## _cr1430 ## Source details **Canonical URL:** [_cr1430](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1430.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1430.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1430.pdf.json) --- ### Summary of Compliance with Basel Core Principles (BCPs) - Canada has a very high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - OSFI employs risk based, proportionate, and “close touch” supervisory practices that are well structured, forward looking, and dynamic. - Entry to the Canadian market is subject to demanding prudential entry standards. - Potential frailties: - The Bank Act could better distinguish OSFI’s and the Superintendent’s prudential responsibilities from those of the Minister. - OSFI could sharpen reporting and notification obligations in acquisition and ownership of banks, related party transactions, and large exposures. ### Assessment scope, methodology and context - Assessment conducted as part of the 2013 FSAP update; IMF mission visited Canada from June 12 to 28, 2013. - Canada assessed against the BCP methodology issued by the BCBS in September 2012. - Canadian authorities chose assessment against both Essential Criteria and Additional Criteria; assessments are qualitative. - Assessment focused on OSFI as supervisor of the banking system; did not cover provincial deposit-takers or other financial intermediaries. - Extensive review of laws, rules, guidance, supervisory documents and meetings with OSFI, BoC, Department of Finance, auditing firms, and banking participants. ### Key banking-sector findings - Market structure and mandate: - Banking system is highly concentrated in six domestic players with limited foreign presence. - OSFI’s mandate emphasizes early intervention within a risk tolerance framework that does not seek a zero failure regime. - Powers and approach: - OSFI has comprehensive supervisory powers but uses legal intervention sparingly to preserve close relationship supervision. - Cooperative domestic and international arrangements are well established; cooperation with FINTRAC on AML/CFT is excellent but OSFI lacks power to impose penalty fines for AML/CFT weaknesses. - OSFI is a proactive early adopter of international reforms (Basel 3, D-SIBs) and articulates expectations via guidelines rather than legal regulations. - Supervisory style and data: - Supervisory style is “close touch”; supervisory approach identifies significant activities, is forward-looking and links risk analysis to intervention rating and stages. - Gaps exist in prudential data for large exposures and related party lending; OSFI maintains a database of larger banks’ exposures above $10 million but no formal regulatory return covering all banks for large-exposure compliance. - OSFI publishes financial data on banks but its data access tool does not facilitate time-series or peer analysis or flexible access (for example, via spreadsheet). ### Transfer of significant ownership and major acquisitions - Transfer of ownership: - Banks must submit an annual “Return of Shareholders” but this does not always identify ultimate beneficial shareholders. - No specific requirement exists for banks to notify OSFI of material adverse changes affecting suitability of a major shareholder or controller. - Risks from these notification gaps are managed within supervisory relationships; risk negligible for widely held banks but not for smaller institutions. - Major acquisitions: - Bank Act sets limits and requires Ministerial approval for major acquisitions; licensing is a two-step process requiring OSFI and Minister approval, with Minister’s approval not sought unless OSFI has made a favourable prudential determination. - OSFI prepares prudential assessments and recommends approval only if satisfied; unclear that a “prudential veto” is securely in place. - No approval required for acquisitions made through a foreign or provincially regulated subsidiary—exposes OSFI and banks to risk if foreign regulators apply different standards or powers. ### Capital adequacy, internal models and systemic bank measures - Capital and internal-model oversight: - OSFI has fully adopted Basel II and Basel III and retained its own leverage ratio requirement in addition to Basel risk-based ratios. - Canada established a D-SIB regime consistent with BCBS standard and will impose a 1 percent capital surcharge, effective in 2016. - OSFI implements rigorous review and approval of banks’ internal models; recent IRB credit model reviews found deficiencies and OSFI communicated there will be no capital reductions from modeling without associated improvements. - Credit risk and problem assets: - Credit risk supervision is effective and forward-looking with regular detailed on-site reviews and stress testing. - Little published OSFI guidance on credit risk management and problem asset management; recommendation to develop comprehensive guidance in line with international standards. - Concentration and related-party exposures: - OSFI imposes a 25 percent of capital limit on large exposures; limit for subsidiary banks is 100 percent of capital. - Bank Act limit on aggregate related party exposures to directors and officers is 50 percent of capital. - No formal regulatory return for large exposure limit compliance covering all banks and no clear notification threshold for action; OSFI maintains an exposures database for amounts above $10 million. ### Supervisory powers, staging and consolidated supervision - Corrective powers and staging: - OSFI has wide corrective and sanctioning powers and uses a structured, staged intervention approach developed with CDIC emphasizing early intervention and legal case building at each stage. - Recommendation: institute post facto reviews of staging cases in addition to interim reviews to ensure appropriate momentum through staging. - Consolidated supervision and home-host relations: - Strong legal/regulatory framework for consolidated supervision; emphasis on group risk distribution, risk management and information flows. - OSFI requires solo entity information on parent banks for systemic banking groups but otherwise structures work around “significant activity.” - Recovery and resolution planning required greater legal-entity scrutiny; home-host relationships are strong for significant overseas relationships and collegiate relationships are improving with CDIC. ### Risk management, liquidity, market and operational risk - Risk management oversight: - High standard in scope, depth and quality; specialist teams and peer comparison used. - OSFI operates at a principles-based level and could issue a more comprehensive suite of risk management standards (recommendation). - Liquidity: - Strong focus since the crisis; OSFI developed its own liquidity measure and raised expectations toward Basel III measures; much recent supervision for large banks conducted off-site—recommendation to maintain regular on-site coverage. - Market and operational risk: - Market risk supervision for large banks appears comprehensive; operational risk program is strong with dedicated technology risk experts but no overarching OSFI guidance on operational risk—targeted guidance used. ### AML/CFT and supervisory gaps - FINTRAC FATF review identified concerns with FINTRAC’s supervisory practices and lack of enforceable customer due diligence requirements in the PCMLTFA. - Under BCP assessment minor deficiencies remain; greater clarity or focus desirable in some areas. - OSFI is not designated as competent authority for AML/CFT and lacks power to impose penalty fines for AML/CFT weaknesses. ### Key banking-sector recommendations (selected) - Principle 1: - Explore strengthening enforceability of guidelines through statutory changes to OSFI powers under the Bank Act. - Consider whether key prudential standards should migrate to the format of a regulation. - Principle 2: - Codify the “prudential veto” clearly in the Bank Act for all approvals where prudential considerations are relevant (for example, transfer of ownership and investment). - Consider exempting supervisors from the government’s fiscal controls and administrative guidance to enhance OSFI’s financial autonomy. - Principle 3: - Put in place more frequent and structured arrangements to ensure relevant information is shared actively and proactively between provincial and federal authorities. - Transfer of ownership and reporting: - Institute a standardized form for annual reporting of shareholdings and institute annual check on ultimate beneficial ownership. - Introduce specific requirement for banks to notify OSFI of material adverse changes affecting suitability of a major shareholder or controller. - Amend Bank Act to introduce approval or notification requirement when acquisition is made through a foreign or provincially-regulated subsidiary. - Supervisory reporting and data: - Review prudential data needs for ongoing supervision, especially for recovery and resolution planning and solo entity focus. - Strengthen large exposure reporting and monitoring regime, update Large Exposure Guideline (dated 1994) and reconsider higher exposure limit for subsidiary banks. - Establish a formalized regime for monitoring related-party transactions including regular regulatory reporting and consider lowering the 50 percent of capital limit for directors and officers. ### Insurance sector assessment — observance and framework - Overall: - Canadian regulatory regime for insurance has a high level of observance with the Insurance Core Principles (ICPs). - OSFI’s risk-based Supervisory Framework facilitates structured and comprehensive supervisory risk assessments; industry regards OSFI supervisors highly. - Distinguishing strength: application of OSFI’s regime on a consolidated basis to each operating Federally-Regulated Insurance company (FRI). - Financial requirements and valuation: - Robust requirements on valuation of technical provisions and assets; consistent economic basis and margins for adverse deviation. - Separate capital adequacy frameworks for Life and Health (L&H) and Property and Casualty (P&C) capturing material risks. - Areas for improvement: - Strengthen legal capacity and operational autonomy of supervisors (empower supervisors to issue enforceable rules administratively; update laws to separate prudential decisions from national interest issues). - Adopt transparent and consistent regulatory regime for group-wide supervision and empower OSFI to take measures at holding company level. - Improve prudential and COB standards and supervision of insurance groups; enhance reporting granularity and intra-group transaction reporting. ### P&C industry specifics and solvency metrics - Market and exposures: - P&C industry writes almost exclusively domestic risks; motor insurance is the dominant line. - Ontario automobile insurance accounts for about 25 percent of P&C industry premiums. - Industry experienced its third straight year of catastrophe-related insurance claims above Can$1 billion. - Mortgage insurance market shares: - CMHC: about 70 percent market share - Genworth Financial Mortgage Insurance Company Canada: 25 percent - Federal government guarantees 90 percent of a private insurer’s residential mortgage loans in event of insolvency. - Solvency metrics: - L&H minimum ratio: 120 percent - P&C minimum ratio: 100 percent - OSFI’s supervisory target for both classes: 150 percent - Stress and key risks: - L&H FRIs face protracted low interest rates, volatile equity markets, slow economic growth, reinvestment risk from legacy portfolios. - P&C FRIs face difficult investment conditions and significant natural catastrophe exposures; 2012 OSFI standardized stress test on earthquake identified insured losses of up to $32 billion depending on scenario. - Mortgage insurers exposed to tail events correlated to housing market and macro risks. ### Insurance-sector recommendations (selected) - Strengthen supervisors’ legal and operational autonomy; empower supervisors to issue enforceable rules by administrative means. - Adopt transparent and consistent group-wide supervision regime with clear definition of group scope and prudential/market conduct requirements. - Enhance OSFI guidance on investments, valuation (credit spreads, non-fixed income investments) and ORSA finalization and early implementation expectations. - Increase granularity of solo-level reporting and standardize intra-group transaction reporting; broaden related party transaction reporting scope. ### Securities markets and provincial regulators - Market structure and size: - Total market capitalization of Canadian equity market at end-2012: nearly $2.2 trillion, or about 121 percent of GDP. - Nominal value of total bonds outstanding at year-end 2011: just under $2.2 trillion (approximately 122 percent of GDP). - Mutual fund assets under management as of December 2012: $849.7 billion. - ETFs quoted market value on TSX in 2012: $56.4 billion from 265 funds. - Canadian hedge fund assets estimated at $31 billion. - Provincial regulators: - Four largest provinces (Alberta, British Columbia, Ontario and Québec) supervise roughly 95 percent of the market; these agencies are operationally independent and fully self-funded. - Provincial regulators have comprehensive powers including rulemaking, registration, supervision and enforcement; AMF uses independent tribunal BDR for adjudication. - CSA and harmonization: - CSA is a non-statutory association; Secretariat has six staff. - There are currently 40 national and multilateral instruments; most aspects harmonized though differences remain (derivatives enabling legislation, certain prospectus exemptions, registration exemptions for EMDs in northwest jurisdictions, registration of non-resident IFMs). - Passport system and SROs: - Passport system implemented for issuers, CIS, intermediaries and CRAs; Ontario has not joined but an interface exists extending OSC decisions. - SROs: IIROC (investment dealers and market surveillance), MFDA (mutual fund dealers), CSF (Québec), MX and NGX for derivatives and energy markets. ### Securities regulation findings and recommendations (selected) - Overall high level of IOSCO Principles implementation; provincial regulators have robust powers and increasing harmonization. - Challenges include enhancing coordination between regulators, building specialized staffing capacity, improving quantitative analysis and increasing on-site inspections. - Recommendations include: - Continue addressing remaining harmonization issues (derivatives, prospectus exemptions, EMD registration). - Strengthen crisis management arrangements and protocols, including simulation exercises and involvement of OSFI for large investment dealers within banking groups. - Consider enhancing prudential framework for use of uninvested client cash and extend custodial requirements where appropriate. - Monitor and consider strengthening CPAB enforcement tools and transparency. ### Authorities’ responses (summary) - Canadian authorities (federal and provincial regulators) expressed appreciation for the IMF assessment, share view of high observance with BCPs, ICPs and IOSCO Principles, and will consider IMF recommendations in light of initiatives planned or underway. - Securities regulators emphasize continued harmonization while preserving jurisdiction-specific tailoring; regulators defend current on-site inspection levels and note progress in enforcement and cooperation with criminal authorities. - Insurance and banking authorities acknowledge recommendations and note feasibility considerations given division of federal/provincial responsibilities. *International Monetary Fund staff summary and excerpts from the Financial Sector Assessment Program — Canada (content unit _cr1430).* ### 1. Summary of Compliance with BCPs _____________________________________________________________ 8 ### _cr1430 - 1. Summary of Compliance with BCPs _____________________________________________________________ 8 ### A. Summary - Canada has a very high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - The Canadian banking supervisor (OSFI) employs risk based, proportionate, and “close touch” supervisory practices that are well structured, forward looking, and dynamic. - Entry to the Canadian market is subject to demanding prudential entry standards. - Potential frailties: - The Bank Act could better distinguish OSFI’s and the Superintendent’s prudential responsibilities from those of the Minister. - OSFI could sharpen reporting and notification obligations in acquisition and ownership of banks, related party transactions, and large exposures. ### B. Introduction - The assessment is part of the 2013 FSAP update for Canada. - The assessment of OSFI was conducted during an IMF mission that visited Canada from June 12 to 28, 2013. - Canada was assessed against the BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012. ### C. Information and Methodology Used for Assessment - The Canadian authorities chose to be assessed and rated against both Essential Criteria and Additional Criteria. - The BCP Methodology uses essential and additional criteria; assessments are qualitative. - The last full BCP assessment was conducted in 2000; a targeted assessment of four principles was carried out in 2008. The methodology was revised in 2006 and again in 2012. - The assessment focused on OSFI as the supervisor of the banking system and did not cover regulation and supervision of other financial intermediaries at federal or provincial level. - The assessment team reviewed laws, rules, guidance, and held extensive meetings with OSFI, BoC, Department of Finance, auditing firms, and banking sector participants. - The authorities provided a comprehensive self-assessment, responses to questionnaires, and facilitated access to supervisory documents and files. - The assessment recognized proportionality: supervisory practices should be commensurate with the complexity, interconnectedness, size, risk profile, and cross-border operations of supervised banks. ### D. Key Findings - Canada’s banking system is highly concentrated in six domestic players, with limited foreign presence. - OSFI’s mandate emphasizes early intervention while operating within a risk tolerance framework that does not seek a zero failure regime. - OSFI has comprehensive supervisory powers but uses legal intervention sparingly to preserve the effectiveness of close relationship supervision; this approach requires early identification of failures and timely resolution of supervisory issues. - OSFI maintains a close and cooperative approach with other authorities domestically and internationally; cooperation with FINTRAC on AML/CFT is excellent but OSFI lacks power to impose penalty fines for AML/CFT weaknesses—revision to the Bank Act would remedy this. - OSFI is a proactive early adopter of international regulatory reforms (e.g., Basel 3, D-SIBs) and articulates expectations via guidelines rather than legal regulations. - OSFI operates at a relatively principles-based level and could issue a more comprehensive suite of risk management standards. ### Table 1. Summary of Compliance with BCPs — Core Principle Comments (selected) - 1. Responsibilities, objectives and powers - OSFI has the sole legal mandate for the supervision of banks in Canada. - The Bank Act provides a wide range of powers and is subject to mandatory five-year revision to remain current. - 2. Independence, accountability, resourcing and legal protection for supervisors - OSFI is a government agency whose formal head is the Minister of Finance; operational independence is evident in practice. - The Bank Act could better distinguish prudential responsibilities of OSFI and the Superintendent from those of the Minister; a secure veto on prudential grounds is desirable for decisions such as change of control or major acquisitions. - 3. Cooperation and collaboration - Cooperative arrangements domestically and with foreign authorities are well established and effective. - Weaknesses exist in federal–provincial arrangements; touch points with provincial regulators are less well developed and represent a potential frailty. - Full and free flow of information to OSFI is important to fulfill the federal supervisory mandate. - 4. Permissible activities - Under federal law a bank must be incorporated and regulated at the federal level; provincial deposit-taking entities (e.g., Desjardins, Alberta Treasury Branches) fall outside federal scope. - The BCP assessment focuses on the federal level and does not assess provincial deposit-taking entities. - 5. Licensing criteria - Entry is carefully vetted; OSFI’s risk tolerance for new entrants is low and focused on prudential and national security considerations. - Licensing is a two-step process requiring OSFI and Minister approval; the Minister’s approval cannot be sought unless OSFI has made a favourable prudential determination. - After licensing, OSFI does not carry out an ongoing fit and proper assessment of new directors and senior management. *Source: BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION — Canada, assessment as part of the 2013 FSAP update.* ### 6. Transfer of significant ### 6. Transfer of significant ownership ### Transfer of ownership (Section 6) - Banks must submit an annual “Return of Shareholders” but this filing does not always identify ultimate beneficial shareholders. - No specific requirement exists for banks to notify OSFI of material adverse changes affecting the suitability of a major shareholder or controller. - The risks from both notification gaps are managed within the supervisory relationship; risk is negligible for widely held banks but not necessarily for smaller institutions. - The issue of a “prudential veto” in respect of approvals granted by the Minister is relevant to this principle. ### Major acquisitions (Section 7) - The Bank Act sets limits and requires Ministerial approval for major acquisitions by banks. - Where Ministerial approval is required, acquisition and investment regime is implemented through OSFI and the Minister; OSFI prepares prudential assessments and recommends approval only if satisfied. - OSFI assesses prudential soundness including future supervisability of the group post-acquisition. - It is unclear that a “prudential veto” is securely in place. - No approval is required for acquisitions made through a foreign or provincially regulated subsidiary, exposing OSFI and banks to risk if foreign regulators apply different standards or powers. ### Supervisory approach, techniques, and reporting (Sections 8–11) - OSFI has developed a supervisory approach that: - Identifies significant activities within firms. - Incorporates a forward-looking time dimension. - Marries risk analysis to supervisory outcomes communicated via an intervention rating and “stages” of supervisory intensity. - Supervisory style is “close touch” with high standards and accessible, consultative interaction with industry. - Risk of close touch: potential loss of direction/momentum; OSFI must guard against being slow to be assertive. - OSFI receives standard prudential data, management information and ad hoc data; gaps in prudential data relate to large exposures and related party lending (see CPs 19 and 20). - OSFI makes financial data on the banks publicly available on its website but should ensure its reporting-review process keeps pace with needs. - OSFI has wide corrective and sanctioning powers under the Bank Act and employs a structured, staged intervention approach developed with CDIC, emphasizing early intervention and building legal cases at each stage. - Staging allows intensification of restrictions (limitation on business, higher capital etc); institutions may remain staged while remedial action proceeds and OSFI must maintain pressure to make meaningful progress on credible timelines. ### Consolidated supervision and home-host relationships (Sections 12–13) - OSFI has a strong legal and regulatory framework for consolidated supervision applied consistently. - OSFI emphasizes distribution of risks through the group, strong risk management, internal controls and information flows. - OSFI requires solo entity information on parent banks for systemic banking groups but generally places less emphasis on individual banks within groups, structuring work around “significant activity.” - Recovery and resolution planning has required greater legal-entity scrutiny and has “shone a light” on issues needing prudential assessment. - OSFI acts primarily as a home supervisor; it monitors overseas bank evolution and allocates supervisory resources accordingly. - Home-host relationships are strong for significant overseas relationships; collegiate relationships are growing in confidence and effectiveness, with coordinated work on crisis management, resolution and recovery with CDIC. ### Corporate governance, risk management process, and supervisory expectations (Sections 14–16, 25–26) - OSFI supervises corporate governance comprehensively with frequent director contact and a centralized corporate governance supervision unit. - Risk management supervision is high standard in scope, depth and quality; supervisors rigorously assess inherent risk and risk management quality, with specialist teams and peer comparison. - OSFI operates at a principles-based level and issues limited detailed written guidance; existing standards are inconsistent in format (guidelines vs. advisories) and do not comprehensively cover all risk areas. - Recommendation: OSFI could provide a comprehensive suite of risk management standards (potentially high level or based on BCBS guidance). - OSFI takes a proactive and conservative approach to capital adequacy: - Supervisors regularly assess capital management and use stress testing. - OSFI has fully adopted Basel II and Basel III and accelerated timelines for full implementation. - OSFI retained its own leverage ratio requirement in addition to Basel risk-based ratios. - Canada established a D-SIB regime consistent with BCBS standard and will impose a 1 percent capital surcharge, effective in 2016. - OSFI implements a rigorous program to review and approve banks’ internal models; recent credit risk IRB model reviews found deficiencies and OSFI communicates that there will be no capital reductions from modeling without associated improvements in risk measurement and management. - OSFI employs a dedicated operational risk team including technology risk experts; it uses BCBS Sound Practice guidance and has issued targeted guidance (e.g., outsourcing). ### Capital adequacy, credit risk, problem assets, concentration and related-party exposures (Sections 16–21) - Capital and internal-model oversight: - OSFI reviews internal models and model validation work is underway with follow-up on identified issues. - Continued vigilance required. - Credit risk supervision: - Effective and forward-looking; regular detailed on-site reviews of significant and higher risk portfolios; active use of stress testing. - No overarching credit risk management guideline has been issued. - Problem assets and provisioning: - Supervisors review loan classification and timeliness during on-site reviews; credit quality indicators monitored closely. - Levels of problem assets in most lending segments remain low; attention to problem asset management processes is critical. - Little published guidance available from OSFI on problem asset management. - Concentration risk and large exposures: - OSFI monitors concentrations and acts when excessive; strong capability via risk surveillance, specialist teams and Emerging Risk Committee. - OSFI imposes a 25 percent of capital limit on large exposures. - OSFI maintains a database of larger banks’ exposures above $10 million, but there is no formal regulatory return for large exposure limit compliance covering all banks or a clear notification threshold for action or closer monitoring. - Limit for subsidiary banks is substantially higher: 100 percent of capital. - Related-party transactions: - By law transactions with related parties are prohibited with key exceptions; explicit board reporting and oversight requirements exist in the Bank Act. - OSFI typically reviews oversight of compliance obligations annually. - No formal regulatory return requires more frequent reporting of related party exposures to OSFI. - The Bank Act limit on aggregate related party exposures to directors and officers is 50 percent of capital, which is very high relative to large-exposure limits and international expectations. ### Country, market, interest-rate, liquidity, operational risk, internal control and audit, and disclosure (Sections 21–28) - Country and transfer risks: - Supervisors monitor key country exposures (for example, Eurozone, U.S. and Caribbean loan books). - Large-bank supervisors obtain reports on largest foreign exposure concentrations. - No specific OSFI guidance issued on management of country and transfer risks to clarify expectations. - Market risk: - Market risk supervision for large banks appears comprehensive, including on-site practice reviews and detailed model review. - Interest rate risk in the banking book: - OSFI issued guidance; banks expected to reflect interest rate risk in ICAAPs; regular off-site monitoring through standard reporting of interest rate shock impacts on earnings and capital. - Liquidity risk: - Strong focus since the financial crisis; banks increased liquidity reserves and adopted more prudent funding profiles. - OSFI developed its own liquidity measure and raised expectations toward Basel III measures; much recent supervision for large banks conducted off-site. - Operational risk: - Strong program with dedicated operational risk team and technology risk experts; regular cross-industry reviews on issues like legacy systems and cyber risks. - OSFI has not issued an overall guidance on operational risk but uses BCBS guidance and has targeted guidance (e.g., outsourcing). - Internal control and audit: - High degree of interaction with internal audit and audit committees; supervisors balance oversight and use of internal audit work without undue reliance. - Financial reporting and external audit: - Strong communication channels with external auditors and ability to leverage their expertise. - Statutory ‘well being letter’ requirements may not cover all prudential matters and may hinder timely communication. - OSFI expects banks to adhere to new BCBS guidance on external audit, including a more generalized reporting requirement on matters of prudential concern. - Disclosure and transparency: - OSFI implemented all Pillar 3 requirements and included enhanced disclosure expectations for Canadian banks. - Canadian D-SIBs expected to adopt Financial Stability Board’s Enhanced Disclosure Task recommendations. - Pillar 3 requirements issued in Advisories rather than a Guideline, giving OSFI greater flexibility. - OSFI could provide greater financial and risk data in more usable formats; the OSFI data access tool is not particularly user friendly and does not facilitate time-series or peer analysis or flexible access (for example, via spreadsheet). ### Abuse of financial services / AML (Section 29) - The last FATF review identified concerns with FINTRAC’s supervisory practices and lack of enforceable customer due diligence requirements in the PCMLTFA. - Under the Basel Core Principles assessment minor deficiencies remain, and greater clarity or focus is desirable in some areas. ### Key recommendations (E. Recommendations — selected items) - Principle 1 (Responsibilities, objectives and powers): - Explore strengthening enforceability of guidelines through statutory changes to OSFI powers under the Bank Act. - Consider whether key prudential standards should migrate to the format of a regulation. - Principle 2 (Independence, accountability, resourcing and legal protection for supervisors): - Codify the “prudential veto” clearly in the Bank Act for all approvals where prudential considerations are relevant (for example, transfer of ownership and investment). - Consider exempting supervisors from the government’s fiscal controls and administrative guidance to enhance OSFI’s financial autonomy. - Principle 3 (Cooperation and collaboration): - Put in place more frequent and structured arrangements to ensure relevant information is shared actively and proactively between provincial and federal authorities (modeled on current formats) to enhance firm- and group-specific supervision and systemic understanding. *International Monetary Fund staff summary of Chapter 6: "Transfer of significant ownership" from the Canada assessment* ### 4. Permissible activities The scope of the federal system does not, and cannot under current law, ### _cr1430 - 4. Permissible activities The scope of the federal system does not, and cannot under current law, ### Banking supervision — recommended actions and expectations - The scope of the federal system does not, and cannot under current law, encompass all deposit-taking entities of significance. The relevant Canadian authorities should assess and as necessary revise laws and arrangements to ensure the soundness and stability of the entire financial system within Canada, and not only the federal aspect of that system. - OSFI should institute a policy of assessing the fitness and properness of all new board members and new senior management executives. (Licensing criteria) - OSFI should consider a standardized form for the annual reporting of shareholdings and should institute an annual check on ultimate beneficial ownership on all institutions in order to obtain comfort that OSFI will have timely notification should indirect holdings or changes in ownership and control—whether increasing or decreasing—take place. (Transfer of significant ownership) - There should be a specific requirement for banks to notify OSFI of material adverse changes affecting the suitability of a major shareholder or controller. It is recommended that at a minimum OSFI introduce an explicit reporting requirement. If necessary, a requirement to file such a report to the Superintendent could be included in the next revision of the Bank Act. - It is recommended that the Bank Act be amended to introduce an approval, or at minimum, notification requirement to OSFI when an acquisition is made through a foreign or provincially-regulated subsidiary. (Major acquisitions) ### Supervisory approach, techniques, and tools - It is recommended that OSFI intensify its analysis of groups from a legal entity based perspective to complement the understanding yielded by the examination of significant activities. OSFI should also review the effectiveness of its communication and coordination with non-bank regulators for entities within the consolidated groups. (Supervisory approach) - It is recommended that OSFI consider whether its internal monitoring systems could be enhanced to further support the overarching, and risk-focused view of the institution to ensure timely actions and progress. (Supervisory techniques and tools) - A requirement should be introduced, through amendment to the Bank Act or otherwise, for a bank to notify OSFI in advance of any material adverse development in the institution. (Supervisory techniques and tools) - It is recommended that OSFI review its prudential data needs to support ongoing supervision, taking into account particularly recent work on recovery and resolution planning which places greater focus on the individual legal entities. (Supervisory reporting) ### Corrective powers, consolidated supervision, and home-host relationships - It is recommended that OSFI institute post facto reviews of staging cases in addition to interim reviews in order to identify how best to ensure appropriate momentum through the staging phase. The authorities should consider whether further legal authority or powers are required to enable them to move more promptly to address situations where a bank’s business model is deemed or proved to be non-viable over a period of time. (Corrective and sanctioning powers of supervisors) - OFSI should require solo data for all regulated banks within the consolidated banking groups where this is not already the practice. (Consolidated supervision) - It is recommended that OSFI require periodic data on intra-group transactions. OSFI should formalize its policy to always make access to parental data and notification of material parental business and governance changes a condition of licensing for those instances where the parent entity is not a regulated entity. (Consolidated supervision) - It is recommended that in its recovery planning, OSFI consider and anticipate the potential needs in a crisis of supervisors in jurisdictions where the Canadian entity is material. (Home-host relationships) ### Risk management, capital, and specific risk areas - OSFI should review its current set of prudential Guidelines relating to risk management against international standards and other OSFI prudential expectations and issue expanded or new guidance to close any identified gaps, particularly in areas such as credit risk. (Risk management process) - Over time, OSFI may wish to consider whether the D-SIB capital surcharge should differ across banks according to their risk or systemic importance. It is recommended that OSFI seek a formal BCBS Basel III FAQ to be published regarding the ‘purchase for cancellation’ provision for Additional Tier 1 and Tier 2 capital instruments. (Capital adequacy) - As discussed under BCP 15, OSFI should develop comprehensive guidance on credit risk management in line with international standards to ensure its expectations and minimum standards are well understood. (Credit risk) - OSFI should consider setting out its expectations with respect to problem asset management in comprehensive guidance on credit risk management, as discussed in BCP 15 and BCP 17. (Problem assets, provisions, and reserves) - It is recommended that OSFI strengthen its large exposure reporting and monitoring regime to include, for example, regular regulatory reporting of compliance and notification of exposures greater than a specified level of capital. OSFI’s Large Exposure Guideline dates from 1994 and OSFI should consider updating its guidance in light of the BCBS project currently underway and to cover concentration risks more generally. OSFI should also reconsider whether the higher exposure limit for subsidiary banks continues to be appropriate. (Concentration risk and large exposure limits) - OSFI should establish a more formalized regime, including regular regulatory reporting, for monitoring related-party transactions. In addition, OSFI should consider whether the Bank Act limit on aggregate related party exposures of 50 percent of capital to directors and officers should be lowered to a level more consistent with the limits on large exposures. (Transactions with related parties) - OSFI should consider issuing guidance documenting its expectations for the management of country and transfer risks. (Country and transfer risks) - OSFI should consider clarifying its market risk management expectations for foreign bank branches and banks with small or no trading books, which are not subject to the Capital Adequacy Requirement Guideline on Market Risk. (Market risk) - OSFI should ensure that, even with significant off-site analysis, reporting and review occurring, supervisors maintain regular on-site coverage of liquidity risk management to verify the effective application of policies and controls in practice. (Liquidity risk) - OSFI should consider issuing more comprehensive guidance on setting out its expectations for operational risk management and covering areas such as business continuity expectations. (Operational risk) ### Disclosure, abuse prevention, and supervisory expectations - As OSFI and the banks view Pillar 3 requirements as minimum required disclosure practice, OSFI should consider issuing Pillar 3 requirements in Guideline format. OSFI may wish to review best practices in other countries and consider publication of time series data sourced from its regulatory returns that would enhance the public understanding of banks’ operations and risk profile. (Disclosure and transparency) - It is recommended that OSFI explicitly state its expectation that banks’ compliance officer (CAMLO) is appointed at the management level. It is also recommended that Guideline (B-10) on Outsourcing of Business Activities, Functions and Processes be amended to more clearly establish the requirement that the screening processes that are in place when the bank is entering into outsourcing relationships will ensure high ethical and professional standards. (Abuse of financial services) ### Authorities’ response (summary) - The Canadian authorities expressed appreciation to the IMF and its assessment team and share the view that Canada, primarily through OSFI, has a very high level of observance with the Basel Core Principles for Effective Banking Supervision (BCPs). - Canada is highly committed to the FSAP process and the insights that the IMF can provide. Canada fully agrees that it is important to continually review and seek to improve the regulatory framework and supervision practices. - The IMF has made a number of observations and recommendations which could further enhance the very high degree of compliance with the BCPs. These will be given consideration by the relevant Canadian authorities, having due regard to the various initiatives currently planned or underway, and taking into account the features of the Canadian regime that contributed to the performance of the Canadian banking system during and post-crisis. ### Assessment of insurance core principles — summary findings - The Canadian regulatory regime for insurance has a high level of observance with the Insurance Core Principles (ICPs). OSFI’s risk-based Supervisory Framework facilitates structured and comprehensive supervisory risk assessments and the industry has a high regard for the professionalism of OSFI supervisors. - OSFI has a generally robust set of financial requirements, including comprehensive requirements on valuation of technical provisions and assets, professional and regulatory requirements applying to the appointed actuary and capital adequacy frameworks, separate for Life and Health (L&H) and Property and Casualty (P&C) business, that capture all material risks. - A distinguishing feature and a strength of OFSI’s regime is its application on a consolidated basis to each operating Federally-Regulated Insurance company (FRI). - There is scope for strengthening the legal capacity and operational autonomy of the supervisors as well as prudential and COB standards and the supervision of insurance groups. Recommendations include: - Empower supervisors to issue enforceable rules by administrative means. - Update laws applying to OSFI and the AMF to separate provisions governing prudential decisions of supervisors from national interest issues. - Amend laws applying to FSCO to limit circumstances under which the provincial government can issue it a policy statement. - Adopt a transparent and consistent regulatory regime for group-wide supervision. - Empower OSFI to take supervisory measures at the level of the holding company and develop/apply a full framework of capital and disclosure requirements to all Canadian solo legal entity FRIs within groups. - Provincial authorities should continue to harmonize their COB regimes and ensure adequate supervisory resources for effective COB supervision. FSCO should be equipped with adequate resources and financial capacity to deal with the size and diversity of the Ontario marketplace. ### Insurance market and institutional setting — key statistics and structure - Insurance penetration and density for the Canadian L&H industry: 3.2 percent and Can$1,687, comparable to advanced markets of 3.6 percent and US$1, 543 as at end-2011. - P&C industry penetration and density as at end-2012: 2.37 percent and Can$1,234; advanced markets averages were 5.0 percent and US$ 2,168 as at end-2011. - Reinsurance penetration and density in 2012: 0.63 percent and Can$330. - Number of domestic employees in the insurance industry: approximately 254,400 at end-2011. - Number of FRIs as at end-2012: 264 (down from 290 in 2008); P&C FRIs accounted for 57 percent of FRIs. - P&C industry assets as a share of total industry assets in 2012: 17 percent. - Number of foreign insurers licensed to operate as branches in Canada: 80. - Number of captive insurers: 23, all based in British Columbia. - Assets held by provincial insurers as at end-2011: Can$75.4 billion, about 11 percent of the assets held by FRIs. Provincial insurers in Québec had more than Can$60 billion in assets. - L&H industry concentration: Manulife Financial Corporation (MFC), Sun Life Financial Inc. (SLF) and The Great West Life Assurance Company (GWL) held just under 76 percent of total life insurance assets in Canada in 2012 at the legal entity level. - Asia represented 19 percent of premiums written in 2012 for the top three L&H insurance groups. - Top-10 P&C FRIs produced 46 percent of total industry premium in 2012. - Assets held by reinsurers: Can$29 billion or 3 percent of the assets of direct insurers. - Intermediaries as at end-2012: approximately 154,000 insurance agents and 45,000 insurance brokers. - Allocation to fixed income securities in L&H investment portfolios: consistently above 65 percent (excluding segregated funds) in the last five years. - L&H investments in real estate (directly and through mortgage loans) as at end-2012: 20 percent of their assets (excluding segregated funds). - Amount invested in private placement debts by L&H FRIs: some Can$20 billion. - Segregated fund assets at the consolidated level as at end-2012: Can$422 billion. - Government and corporate bonds constituted more than 85 percent of the investments of P&C FRIs for the last five years. Almost the entire debt security portfolio was invested in Canadian debt securities. - Some Can$10 billion in provisions for the embedded guarantees are included as technical provisions for non-participating policies. - In the absence of growth, profitability of L&H FRIs has been declining. *Source: IMF Financial Sector Assessment Program — Canada (excerpts from the assessment chapter).* ### 32. The P&C industry writes almost exclusively domestic risks; with motor insurance as the ### _cr1430 - 32. The P&C industry writes almost exclusively domestic risks; with motor insurance as the ### Overview - The P&C industry writes almost exclusively domestic risks; motor insurance is the dominant line of business. - Ontario automobile insurance is the single largest P&C product, accounting for about 25 percent of the premiums of the P&C industry. - The industry experienced its third straight year of catastrophe-related insurance claims above Can$1 billion. ### Market structure and major participants - Canada Mortgage and Housing Corporation (CMHC) is currently one of the largest FIs in Canada. - Federally regulated lenders must insure residential mortgage loans with LTV greater than 80 percent against default with either CMHC or a private mortgage insurer. - Market shares in mortgage insurance: - CMHC: about 70 percent market share - Genworth Financial Mortgage Insurance Company Canada: 25 percent - The federal government guarantees 90 percent of a private insurer’s residential mortgage loans in the event of insolvency. ### Solvency regimes and capital metrics - Solvency regimes differ for L&H and P&C FRIs, including different solvency control levels. - All L&H and P&C FRIs meet the minimum ratios: - L&H minimum ratio: 120 percent - P&C minimum ratio: 100 percent - OSFI’s supervisory target for both classes of FRIs: 150 percent. - The solvency position of the L&H industry has been eroded since 2010 while overall solvency of the P&C industry has remained stable. ### Key exposures and stress scenarios - L&H FRIs face: - Protracted low interest rates - Volatile equity markets - Slow economic growth - Reinvestment risk from legacy portfolios due to long-term liabilities - P&C FRIs face: - Difficult investment market conditions - Significant natural catastrophe exposures - The 2012 OSFI standardized stress test on earthquake identified insured losses of up to $32 billion depending on the scenario. - Mortgage insurers are exposed to potential tail events correlated to the housing market and macro-economic risks. - Wealth management products are a growth area as insurers shift investment risks to policyholders and focus on fee-based income. ### Supervisory framework and responsibilities - Federal and provincial supervisors share responsibilities: - OSFI: prudential supervision of insurers under the federal Insurance Companies Act (ICA) and licensed Canadian branches of foreign insurers; applies consolidated supervision to each operating FRI. - Provincial supervisors: solvency oversight of provincially incorporated insurers; market conduct supervision for all insurers operating within their provinces. - OSFI can examine and report on CMHC’s commercial operations but cannot take enforcement actions against CMHC as it is a Crown corporation; OSFI must report examination results and recommendations to the CMHC’s responsible Minister, the Minister of Finance and CMHC’s board at least once per year. - OSFI and provincial regulators work closely with FINTRAC on anti-money laundering and terrorist financing compliance. - The Canadian Council of Insurance Regulators (CCIR) facilitates coordination amongst provincial supervisors; OSFI participates as an observer. ### Actuarial standards and professional oversight - The Actuarial Standards Board issues technical standards (Standards of Practice). - The Canadian Institute of Actuaries (CIA) issues and enforces professional and ethical standards; only Fellows of the CIA who meet additional OSFI guideline requirements are qualified to sign actuarial reports required by OSFI. - The CIA is a self-regulatory professional body; disciplinary actions are published on the CIA’s website. ### Consumer protection and compensation mechanisms - National adjudication services: - General Insurance OmbudService - OmbudService for L&H insurance - Policyholder compensation schemes cover relevant policyholders of companies incorporated federally or provincially. - For L&H insurance, Assuris (private not for profit) provides compensation in case of failure (defined as the issuance of a winding-up order). - For P&C, membership in PACICC is required by provincial supervisory authorities rather than by OSFI as a licensing condition. ### Key findings (assessment against Insurance Core Principles) - The Canadian regulatory regime has a high level of observance with the ICPs. - OSFI’s risk-based Supervisory Framework facilitates structured and comprehensive supervisory risk assessments. - OSFI supervisors are held in high regard for professionalism; supervisory intervention processes are transparent and support timely intervention. - OSFI has adequate supervisory resources and technical capacity; minor regulatory gaps have been addressed via guidelines and supervision. - OSFI’s financial requirements are generally robust, including: - Comprehensive valuation requirements for technical provisions and assets - Consistent economic basis for valuation across the balance sheet - Margins for adverse deviation - Separate capital adequacy frameworks for L&H and P&C capturing all material risks - Limited use of internal models with a full model approval process and ongoing monitoring - A distinguishing strength: application of OSFI’s regime on a consolidated basis to each operating FRI. ### Areas for improvement and policy recommendations - Strengthen legal capacity and operational autonomy of supervisors: - Consider empowering supervisors to issue enforceable rules by administrative means. - Update laws for OSFI and AMF to separate prudential supervisory provisions from national interest considerations by executive authorities. - In FSCO’s case, limit circumstances under which the provincial government can issue policy statements affecting supervision. - Prudential and conduct-of-business (COB) standards and group supervision: - Adopt a transparent and consistent regulatory regime for group-wide supervision, based on a clear definition of the group. - Include prudential and market conduct requirements at the group level and a consistent approach to group capital requirements and group-wide supervisory work. - Empower OSFI to take supervisory measures at the holding company level. - Develop and apply a full framework of capital and disclosure requirements to all Canadian solo legal entity FRIs within groups. - Strengthen OSFI’s approach in the area of investments. - Provincial authorities should continue to harmonize COB regimes while ensuring adequate supervisory resources. - Ensure FSCO is equipped with adequate resources and financial capacity to deal with the size and diversity of the Ontario marketplace. - Enhance transparency of OSFI’s different approaches to supervising insurance groups. - Address reporting gaps: - Increase granularity of reporting on a non-consolidated basis. - Standardize reporting of intra-group transactions. - Broaden scope of related party transaction reporting to include intra-group transactions with fewer exemptions. *Source: _cr1430 - 32. The P&C industry writes almost exclusively domestic risks; with motor insurance as the* ### 10. Preventive and Corrective The supervisors are empowered to take action against a person who ### _cr1430 - 10. Preventive and Corrective The supervisors are empowered to take action against a person who ### Preventive and Corrective Measures - OSFI’s Supervisory Framework supports early intervention and has published guidance on its approach to taking progressive escalation of actions or remedial measures at each stage of the intervention ratings assigned to FRIs and severity of the situation. - OSFI has adequate powers to initiate timely and proportionate preventive and corrective measures where FRIs are unable or unwilling to adequately address supervisory concerns. - AMF and FSCO have adequate legal authority to take preventive and corrective measures relating to CoB issues. - Measures: conducts insurance business without the necessary Order from OSFI or license from AMF or FSCO. ### Enforcement - All three supervisors have adequate legal authority and tools to take enforcement actions and impose sanctions, in a progressive approach that is commensurate with the severity of the offence. - There are established internal guides as well arrangements to ensure consistent and fair application of enforcement actions and sanctions. - In practice, OSFI rarely takes enforcement actions as its moral suasion has been effective. - FSCO and AMF have taken a number of enforcement actions on market conducts breaches. ### Winding-up and Exit from the Market - Legislation contains extensive provisions for authorities to manage the exit from the market of an insurance company, including Canadian branches of foreign insurers, in an orderly manner. - Policyholders rank above general (unsecured) creditors. - L&H provisions are substantially untested for many years (notwithstanding the failure of a small provincially-incorporated company in 2012). - P&C arrangements have been more often tested, though most failures have been smaller, provincially regulated companies. ### Reinsurance and Other Forms of Risk Transfer - OSFI’s guidelines on reinsurance, recently reissued after a full review, set out extensive standards on the management of reinsurance. - Emphasis on management taking responsibility for assessing reinsurance counterparties rather than relying on third parties; setting limits in line with risk appetite; documenting the approach in a board-approved statement. - OSFI’s policy to require collateral to be posted by foreign reinsurers as a condition of credit being taken for reinsurance enhances security but needs accompanying requirements for FRIs to evaluate residual risks and systematic evaluation by OSFI of supervision arrangements for foreign reinsurers. ### Valuation - Requirements on valuation of technical provisions and assets provide a comprehensive framework of standards, including a consistent economic basis for valuation across the balance sheet and margins for adverse deviation. - Approach is principles-based and provides significant discretion to be exercised by the AA, underpinned by professional and regulatory requirements, oversight, peer review and audit requirements. - Some aspects warrant strengthening: allowances for credit spreads and the extent of discretion in relation to non-fixed income investments. - Continued robust oversight, peer review and audit requirements are important to challenge actuaries’ assumptions and methods. ### Investment - Legislation and guidelines include restrictions on certain investments, hard limits on particular asset classes (with exemptions for the largest insurers) and high-level requirements for prudent investment management. - Valuation and capital requirements incentivize asset and liability matching and require capital for particular asset risks. - Valuation requirements allow FRIs to take account of current yields on assets in reinvestment rate assumptions, creating incentives to invest in higher yielding assets; this needs to be accompanied by a more robust framework for investment in higher risk and more complex assets. ### Enterprise Risk Management for Solvency Purposes - OSFI has extensive guidelines requiring FRIs to identify, measure and manage all material risks, taking into account stress testing results. - Guidelines require insurers to make their own evaluation of capital needs based on their own assessment of risks. - OSFI’s guideline on ORSA requirements, currently a draft standard scheduled to be implemented in 2014, will consolidate and extend this framework and emphasise FRIs taking their own view of overall capital needs, independent of the regulatory framework. - Full implementation will take time, even if FRIs are already improving frameworks based on the draft guideline. ### Capital Adequacy - Capital requirements for FRIs are comprehensive, capturing all material risks and requiring FRIs to hold capital for risks not covered by standard requirements. - The approach is risk-sensitive and encompasses operational risk via additional buffers rather than detailed quantitative requirements. - OSFI requires FRIs to calculate internal capital targets and uses oversight of this process to assess whether capital fully reflects individual risks. - OSFI allows limited use of internal models with a full model approval process and ongoing monitoring. - A distinguishing strength is application on a consolidated basis to each operating FRI, encompassing foreign insurance operations. - Limitations on powers over unregulated companies within a group cause variation in OSFI’s consolidated application across groups. - OSFI is developing requirements for solo legal entity capital for material solo FRIs, but the full capital requirements are not applied at the legal entity level. ### Intermediaries - Provincial supervisors collaborate to harmonize regulatory regimes for intermediaries, with CISRO playing a proactive role. - AMF and FSCO supervise large populations of intermediaries in their jurisdictions. - Ontario and Québec regimes are broadly similar but differ in key areas (e.g., use of SROs). - Licensing criteria and ongoing compliance requirements are clearly established and supported by supervisory guidance. - Regulatory information mainly from renewals, supplemented by third party notifications (SROs, complainants). - Most intermediaries are individuals; no explicit corporate governance requirements for intermediaries, though incorporated entities are subject to general corporate laws; insurance laws impose duties and prohibitions on intermediaries. - AMF conducts routine inspections targeting higher-risk intermediaries. - FSCO’s approach is more reactive, mainly in response to self-declarations of non-compliance or complaints/information received. - Ontario laws require insurers to screen and monitor agents and report non-compliance; complexity arises from agents representing multiple insurers or placing business through MGAs. - CLHIA has industry guidelines on MGAs; trade-offs from a self-regulatory approach must be weighed carefully and ongoing. ### Conduct of Business - CCIR coordinates and promotes harmonization of CoB regimes and developed a risk-based supervision approach adopted by FSCO and influential in AMF’s framework. - JFFMR has reviewed insurers’ and mutual funds’ processes for new products to ensure consumer interests are considered. - Industry associations have voluntary codes of conduct promoting due skill, care and diligence. - Nation-wide Complaint Reporting System accessible by all provincial supervisors (except British Columbia). - Québec: IA, DA and related regulations plus AMF guidelines provide for fair treatment of policyholders, disclosure requirements, promotion of fair treatment culture, product development/promotions, timely and equitable claims and complaints handling, policy servicing obligations, and statutory privacy protection. - FSCO and RIBO have CoB requirements through point of contract completion; resource constraints limit consistent monitoring of point of sale materials. - FSCO and RIBO have issued limited supervisory guidance (except motor insurance) and leverage stakeholder associations for codes of conduct. - FSCO relies heavily on OSFI’s due diligence for corporate governance and background checks on directors and senior management of FRIs, since the vast majority of insurers operating in Ontario are FRIs. ### Public Disclosure - At group consolidated level, disclosure requirements are extensive. - Solo-level disclosure requirements are not as comprehensive, especially regarding disclosure of information on the capital of FRIs. - Application of IFRS to all FRIs ensures consistent standards, but reliance on IFRS risks gaps between standard-setters’ disclosure and regulatory objectives, including providing information to policyholders. - OSFI and the Actuarial Standards Board have addressed many gaps through guidelines and Standards of Practice, but reliance on IFRS requires careful monitoring for divergence. ### Countering Fraud in Insurance - Well-developed federal and provincial legislation enables criminal and regulatory authorities to detect, investigate and sanction insurance fraud. - Cooperation evident, especially on motor fraud in Ontario; provincial Anti-Fraud Task Force initiative noted. - Regulatory requirements on insurers set out in laws and guidelines; fraud controls included in supervisory work by OSFI, AMF and FSCO where material under risk-based approach. - FSCO prioritises motor fraud controls; enforcement action has been taken. ### Anti-Money Laundering and Combating the Financing of Terrorism - OSFI, AMF and FSCO are not designated competent authorities for AML/CFT. - All three have arrangements to communicate with FINTRAC (the Financial Intelligence Unit for Canada and competent authority for AML/CFT) regarding AML/CFT arrangements encompassing all L&H insurers and intermediaries. - Information exchange takes place in practice; awareness of ML/FT risks and importance of compliance is present. - Information exchange with foreign authorities is mainly through FINTRAC, but OSFI may exchange information directly related to overseas operations of Canadian L&H FRIs. - OSFI and AMF go beyond ICP22 by establishing specific guidelines for insurers (no similar guidance for intermediaries) and by integrating AML/CFT compliance into supervisory work. - OSFI has an extensive supervision program and a specialist unit; AMF and FSCO take risk-based and proportionate approaches reflecting international standards and OSFI/FINTRAC work. ### Group-wide Supervision - ICA, IA and OIA do not have an explicit definition of insurance group or scope for group-wide supervision, but supervisors address elements within their legal authority. - OSFI adopts different approaches to group-wide supervision depending on legal authority. - A consolidated supervision approach is applied to L&H FRIs headed by a regulated entity under the ICA. - A L&H holding company can be established under the ICA although none has been established. - For groups headed by non-regulated entities, OSFI’s supervision may be applied indirectly through unpublished contracts or letters of undertaking on a case-by-case basis. - Currently, five of the 17 groups headed by unregulated holding companies have executed such undertakings and the terms vary. - OSFI has no legal authority over non-regulated holding companies and can only use indirect means such as increasing capital in a FRI. - The A2 Guideline: Capital Regime for Regulated Insurance Holding Companies and Non-Operating Life Companies does not apply to holding companies regulated indirectly via a contract or undertaking (ICP 17). - OSFI applies both an indirect approach generally and a direct approach where the holding company is also a (non-operating) insurance company (noted in two of the three major groups). - Example: holding company of one large L&H group is not directly subject to the same capital adequacy requirements as the other two large L&H groups. - Indirect approach outcomes vary depending on negotiated undertakings; negotiation time limits effectiveness with reluctant entities. - AMF recently extended Sound Commercial Practices Guidelines to financial groups and exercises consolidated supervision of insurance groups. - FSCO has not established group-wide market conduct requirements and supervises insurers’ CoB on a legal entity basis. ### Macroprudential Surveillance and Insurance Supervision - OSFI has a well-developed macroprudential supervision framework integrating individual FRI supervision with market-wide risk views and capacity to respond to emerging issues through supervisory action and escalation for discussion with other federal agencies. ### Supervisory Cooperation and Coordination - OSFI has coordination arrangements with domestic and foreign supervisors facilitating effective supervision. - Domestically, OSFI (the Superintendent) chairs the FISC and collaborates closely with FISC members; CCIR facilitates coordination among OSFI and provincial supervisors. - Internationally, OSFI is the GWS for all large Canadian, internationally-active life insurers and has initiated supervisory colleges; OSFI contributes actively as a host supervisor. ### Cross-border Cooperation and Crisis Management - OSFI’s approach to cross-border crisis management is untested in practice but includes information-sharing arrangements beyond IAIS MMOU commitments and cooperation mechanisms including supervisory colleges. - OSFI is well-advanced internationally in applying recovery planning frameworks (from banks) to major insurance groups, though it has not shared these plans with foreign supervisors yet. ### Recommendations (selected items from Table 4) - 1. Objectives, Powers and Responsibilities of the Supervisor - a) Consider the scope to strengthen regulation by providing delegated powers, as are available to many regulatory authorities internationally, to issue enforceable rules by administrative means rather than through legislation; - b) Establish explicit supervisory objectives for group-wide supervision under the relevant primary legislation, supported by adequate legal powers to conduct group-wide supervision. - 2. Supervisor - a) Update the relevant primary legislations to adopt separate legal processes for the prudential decisions of OSFI and AMF from the approval from the executive branch to address national policy objectives and specify the circumstances for the issuance of policy statements to FSCO; - b) Consider exempting the supervisors from the government’s fiscal controls and administrative guidance, as in the case of the BOC, to strengthen their financial autonomy; - c) Review the adequacy of supervisory resources of FSCO and whether FSCO should continue to be subject to the hiring controls set by the Ontario Public Service; - d) Enhance the transparency of OSFI’s different approaches to supervising insurance groups; - e) Establish explicit provisions on public disclosure of the reasons for removal of the President and CEO of AMF and the Superintendent of FSCO. - 6. Changes in Control and Portfolio Transfers - Require FRIs to notify OSFI of a significant decrease in the ownership by a person(s) below the pre-determined control level. *International Monetary Fund — Canada sectoral assessment (excerpt)._cr1430* ### 7. Corporate Governance Set out more extensive guidance on FSCO’s own expectations in relation ### _cr1430 - 7. Corporate Governance Set out more extensive guidance on FSCO’s own expectations in relation ### Corporate governance and market conduct - Set out more extensive guidance on FSCO’s own expectations in relation to corporate governance and market conduct. ### Supervisory review and reporting - Enhance and standardize regulatory reporting of intra-group transactions, supported by a clear definition of the scope of intra-group transactions. - OSFI should also review the level of detail of its reporting requirements applying to solo FRIs. - Equip FSCO with adequate supervisory resources to deal with the size and diversity of the Ontario marketplace. ### Preventive and corrective measures - Strike a good balance between timely staging as a result of persistent concerns, and the need to maintain pressure on the institution to make meaningful progress over a credible and situation-specific appropriate timeline in order to exit staging. ### Winding-up and exit from the market - (a) Examine whether the designation of PACICC by approval of the Minister under the ICA in the same way as Assuris would help promote increased cooperation and early exchange of information between OSFI and the PACICC. - (b) Continue to test procedures for handling a failure of a FRI by further simulation exercises and the development of recovery plans that is already underway for the large L&H companies. ### Reinsurance and other forms of risk transfer - a) Consider adding material on the importance of FRIs assessing and managing liquidity risks arising from reinsurance cessions when revising OSFI guidelines; and - b) Enhance OSFI’s process for evaluating the supervisory regimes applying to major unregistered foreign reinsurers so that it explicitly addresses the supervision of reinsurance in their home jurisdictions. ### Valuation - Strengthen the valuation standards on credit spreads and non-fixed income investments, recognizing that the current ASB review of reinvestment assumptions for life insurance valuation is already addressing the issues. ### Investment - Undertake a review of OSFI’s Prudent Person Approach Guideline, to strengthen the requirements on investments and in particular to add explicit requirements that FRI invest only in assets whose risks it can properly assess and manage and on investments in complex or less transparent forms of instruments. ### Enterprise risk management for solvency purposes - Finalise OSFI guideline on ORSA requirements, which is currently a draft, and set expectations for the early phase of implementation work as soon as possible. ### Capital adequacy - (a) Set out details of OSFI’s approach to groups headed by holding companies in the interests of transparency, till such time as OSFI obtains full powers to apply its regulatory framework to holding companies. - (b) Consider aligning OSFI’s requirements for regulated holding companies more closely to those for regulated operating companies. - (c) Finalise OSFI’s proposed standard for the application of the capital framework on a solo legal entity level and develop a plan for publication of the full approach in due course. OSFI should also establish policy requirements to address, and review its reporting requirements on intra-group transactions for capital management purposes (for example, capital transferability within the group). ### Intermediaries - a) Maintain the positive momentum in promoting appropriate harmonisation of the regulatory regimes and supervisory practices with respect to intermediaries across provinces, e.g. regulatory treatment of client monies; - b) Consider establishing proportionate expectation tailored for intermediaries, focussing on achieving fair treatment outcome for policyholders; - c) Implement the recommendations of the CCIR related to the regulatory treatment of MGAs across provinces; and - d) Ensure that FSCO has adequate resources for effective supervision of intermediaries. ### Conduct of business - Strengthen the current CoB regimes by: - a) Continuing the proactive initiatives by CCIR and JFFMR to enhance consistency of COB regulatory regimes across provinces; - b) Empowering FSCO to issue enforceable rules on product development and promotion as well as require insurers and intermediaries to conduct needs analysis before providing advice and meet policy servicing obligations; and - c) Reviewing the adequacy of supervisory resources of FSCO for regulatory policy formulation and conduct more proactive CoB supervision. ### Public disclosure - a) The authorities ensure that FRIs publish (in a format readily available to policyholders as well as market participants generally) both the information on the financial position of the individual legal entities at the solo level in addition to group consolidated requirements, and information about the FRI’s capital; and that the application of OSFI’s guidelines clearly extends to cover FRIs on an individual as well as a consolidated basis; and - b) Maintain the existing process for monitoring IFRS developments to ensure a timely and appropriate response to these developments and determine whether new standards or changes to existing standards have the required impact on disclosure as well as financial soundness requirements. ### Countering fraud in insurance - While their enforcement work has included action against intermediaries in relation to misrepresentation of insurance cover to a customer, consider the merits of setting out both AMF and FSCO expectations of intermediaries in the area of fraud controls more clearly. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - In relation to intermediaries, consider how best AMF and FSCO should set out their AML/CFT expectations in more detail, drawing on their supervisory work and experience. ### Group-wide supervision - Formulate and implement a clear and consistent regulatory regime for group-wide supervision under the relevant insurance laws. Key elements of the regime should cover the scope of group-wide supervision, including material non-regulated entities; prudential and market conduct requirements at the group level. - Going forward, supervisors be empowered to take necessary remedial and enforcement measures at the level of the holding company, in line with emerging international best practices. ### Macroprudential surveillance and insurance supervision - Priorities which OSFI may want to consider for the future, in addition to finalizing its approach to potentially systemically important FRIs, include: - a) Ensuring that it has access to data sources and continuing to develop the international dimension of its macroprudential work through liaison with other regulators. - b) Considering whether its mainly sector-based approach is adequately complemented by consideration of linkages between banks and insurers; and - c) Extending its consideration of risks arising from system-wide market conduct issues, including reputational risks from non-compliance by FRIs and potential conflict between prudential and market conduct regulation. ### Cross-border cooperation and coordination on crisis management - In developing its approach OSFI should: - a) Continue to carry out crisis management testing and simulations: extending this to an international group would be an appropriate next stage; - b) Ensure that it considers the potential needs in a crisis of supervisors in jurisdictions where the Canadian company is material and anticipates these as far as possible; - c) Review the need for supplementing its existing requirements in relation to stress testing by explicitly requiring FRIs to establish and maintain contingency plans and procedures for use in a going- and gone- concern situation as set out in the ICP. ### Authorities’ response (summary) - The Canadian authorities: - Express appreciation to the IMF and its assessment team for the assessment of the Canadian insurance sector. - Share the view that Canada has a high level of observance with the Insurance Core Principles (ICPs). - Are highly committed to the FSAP process and agree that continual review and improvement of the regulatory framework and supervision practices is important. - Note that the IMF made a number of observations and recommendations which could further enhance compliance with the ICPs; these recommendations will be given consideration by relevant federal and provincial authorities, taking into account initiatives planned or underway and features of the Canadian regime. - Note that some recommendations fall within regulators’ mandates and others are subject to decisions by different levels of government. - Highlight recommendations on Principle 23 related to group-wide supervision, noting advice for a legislated definition of the scope of group-wide supervision and empowerment of supervisors to take remedial measures at the holding company level; suggest the IMF may wish to consider clarity in assessment basis for future work given international standards accept indirect authority over insurance groups and that the principle itself is under review internationally. - Observe that the introduction of ICPs dealing with market conduct issues is relatively new and that a balance between process and outcomes will be important as ICPs and assessment techniques evolve; past experience has not demonstrated a history of significant unaddressed market conduct problems in Canada. ### Assessment of the IOSCO Principles and Objectives of Securities Regulation (summary) - The Canadian framework demonstrates a high level of implementation of the IOSCO Principles. - Provincial securities regulatory agencies have broad powers to regulate and supervise markets; in areas such as enforcement powers these could be considered leading practices. - Provincial regulators have increasingly achieved a high degree of harmonization of their regulatory frameworks and have coordinated supervisory practices. - Key challenges and recommended further action include: - Enhancing coordination between various regulators; - Building additional specialized staffing capacity; - Improving the use of quantitative analysis; - Increasing the number of on-site inspections; - Addressing use of enforcement powers in connection with criminal offenses. - Governance arrangements based on consensus building across several entities might affect timeliness of decision making. ### Assessment scope and methodology highlights - A targeted assessment of the Canadian Securities Market was conducted June 3-28, 2013, as part of the Financial Sector Assessment Program by Ana Carvajal, Monetary and Capital Markets Department. - The assessment covered principles 1, 2, 3, 6, 7, 8, 9, 12, 19, 20, 22, 23, 24, 28, 29, 30, 31, 32, 34, and 35 in their entirety while principles 25 and 37 were partially reassessed. - The assessment relied largely on analysis of the regulatory framework and supervisory practices of the four largest provinces (Ontario, Québec, British Columbia and Alberta), which comprise roughly 95 percent of the activity of the Canadian securities market. - The assessor relied on: (i) self-assessments and a report on market data prepared by OSC, AMF, BCSC and ASC; (ii) review of national instruments, laws, regulations, and documents; (iii) meetings with provincial regulatory leadership and staff and other public authorities; and (iv) meetings with SROs (IIROC, MFDA, CSF, MX), CIPF, market participants, auditing firms, credit rating agencies and law firms. *Source: IMF Financial Sector Assessment (Canada) — content unit _cr1430* ### 62. The nature, structure, resources and powers of the provincial regulators vary. The ### _cr1430 - 62. The nature, structure, resources and powers of the provincial regulators vary. ### Provincial regulators: nature, structure, resources and powers - In the smallest provinces the regulator might still be part of the government, funded by it and with limited resources. - The four largest provinces—Alberta, British Columbia, Ontario and Québec—roughly supervise 95 percent of the market. - These four regulatory agencies are operationally independent and fully self-funded by levies imposed on market participants. - They have comprehensive powers, including rulemaking, registration, recognition, designation, supervision and enforcement authority—not only administrative but also quasi-criminal authority. - In the case of the AMF, adjudication of administrative cases is carried out through an independent tribunal, the Bureau de Décision et de Révision (BDR). ### Canadian Securities Administrators (CSA): harmonization and Secretariat - The CSA is a non-statutory association bringing together all Canadian securities regulatory authorities to improve regulation and supervision of Canadian securities markets. - A Secretariat, located in Montreal, was established in 2004. - The Secretariat currently has six staff in charge of providing logistical support to the CSA committees and managing national databases in the area of securities markets. - The CSA has adopted national and multilateral instruments: there are currently 40 national instruments and multilateral instruments covering areas including issuers, CIS, market places and registrants. - Most aspects of securities regulation have been harmonized; remaining important differences include: - enabling legislation for derivatives, - certain prospectus exemptions, - registration exemptions for EMDs in the northwest jurisdictions, - registration of non-resident Investment Fund Managers (IFMs). ### Supervisory coordination, passport system, and SRO coordination - A passport system has been implemented for issuers, CIS, securities intermediaries and credit rating agencies: - A decision by the principal regulator (usually where the issuer/CIS/securities firm/CRA is domiciled) is automatically extended to other provinces. - Ontario has not joined the passport system; however, an interface was created whereby decisions taken by the OSC as the principal regulator are automatically extended in the rest of the provinces. - Where Ontario is not the principal regulator, the principal regulator acts as the liaison so the system works as a single “window.” - Principal regulator approach applies to on-going supervision, including review of periodic filings and on-site inspections. - SRO coordination: - IIROC and MFDA coordination is based on a principal regulator approach, with one regulator acting as coordinator on behalf of all regulators. - For exchanges, coordination is based on a lead regulator approach, whereby one regulator recognizes the exchange while others grant exemptions. - Enforcement coordination uses joint investigations, joint adjudications and reciprocal orders. - A system of committees serves as a forum to coordinate and discuss topics, set national priorities, and address novel issues. ### Role of Self-Regulatory Organizations (SROs) - Provincial regulators rely largely on SROs for regulation and supervision of the market and participants. - Allocation of responsibilities: - Investment dealers and market surveillance of all equity markets: Investment Industry Regulatory Organization of Canada (IIROC). - Mutual fund dealers (except in Québec): Mutual Fund Dealers Association of Canada (MFDA). - Mutual fund dealers in Québec: under the supervision of the AMF. - Discipline and education of individuals acting on behalf of mutual fund dealers in Québec: Chambre de la Sécurité Financière (CSF). - Non-equity exchanges primarily responsible for market surveillance, including MX and NGX for derivatives markets. ### Constitutional context - A recent decision of the Supreme Court of Canada ratified the provincial nature of securities regulation but recognized a role for the federal government on “matters of genuine national importance and scope going to trade as a whole in a way that is distinct from provincial concerns, including management of systemic risk and national data collection.” ### Market structure — Equity markets - Total market capitalization of the Canadian equity market at the end of 2012 was nearly $2.2 trillion, or about 121 percent of GDP. - Four equity exchanges in Canada: TSX, TSXV, Canadian National Stock Exchange (CNSX), and Alpha Exchange Inc. (Alpha). - There are currently seven ATS trading in equity securities in Canada. - Three ATS trading debt securities; most debt trading is done over the counter. - One securities lending ATS. ### Market structure — Debt markets - Major components: Government of Canada bonds, Canada Mortgage Bonds, provincial bonds and corporate bonds. - Nominal value of total bonds outstanding at year-end 2011 amounted to just under $2.2 trillion (approximately 122 percent of GDP, both in local and foreign currency). - Around one third are corporate bonds, of which a little more than 50 percent was issued by non-financial corporations. ### Market structure — Derivatives markets - MX is Canada’s financial derivatives exchange, listing equity, currency, index and interest rate derivatives. - The OTC derivatives market is concentrated among the big six Canadian banks; majority of transactions involving Canadian market participants are entered into with foreign counterparties. - Globally, Canada accounts for US$18 trillion in OTC derivatives, or approximately 2.8 percent of the global market in 2012, with interest rate swaps and foreign exchange contracts being the dominant products. - NGX is Canada’s largest energy exchange based in Calgary, providing electronic trading, central counterparty clearing and data services to North American natural gas, crude oil and electricity markets. - Intercontinental Exchange (ICE) Futures Canada is Canada’s agricultural exchange, established in 1887 (Winnipeg Grains and Produce Exchange), facilitating futures contract trading since 1904. ### Collective Investment Schemes (CIS), ETFs, Hedge funds - Investor behavior and distribution: - At the end of 2011, 91 percent of investment fund assets were acquired and held by investors through distribution channels involving the intermediation of an advisor. - Mutual funds: - Mutual funds account for about 27 percent of total financial wealth in Canada. - As of December 2012, the mutual fund industry had assets under management of $849.7 billion. - Post-GFC shift from equity funds to balanced and fixed income funds. - Money market funds experienced a decline in assets due to lower yields relative to alternatives. - ETFs: - Quoted market value on the TSX of $56.4 billion from 265 funds listed in 2012, up from $19.4 billion from 77 funds in 2008. - At the end of 2012, ETFs accounted for 6 percent of total investment fund and managed fund assets. - Canadian retail investors also held $10.1 billion in U.S. listed ETFs, representing 16 percent of all ETF investment by Canadians at September 2012. - Hedge funds: - Canadian hedge fund assets were estimated at $31 billion, or about 2 percent of the global hedge fund industry (estimated at about $2.6 trillion in 2012). - The hedge fund industry is concentrated within a few firms. ### Intermediaries: structure and market concentration - Specialized securities intermediaries: dealers, advisers and investment fund managers (IFMs). - Dealer subcategories: investment dealers (IDs), mutual fund dealers (MFDs), scholarship plans dealers, exempted market dealers and restricted dealers. - IDs and MFDs must be members respectively of IIROC and MFDA, except mutual fund dealers in Québec (subject to AMF oversight). - As of December 2012: - 1,498 active firms registered to carry out investment activities in Canada. - 1,365 were headquartered in Canada. - 202 registered firms are IIROC members and 119 are MFDA members. - 543 were IFMs. - Role of the six major banks: - As of December 2012, the six bank-owned dealers accounted approximately for 80 percent of all trading volume. - Canadian bank-owned asset management subsidiaries exercise control of 60 percent of AUM of the top 10 asset management firms and 27 percent of the sector’s total AUM. - Subsidiaries of the six Canadian banks accounted for 92 percent of the total number of sales representatives of IDs and 64 percent of the sales representatives for MFDs. ### Key findings - Principles related to the regulator: - The four regulatory agencies provide a high degree of independence from the government while subject to strong accountability. - Existence of part-time commissioners can pose conflict of interest; mitigated by provincial selection processes and ongoing recusal obligations. - Under the CSA, provincial regulators have made significant progress in coordination and ensuring a level playing field; a few challenges remain. - Progress in arrangements for identification of emerging and systemic risk has been made, though availability of data and use of quantitative analysis is currently a challenge. - Regulators are aware of key market conflicts of interest and are reviewing actions to address them. - Carry from the 2007 assessment: “They are subject to a high degree of transparency, including public consultation on regulations and published policy statements. At the same time, they abide by high standards of ethics that have been codified into an ethics code, with certain reporting obligations. They are active on investor education”. - Principles for SROs: - SROs are subject to recognition based on eligibility criteria addressing financial viability, capacity, governance, and fair access. - Supervision mechanisms include off-site reporting, on-site inspections, regular meetings and close contact with SRO staff. - Governance arrangements of SROs have evolved significantly; challenges remain regarding conflict of interest. - Principles for enforcement: - Canada has an established system for supervision in which SROs play a significant role. - Arrangements include both offsite monitoring and on-site inspections. - Risk-based on-site inspection approaches have led to more focused use of on-site inspections in agencies with the largest populations. - Enforcement by regulatory agencies has progressed and is currently robust. - SROs are working to ensure timely firm responses to compliance deficiencies (MFDA) and to strengthen the nexus between compliance reviews and enforcement activity (IIROC). - Material challenges remain in enforcement of criminal laws by government departments and law enforcement agencies. - Principles for cooperation: - Largest regulatory agencies have explicit and comprehensive powers to share information with local and domestic authorities without external approval. - The four largest jurisdictions are signatories of the IOSCO Multilateral Memorandum of Understanding (MMoU). - They have the power to obtain information that is not in their files on behalf of foreign regulators and have shown a commitment to exchange information and assist other regulatory agencies domestically and internationally. - Principles for issuers: - Carry from a 2007 assessment: “Issuers are subject to disclosure obligations at the moment of authorization and on an ongoing basis, fully in line with IOSCO standards. The regulatory agencies have developed a system for review of the prospectus as well as continuous disclosure obligations. Liability provisions are in place to ensure issuers’ responsibility for the prospectus”. - Principles for CIS: - CIS operators are subject to registration based on fit and proper requirements. - While requirements have been harmonized, the process to review applications varies across provinces. - Supervision arrangements include off-site monitoring and on-site inspections; risk-based approaches have led to more focused use of on-site inspections in larger agencies. - Hedge Fund managers are subject to the same regulatory regime as other CIS operators. - All CIS offered to the public are required to have a custodian; custody can be provided by a related party but additional safeguards exist, including regulated custodians, existence of the IRC, and disclosure to investors. - Carry from the 2007 assessment: “Public offerings of CIS are subject to disclosure requirements at the moment of authorization and on an ongoing basis, fully in line with IOSCO principles. There are rules in place on separation of assets.” - Principles for market intermediaries: - Market intermediaries are subject to registration based on fit and proper requirements. - While requirements have been harmonized, the process to review applications varies across provinces. - Overall requirements are robust, but prudential requirements for investment dealers need to better capture risks associated with use of uninvested moneys of clients. - Supervision arrangements include off-site monitoring and on-site inspections; risk-based approaches have led to more focused use of on-site inspections in larger agencies. - Early warning systems exist; there is a need to improve coordination arrangements in the event of failure of large investment dealers. *Source: _cr1430 - 62. The nature, structure, resources and powers of the provincial regulators vary.* ### 85. Principles for secondary markets—Carry from the 2007 assessment: “The operation of an ### _cr1430 - 85. Principles for secondary markets—Carry from the 2007 assessment: “The operation of an ### Principles for secondary markets — carryover findings - “The operation of an exchange is subject to an authorization regime based on eligibility criteria that include financial viability, capacity, governance, and fair access.” - “Alternative Trading Systems (ATS) are regulated as dealers subject to certain market requirements; however the framework allows the regulatory agencies to regulate them as exchanges once they reach a certain threshold.” - “There are plans to deal with market disruptions, although in one of the agencies these should be further developed [...].” - “The two main clearing entities, one for securities and the other for derivatives, have developed reasonable mechanisms to manage large exposures including selection criteria for clearing members, margins and collateral”. - “There are robust mechanisms in place for market surveillance.” - “Exchanges and ATS are subject to pre-trade and post-trade transparency provisions.” - “Dark orders are allowed; but the current framework incentivizes transparency.” - “Arrangements to minimize failed settlements are reasonable, and there are robust reporting requirements in connection with shortselling.” ### Summary of IOSCO Principles — key findings (selected principles) - Principle 1: Securities markets regulated at the provincial level; responsibilities and mandate of the four regulatory agencies analyzed are clearly established by law; high degree of harmonization though some important differences remain; coordination mechanisms (CSA committee system, passport system) exist but should be strengthened. - Principle 2: Four regulatory agencies operate under a robust framework of operational and financial independence; accountability mechanisms to the Government via the MoF and judicial review exist; concerns noted about part time board members who may be directors of issuers/registrants, mitigated by selection processes and conflict of interest rules and recusal practices. - Principle 3: Agencies have robust powers (rulemaking, registration, recognition, designation, information requests, on-site inspections, administrative sanctions, quasi-criminal pursuit); resources have increased; recommendation to continue recruiting specialized staff. - Principle 4 & 5: High degree of transparency, public consultation, investor education; codes of ethics and reporting obligations on investment activities in place. - Principle 6 & 7: Regulators have a definition and methodology to identify systemic and emerging risks, with accountability and periodic reporting; analysis remains mostly qualitative and data availability is a challenge; HoA used for systemic risk discussions but coordination, especially for crisis management, needs deepening. - Principle 8: Important conflicts of interest identified (including trailing commissions); authorities are analyzing regulatory actions. - Principle 9: Extensive use of SROs for supervision and market surveillance; SROs subject to strong oversight (recognition, rule approval, reporting, on-site inspections); governance challenges remain related to conflicts of interest. - Principle 10 & 11: Agencies possess broad inspection, investigation, surveillance and enforcement powers, including on-site inspections without prior notice, injunctions, trading suspension, asset freezes, compulsion of third-party testimony, administrative sanctions and referrals to criminal authorities. - Principle 12: Off-site monitoring and risk-based on-site inspections apply to intermediaries; enforcement has improved and is robust though criminal enforcement coordination shows mixed results. - Principle 13–15: Broad authority to share information domestically and internationally; four largest agencies are signatories of the IOSCO MMoU and hold bilateral MoUs (including with U.S. SEC and U.S. CFTC). - Principle 16–18 & 21: Issuers subject to disclosure at authorization and ongoing; corporate governance and shareholder protections exist; financial statements prepared under Canadian GAAPs and audits under Canadian AS. - Principle 19 & 20: Auditors subject to CPAB oversight; CPAB conducts on-site inspections and issues mandatory recommendations but cannot impose fines; transparency and information-sharing limitations identified; codes of conduct include robust independence provisions. - Principle 22: Designation process for Credit Rating Organizations built around the IOSCO Code of Conduct; principal regulator process robust but on-site inspection program not yet in place. - Principle 23: Sell-side analysts and investment dealers subject to robust conflict of interest rules developed by IIROC; technical reports and valuations for some issuers subject to qualified professional requirements. - Principle 24–27: Operators of CIS and IFMs subject to registration and disclosure requirements; custodial requirements for CIS offered to the public (custodian must be a bank or trust company); valuation at fair value required; on-site inspection programs are risk based and concentrated in larger provinces. - Principle 28: HF operators (IFMs) are registered; HFs themselves are not registered; agencies can require HF-related information and conduct thematic reviews. - Principle 29–31: Market intermediaries required to register on fit and proper criteria; capital requirements based on a net capital formula; unique Canadian feature: investment dealers allowed to use uninvested client cash subject to prudential requirements and leverage ratio and contribution to compensation fund; compliance systems and internal controls required but sole proprietorship structure may pose challenges. - Principle 32: Early warning systems in place for IDs and MFDs; no comprehensive protocol for insolvency of securities firms (notably large IDs); a crisis management group constituted after MF Global Canada insolvency. - Principle 33–36: Exchanges subject to authorization based on integrity, financial viability, capacity; IIROC and derivatives exchanges have robust automated real-time and post-trade surveillance; MoU between IIROC and MX exists; equity and debt markets subject to robust pre- and post-trade transparency, consolidated tape; UMIR and MX rules target manipulation and unfair trading practices. - Principle 37–38: CDS and CDCC have mechanisms to manage large exposures (capital requirements for clearing members, margins, collateral, transaction caps); mandatory buy-in for failed settlement not required but rules incentivize timely settlement; shortselling reporting obligations exist; securities settlement systems and CCPs should be subject to regulatory/supervisory requirements to ensure fairness, effectiveness and systemic risk reduction. ### Recommendations (selected, by Principle) - Principle 1: - Continue addressing differences in derivatives, prospectus exemptions, registration exemptions for EMDs in northwest jurisdictions and registration of non-resident IFMs to achieve further harmonization. - Foster convergence of supervisory practices; consider more frequent peer reviews. - Strengthen coordination among provincial regulators and SROs and with other financial authorities, including crisis management. - Work towards a level playing field between all investment products, notably distribution obligations for segregated funds. - Pursue arrangements for timely decision making. - Principle 2: - Agencies with commission structures that have not done so should consider internal policies restricting directors of issuers and registrants from sitting on the board. - Principle 3: - Continue hiring staff with specialized expertise. - Principle 6 & 7: - Deepen systemic and emerging risk frameworks by making more use of quantitative analysis; devise a strategy for data and resources. - Ensure two-way communication with SROs and review decentralized risk structures for stronger accountability. - Principle 8: - Continue prioritizing identification and regulatory action on conflicts of interest, including trailing fees. - Principle 9: - Focus oversight on SRO governance issues. - Principle 12: - Build cooperative arrangements with criminal authorities. - MFDA to ensure timely firm responses to compliance reviews. - IIROC to strengthen links between compliance reviews and enforcement. - Use joint investigations, adjudications and reciprocal orders to coordinate enforcement. - Principle 19: - Monitor CPAB’s use of enforcement tools; consider fines and greater transparency of disciplinary measures. - Improve CPAB information sharing with audit committees and regulators. - Amend remaining provincial legal frameworks to grant CPAB legal protection and non-compellability. - Principle 22: - Finalize implementation of an on-site inspection program for DROs. - Principle 24 & 29: - Monitor efficacy of risk-based approach and enhance on-site inspections, particularly in large-population provinces. - Consider explicit integrity and solvency requirements for shareholders and integrity, solvency and experience requirements for directors. - Review differences across categories (PM, EMD vs ID, MFDA) regarding SRO membership and contingency fund contributions. - AMF to continue harmonization of MFD category. - Principle 25: - Consider extending custodian requirements to all CIS (custodian requirement for public-offer CIS already implemented). - Principle 30: - Strengthen prudential framework for use of uninvested client cash to capture risks adequately. - Principle 31: - Continue monitoring and enhancing risk-based on-site inspection programs. - Principle 32: - Institutionalize crisis management arrangements with a specific protocol defining party roles and regular simulation exercises; include OSFI in coordination for large IDs that are part of banking groups. - Work towards implementing portability requirements. - Principle 34: - Continue development of an automated system for cross-market surveillance (MoU between RS and MX finalized as recommended). - Principle 35: - Provinces should reassess whether additional transparency is needed in the government debt market (2007 recommendation not implemented). - Review minimum size for dark orders in coordination with IIROC. - Consider expanding post-trade transparency in the corporate bond market and for the government bond market. ### Authorities’ Response - G. Authorities’ Response *International Monetary Fund — Canada assessment (excerpts from the IOSCO Principles implementation review).* ### 86. The Canadian securities regulators participating in the FSAP (the regulators) welcome ### _cr1430 - 86. The Canadian securities regulators participating in the FSAP (the regulators) welcome ### Overall response and recognition - The regulators welcome the IMF’s review of the Canadian framework for the regulation and supervision of securities markets and appreciate the time, thoroughness and professionalism of the IMF Mission Team. - The IMF concluded that “the Canadian framework for the regulation and supervision of securities markets demonstrates a high level of implementation of the IOSCO Principles.” - The IMF recognized that in some areas, such as enforcement, the securities regulators have powers “that can be considered at the forefront of securities regulation.” - The regulators have considered the IMF’s recommendations in its 2007 FSAP and continue to develop and implement reform initiatives consistent with G-20 commitments and IOSCO reform initiatives, policies and standards. - The regulators will carefully consider the findings and recommendations from this FSAP and will continue to improve oversight and supervision of the securities markets; several IMF recommendations align with ongoing projects. ### On-site inspections - The regulators have devised and implemented an on-site inspection program of regulated firms based on a comprehensive risk-based model. - The risk-based approach allows efficient and effective supervision by focusing on firms and operational areas considered highest risk, targeting problematic conduct. - Regulators continuously assess risks posed by each regulated firm using all available information, review factors in the risk-based model, and consider enhancements to the inspection program. - Given the comprehensive model and continuous review, the regulators believe the current level of on-site inspections is appropriate and will continue to assess efficacy and make justified adjustments as necessary. ### Enforcement of criminal laws - The regulators welcome the IMF’s conclusion of significant progress in enforcement by the provincial Canadian securities regulators. - The IMF recognized increased efforts by securities regulators to support enforcement of criminal laws by relevant criminal authorities. - The regulators emphasize that cases involving criminal activity in the capital markets are prosecuted and that they will continue to cooperate with criminal authorities and assist them in pursuing prosecutions. ### Commentary on Supreme Court of Canada reference - The regulators provided a comprehensive description of the Canadian securities regulatory regime for the IMF’s FSAP assessment. - For objectivity, the IMF should focus on substantive elements of the securities regulatory regime rather than constitutional and political considerations about how implementation responsibilities are delineated. - The regulators consider comments respecting observations of the Supreme Court of Canada in a constitutional matter to be beyond the scope of assessment against the IOSCO Principles. - The reference to the Court’s decision in the assessment is a short excerpt and does not provide the full extent and meaning of the Court’s unanimous decision. ### Part-time Commissioners and conflict management - The IMF recognized that the regulators take conflicts of interest seriously and have comprehensive and robust policies for managing potential conflicts, with no evidence of interference. - Regulators weigh benefits and risks of permitting situations where conflicts may arise. - OSC, BCSC and ASC permit, as a matter of law, inclusion of part-time Commissioners who may be directors of an issuer or registrant after thoughtful analysis; automatic exclusion of otherwise qualified persons could be detrimental to Commissions’ ability to regulate effectively and efficiently. - In OSC and ASC, inclusion of a small number of Commissioners who sit as directors of an issuer, coupled with strong conflicts policies, benefits collective analysis and decision-making. - Conflict management policies and procedures are intended to capture all types of potential conflict situations and are not specifically tied to a Commissioner’s status as a director of a market participant. ### Harmonization - The Canadian securities regulatory regime is highly harmonized as a result of extensive regulator work. - Regulators recognize benefits of a highly harmonized regime but note each Commission may implement non-harmonized securities laws where beneficial to that jurisdiction’s capital market given size, history and geographic realities of Canada. - The ability to tailor laws where appropriate is an important element and strength, enabling harmonized laws in the vast majority of cases while permitting jurisdiction-specific tailoring to achieve investor protection and efficiency. - Regulators will continue to ensure highly harmonized securities laws are implemented where appropriate, but not where doing so would harm any jurisdiction’s capital market. ### Direct supervision of shareholders and directors of registrants - Regulators implemented an oversight regime for registrants that includes ongoing substantive consideration of integrity and solvency of shareholders and of integrity, solvency and experience of directors. - These matters are carefully considered at the time of registration applications and while registrants remain registered. - Regulators have legal authority to deny registration on such grounds and to attach conditions or to suspend or terminate registration, providing requisite authority over shareholders and directors of registrants. ### Regulatory regime for Portfolio Managers and Exempt Market Dealers - Regulators acknowledge perceptions by some market participants of an unlevel “playing field” but note the need to consider differences in permitted activities, standards of care, scope of operations (including custody), business model, and types of clients. - These differences justify substantively distinct, but equally balanced and fair, regulatory requirements for affected market participants. - At this time, regulators do not feel Portfolio Managers and Exempt Market Dealers should be required to become members of an SRO or to contribute to a contingency fund, but they will continue to assess appropriate regulatory requirements for such entities. ### Conclusion - The regulators thank the IMF assessor, Ms. Ana Carvajal, for her professionalism, openness and availability to discuss thoroughly all aspects of this assessment. *Source: Canadian securities regulators’ response in the IMF FSAP assessment (paragraphs 86–100).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1430.pdf_