B focus on the role and accountability of the chief agent, with respect to foreign insurer branches, and the principal officer, with respect to foreign bank branches, in the oversight and management of the business of the Branch. The Draft Guideline broadens the accountability and responsibility for overseeing the business in Canada to “Branch Management”. OSFI expects Branch Management to have an in-depth understanding of the Branch’s operations in Canada and of Canadian laws and regulations and OSFI guidelines applicable to the Branch’s operations.
In the Draft Guideline, Branch Management is not defined, but OSFI expects that the composition of this group would be commensurate with the size and complexity of the entity’s federally regulated business in Canada. In particular, Branch Management consists of individuals who have the authority and responsibility of overseeing the business in Canada for, or on behalf of, the foreign entity. Branch Management may include the chief agent or principal officer, as applicable, and other senior officers of the foreign insurer or foreign bank, whether located in Canada or elsewhere, such as the home office, or a branch of the entity in a different country.
OSFI expects to be informed of the members of Branch Management and their qualifications. OSFI also expects to be notified in advance of proposed changes to the members of Branch Management and to be notified of any “circumstances that may adversely affect” the suitability of members of Branch Management.
Through the Draft Guideline, OSFI’s expects that Branch Management will be responsible for the implementation and oversight of the key elements of the business, including:
- Business objectives, strategies and plans for the Branch;
- Risk management policies and procedures of the Branch;
- Controls to manage the risks pertaining to the business in Canada;
- Policies and procedures to manage the Branch’s assets and liabilities; and
- Independent assessments of the adequacy and effectiveness of these controls, policies and procedures, which may be provided by internal audit or risk management or qualified third parties.
OSFI expects Branch Management to have a thorough understanding of Canadian legislation, regulations, guidelines applicable to the Branch, and any other supervisory or regulatory matters related to the foreign entity’s federally regulated business in Canada that is carried on through the Branch. OSFI expects Branch Management to receive comprehensive and frequent reports, sufficient to satisfy these expectations.
Assuming that a version of Guideline E-4 substantially similar to the Draft Guideline is adopted, foreign banks and foreign insurers should consider adopting a policy that addresses OSFI’s expectations of Branch Management. This policy might specify who will be part of Branch Management, their individual and collective responsibilities, how they will work together to discharge their responsibilities, and the requirements for internal reports to Branch Management. We expect that members of Branch Management will be subject to OSFI Guideline E-17 Background Checks on Directors and Senior Management of [Federally Regulated Entities], to which principal officers of foreign banks and chief agents of foreign insurers are currently subject.
In addition, foreign banks and foreign insurers should review their existing policies and procedures to determine what changes should be made, including those relating to approvals and reporting requirements.
Administration of the Business in Canada
Arrangements with the Foreign Entity’s Home Office
The Draft Guideline reiterates OSFI’s current expectation that the Branch document in writing any material outsourcing arrangements between the Branch and the foreign entity’s home office; this will become an obligation of Branch Management after the Draft Guideline takes effect. In particular, the Draft Guideline requires that arrangements that involve the flow of funds between the foreign entity’s home office and the Branch be clearly documented and that the details of these arrangements be provided to OSFI. Branch Management should provide OSFI with 30 days’ advance notice of any proposed fund transfer, or series of proposed fund transfers, to the foreign entity’s home office that deviate materially from the documented process provided to OSFI.
These written agreements are expected to satisfy the requirements of OSFI Guideline B-10 Outsourcing of Business Activities, Functions and Processes.
The ICA and BA require that that Branches prepare and maintain certain records regarding their business in Canada (the “Records”). However, the Draft Guideline moves from the prescriptive, rules-based approach adopted in Guidelines E-4A and E-4B to a more principles-based approach.
Where Guidelines E-4A and E-4B list the types of records engaged by the ICA and BA requirements, the Draft Guideline does not set out the records to be maintained. Rather, the Draft Guideline specifies that the Records must be accurate to the end of each business day, and sufficiently detailed to enable OSFI to examine the business of the Branch. In the event that the Superintendent of Financial Institutions takes control of the Branch’s assets in Canada, the Records need to sufficiently detailed to allow OSFI to manage the Branch’s assets in Canada prior to the appointment of a liquidator, and to allow a liquidator to liquidate the Branch’s assets in Canada.
Where these records are stored electronically, they must be capable of being reproduced in intelligible written form within a reasonable period of time. OSFI expects these Records to be accessible and intelligible without incurring additional costs and using readily available commercial applications. Providing certain types of information, such as reinsurance arrangements or files on more complex activities, electronically may not constitute sufficient delivery provided for OSFI’s review. OSFI may request that the original hard copy be available at the Branch, as needed.
Branches of foreign banks are required to keep copies of the Records at the principal office in Canada, or at any other place in Canada that the principal officer of the Branch deems fit. Branches of foreign insurers are required to keep copies of the Records at the chief agency of the foreign company in Canada. If the Records are in electronic form, complete copies must be kept on a computer server physically located at the places stipulated in the BA and ICA.
The Draft Guideline notes that certain Branches are exempt under the BA and the ICA from the requirement to keep copies of the Records at the specified places in Canada. In those circumstances, the Branch is required to provide OSFI with “immediate, direct, complete and ongoing” access to the Records that are stored outside Canada.
Supervision of Branches
OSFI supervises the foreign entity’s federally regulated business in Canada, while the home country regulator is the foreign entity’s primary regulator.
OSFI’s Supervisory Assessment
The foreign entity is accountable to OSFI for its Canadian business, including its compliance with federal legislative and regulatory requirements. This accountability is satisfied by Branch Management. OSFI expects Branch Management to be knowledgeable of the results of OSFI’s supervisory reviews and to develop and oversee an appropriate response to OSFI’s expectations, including those arising out of supervisory reviews.
OSFI’s view is that open, ongoing communication between Branch Management and OSFI helps promote the mutual trust and confidence required for effective supervision. As part of its supervision, OSFI will conduct discussions with Branch Management to assess their oversight of their federally regulated business in Canada. The Draft Guideline sets out OSFI’s expectations to be notified promptly of substantive issues and changes affecting the management and operations of the Branch, and that Branch Management will respond in a timely and thorough manner to all communications and requests for information from OSFI.
Legislative Requirements and Supervisory Expectations
The Draft Guideline references OSFI’s expectations that all foreign entities operating in Canada on a branch basis remain, at all times, in compliance with the legislative requirements of the BA and ICA, as well as the supervisory and regulatory expectations set out in OSFI guidance, including the Draft Guideline.
Where OSFI is of the view that the foreign entity is not meeting these requirements and expectations, OSFI may apply additional supervisory and regulatory measures to the foreign entity in respect of its Branch.
As noted above, OSFI has called for comments on the Draft Guideline to be submitted by December 18, 2020. OSFI has advised that it expects to issue the final version of the new Guideline E-4 in spring 2021. OSFI has advised that it will update its risk management and capital guidance to make changes consistent with the Draft Guideline, similar to the approach OSFI took when it updated the Corporate Governance Guideline in 2018.
Clients looking to discuss the Draft Guideline, a potential submission to OSFI in respect of the Draft Guideline, or the compliance and record management regimes, are invited to reach out to the writers.