ARCHIVED - Office of the Superintendent of Financial Institutions - Report

• Previous Page
• Table of Contents
• Next Page

This page has been archived.

Message from the Superintendent

On July 2^nd this calendar year, the Office of the Superintendent of Financial Institutions (OSFI) will mark its 25^th anniversary. OSFI is tasked with overseeing the solvency of federally regulated financial institutions in the interest of depositors and policyholders, and protecting members in federal private pension plans. This report highlights the areas where OSFI will focus its efforts during the 2012-2013 fiscal year.

With the global economy continuing to be subject to considerable uncertainty, the coming year will continue to present challenges to the financial institutions and pension plans subject to our oversight. OSFI will be focusing on anticipating and addressing risks resulting from global events and also from regulatory changes. We will also be creating higher standards for effective risk management, disclosure and governance. We will be paying particular attention to the effects of implementation of international accounting rule changes and of Basel III capital adequacy and liquidity requirements. In addition, OSFI will continue to work on reform of the capital framework for insurance companies.

During the year OSFI will undergo, as well as start preparing for, a number of external reviews. The Financial Stability Board and the Basel Committee on Banking Supervision have begun a number of peer reviews which will test whether countries are implementing standards and policies which have been agreed internationally. This helps ensure a level playing field and brings a new level of commitment and transparency to the global financial system. Preparations will also begin for a 2013 assessment of Canada by the International Monetary Fund (IMF) under its Financial Stability Assessment Program. This is a major undertaking, and as part of this effort OSFI's adherence to international core principles in banking and insurance supervision will be assessed. Along with the Bank of Canada, the process will also involve completing appropriate stress tests and submitting them to the IMF.

OSFI is not alone in ensuring that Canada has a safe and sound financial system. Strong cooperation, communication and action among federal partners such as the Bank of Canada, the Canada Deposit Insurance Corporation, the Financial Consumer Agency of Canada and the Department of Finance – are key. We continue to work together at the Financial Institutions Supervisory Committee and at the Senior Advisory Committee.

It is important that OSFI has the right people and right tools to continue to be effective in the face of transformational rule changes and new risks that may arise. Our plan includes a focus on Human Resources strategies, as well as continuing our renewal of information management and technological infrastructure. Both will provide support to our employees and help us continue to attract the talent we need to meet the important mandate we have.

Section I: Agency Overview

Raison d’être

Responsibilities

OSFI's legislated mandate was implemented in 1996 and under the legislation, OSFI's mandate is to:

• Supervise federally regulated financial institutions and private pension plans to determine whether they are in sound financial condition and meeting minimum plan funding requirements, respectively, and are complying with their governing law and supervisory requirements;
• Promptly advise institutions and plans in the event there are material deficiencies and take, or require management, boards or plan administrators to take, necessary corrective measures expeditiously;
• Advance and administer a regulatory framework that promotes the adoption of policies and procedures designed to control and manage risk; and
• Monitor and evaluate system-wide or sectoral issues that may impact institutions negatively.

OSFI's prudential mandate supports a safe and sound Canadian financial system.

OSFI's legislation also acknowledges the need to allow institutions to compete effectively and take reasonable risks. It recognizes that management, boards of directors, and plan administrators are ultimately responsible and that financial institutions and pension plans can fail.

Strategic Outcomes and Program Activity Architecture (PAA)

Primary to OSFI's mandate and central to its contribution to Canada's financial system are two strategic outcomes:

The diagram below illustrates OSFI's framework of program activities and program sub-activities, which roll-up and contribute to progress toward the Strategic Outcomes.

[text version]

Planning Summary

Financial Resources ($ millions)

2012-2013	2013-2014	2014-2015
127.7	130.2	134.5

The financial resources table above provides a summary of the total planned spending for OSFI for the next three fiscal years.¹

Human Resources (Full-time Equivalent – FTE)

2012-2013	2013-2014	2014-2015
609	608	608

The human resources table above provides a summary of the total planned full-time equivalent resources for OSFI for the next three fiscal years.

Strategic Outcome (SO) One: A safe and sound Canadian financial system.

Performance Indicators	Targets
% of knowledgeable observers2 that rate OSFI as somewhat or very effective in monitoring and supervising their institution or pension plan.	70%
Percentage of estimated recoveries on failed institutions (amount recovered per dollar of claim).	90%
Percentage of estimated recoveries on pension plans that have terminated under-funded.	85%

Program Activity	Expected Results	Forecast Spending ($ millions) 2011-2012	Planned Spending ($ millions)			Alignment to Gov't of Canada Outcomes
			2012-2013	2013-2014	2014-2015
Regulation and Supervision of Federally Regulated Financial Institutions	Protect depositors and policy holders while recognizing that all failures cannot be prevented.	62.4	65.9	68.1	70.9	Strong economic growth
Regulation and Supervision of Federally Regulated Private Pension Plans	Protect the financial interests of federally regulated private pension plan members and beneficiaries.	5.6	4.5	4.6	4.8	Income security for Canadians
Total for SO One		68.0	70.4	72.7	75.7

Strategic Outcome (SO) Two: A financially sound and sustainable Canadian public retirement income system.

Performance Indicators	Targets
Panel of Canadian peer actuaries selected by an international and independent body attests that the Chief Actuary and staff have adequate professional experience, complete work in compliance with professional standards and statutory requirements, access adequate information and complete relevant data tests and analysis, use reasonable methods and assumptions in completing actuarial reports and that these reports fairly communicate the results of the work performed.	Unanimous agreement amongst peers
Adequacy of professional experience of the Chief Actuary and staff. AND	Unanimous agreement amongst peers
Compliance with Canadian and international professional standards.	Unanimous agreement amongst peers

Program Activity	Expected Results	Forecast Spending ($ millions) 2011-2012	Planned Spending ($ millions)			Alignment to Gov't of Canada Outcomes
			2012-2013	2013-2014	2014-2015
Actuarial Valuation and Advisory Services	Stewards of Canada's public retirement income system are provided with independent, accurate, high quality and timely professional actuarial services and advice.	4.3	4.6	4.9	5.1	Income security for Canadians
Total for SO Two		4.3	4.6	4.9	5.1

Internal Services: Supports both Strategic Outcome

Program Activity	Forecast Spending ($ millions) 2011-2012	Planned Spending ($ millions)
		2012-2013	2013-2014	2014-2015
Internal Services	52.5	52.7	52.6	53.7
Total for Internal Services	52.5	52.7	52.6	53.7

Contribution of Priorities to Strategic Outcomes

All Organizational Priorities link to both of OSFI's Strategic Outcomes.

Organizational Priorities	Type	Description
Risks Emanating from the Economy	Ongoing	Effectively monitor and manage our response to risks in the increasingly complex and dynamic regulatory and financial environments, while the volume and pace of change are increasing, through continuing to: Proactively and strategically advocate for OSFI's regulatory approaches through participation in policy discussions at international fora and working with domestic partners and industry stakeholders on similar issues in the Canadian context. Identify, monitor and report internally on emerging risks, including system-wide risks that may have a material impact on Federally Regulated Financial Institutions (FRFIs) and Private Pension Plans. Develop and promote improved risk management practices, disclosure practices, risk data aggregation and strong corporate governance standards for FRFIs (and where relevant for Pension Plans). Participate and achieve strong results in the International Monetary Fund's (IMF) Financial Sector Assessment Program (FSAP), as well as ongoing peer reviews by the Financial Stability Board and the Basel Committee on Banking Supervision.
Risks Emanating from Regulatory Reform	Ongoing	Proactively and strategically address risks arising as a result of the regulatory changes being introduced (including unintended consequences arising from such changes) through a consultative process with industry: Banking Reforms: Determine the impacts of the fundamental redesign of global banking regulation on our regulatory framework, including capital levels, and make domestic adjustments as required. In response to the Basel III framework, develop new rules, guidelines and disclosure, revise the definition of capital and develop a common reporting framework for Canadian banks. Play a leading role in the collaborative establishment of a credible resolution framework for major banks in Canada. Insurance Reforms: Enhance the supervisory regime for insurance companies by implementing the new Supervisory Framework and revising domestic regulatory capital and other regulatory requirements and disclosures. Pensions Reforms: Adjust the monitoring of risks and other supervisory, regulatory and approval processes for pension plans to address pensions related legislative and regulatory changes. International Accounting and Auditing Reforms: Continue to participate in discussions with international and domestic standard setters to represent OSFI's views and influence the development of final accounting and auditing standards (e.g. Insurance Contracts Phase II and replacement of International Accounting Standards (IAS) 39 Financial Instruments). Review impacts of changes to IFRSs and International Auditing Standards and assess implications for FRFIs and for OSFI's oversight of FRFIs.
A High-Performing and Effective Workforce	Ongoing	Actively develop and prepare current and future OSFI employees and create business processes for continued success in the environment in which they will be required to operate, thereby ensuring that OSFI has people with the right skills, motivation and tools at the right time and in the right place to deliver our business goals: Implement two key frameworks: Managing Compensation and Human Resources (HR) Management. Implement the HR Plan as committed and monitor and report internally on progress to plan and related risks.
An Enhanced Corporate Infrastructure	Ongoing	Apply innovative and influential strategies to enhance internal systems, processes, and knowledge transfer, which will sharpen our focus on how to work more effectively and efficiently. Improve the sustainability of effective corporate services by implementing key process documentation and internal controls in a risk-management approach. Continue to champion the Information Technology Renewal (ITR) program to achieve targeted milestones. Develop an enterprise information and FRFI data management strategy and framework, as per sound Enterprise Information Management (EIM) principles, to ensure OSFI effectively captures and shares information.

Risk Analysis

OSFI operates in a constantly changing environment reflected in uncertain economic and financial conditions and an industry that can undergo periods of rapid change and is becoming increasingly complex. OSFI's ability to achieve its mandate and objectives is impacted by the range of risks that exist in such circumstances. OSFI is challenged to effectively and efficiently identify, evaluate, prioritize and develop initiatives to address areas where exposure is greatest.

OSFI's Enterprise-wide Risk Management (ERM) framework divides risks into external and internal categories. The external risk category consists of economic and financial conditions, the financial industry environment, OSFI's legal environment and catastrophic events. External risks arise from events that OSFI cannot influence, but are monitored in order to mitigate their potential impact on OSFI's operations. The internal risk category consists of operational risks that are broadly categorized as people, processes (governance processes, internal processes, and relationship management processes), enabling supporting systems, and culture (core values and change management).

OSFI's ERM process has identified several key risks to the achievement of its mandate and objectives, as follows:

External Risks

Economic, Industry and Regulatory Environment

The economic outlook for major foreign economies and for Canada is of concern, with a reasonably high probability that the U.S. recovery will continue to be weak, and some observers expecting a mild recession in Europe in 2012. More generally, there is considerable uncertainty associated with the resolution of the European sovereign debt problems, which could potentially generate additional stress in global and Canadian financial markets and undermine the performance of the global and Canadian economies.

The Canadian economy is also less robust and less resilient to adverse shocks compared to the last recession. Elevated household debt levels not only make households vulnerable to adverse shocks but continued low interest rates could encourage even higher household indebtedness for a period of time. Also, consumers themselves could become a source of negative domestic influence if they take action to rein in spending to address their indebtedness.

Global and domestic financial events require that OSFI be in a position to respond effectively to a continually evolving economic and regulatory environment. On a micro-level, prevailing conditions continue to put pressure on OSFI staff to provide interpretations or to reassess existing guidance to ensure its effectiveness under stressful and evolving conditions. Specific strategies have been put in place within individual Divisions, consistent with specialized responsibilities and current projects, to address ongoing industry developments. Resources continue to be reassigned and priorities realigned as necessary.

Capital Adequacy, Leverage and Liquidity

A fundamental redesign of the Basel capital framework for banks and the need to update prudential regulatory frameworks to address continued disruptions in global financial markets also require banks and regulators to focus more on the measurement of risks and its relation to the overall level of capital adequacy, leverage and liquidity. OSFI expects that the review, consultation and implementation of these changes will require more resources by both financial institutions and OSFI to address the number, breadth and novelty of more international rules and the need to monitor and advocate for comparable and timely implementation in peer jurisdictions. It is expected that policies creating OSFI's current prudential framework will have to be updated to incorporate new issues, information and lessons learned from the times of stress and the new internationally required minimum prudential standards. Monitoring the impact of new standards on bank behaviour will become equally important.

Work is underway in Canada as well as in many countries and international fora to develop more risk-sensitive capital frameworks for insurance companies (Minimum Continuing Capital and Surplus Requirement (MCCSR) and the Minimum Capital Test (MCT)). Both companies and regulators recognize the need to have more risk sensitive approaches that better reflect the issues arising from increasingly complex products, dynamic markets, accounting changes, and the need to be more transparent regarding the level of policyholder protection.

Changes to International Financial Reporting Standards (IFRSs) and Auditing Standards

As Canadian financial institutions moved to IFRS in 2011, OSFI is now focused on new projects by the International Accounting Standards Board (IASB) that will have a significant impact on FRFIs going into the next two to three years.

There are two key projects that will impact banks and insurers: replacement of Financial Instruments and Insurance Contracts Phase II. The Financial Instruments project proposes increased use of fair value and expected loss provisioning for loans. The Insurance Contracts Phase II project proposes to fundamentally change the valuation of insurance liabilities and recognition of revenue. The impacts of the changes for these projects are extensive in that they will not only change the accounting, but will also significantly impact loan values and provisions, actuarial standards, and the regulatory capital regime. It is crucial that OSFI continues to anticipate, understand and, when practicable, influence such changes so that OSFI will continue to be able to perform accurate risk assessments of financial institutions and will be able to adjust the regulatory capital framework as required.

The 2008 financial crisis has motivated much international and domestic consultation and proposals on how the audit function could be enhanced in order to contribute to increased financial stability. OSFI is actively monitoring and participating in domestic and international work efforts (internationally through the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), and the International Association of Insurance Supervisors (IAIS) and domestically through the Auditing and Assurance Standards Board (AASB) and Auditing and Assurance Standards Oversight Council (AASOC)).

Internal Risks

People Risks

OSFI's success is dependent upon having employees with highly specialized knowledge, skills and experience to regulate and supervise financial institutions, identify significant issues, and perform accurate risk assessments. OSFI is also being called on to take an increasing leadership role domestically and internationally and to devote resources to further improving financial regulation and considering systemic issues.

A volatile global economy, increasingly complex products, changes to prudential regulation and emerging risks in the industry also mean that OSFI needs to be able to attract, motivate, develop and retain skilled people, particularly those whose skills are in demand in the financial sector. In addition, a significant increase in hiring over the last three years due to market conditions, and normal turnover and retirement rates mean that a continuous learning environment is necessary to enable employees to meet the challenges of this constantly changing environment. Not having sufficient skill sets in place can result in an over reliance on certain key resources, which can lead to other people risks.

Systems Risks

Enabling technology and a robust, secure and well-supported Information Management/Information Technology (IM/IT) infrastructure are key success factors to OSFI in meeting its mandate. OSFI must ensure that the necessary information systems and infrastructure are in place to effectively support its supervisory and regulatory activities. OSFI has undertaken a multi-year information technology renewal initiative (ITR) in support of a long term IM/IT Strategy to mitigate this risk. Implementation issues related to this initiative are being closely monitored and evaluated.

Expenditure Profile

In accordance with the Treasury Board Secretariat's Guide to the Preparation of Part III of the 2012-2013 Estimates, the financial and human resources presented in this Report on Plans and Priorities reflect OSFI's approved Annual Reference Level Update (ARLU) estimates, which were prepared in early summer 2011. At the time of writing this Report on Plans and Priorities (RPP), OSFI was completing its business planning process for fiscal years 2012-2013 to 2014-2015 and assessing its capacity requirements. Any changes to OSFI's approved ARLU estimates as a result will be reflected in next year's RPP.

During the 2012-2015 planning period, OSFI will continue to focus on responding to risks emanating from the economy and from regulatory reforms, primarily in banking, insurance, and accounting (IFRS). Work continues on determining the impacts of the fundamental redesign of global banking regulations on the capital and liquidity of Canada's banks, on making changes to insurance company capital rules, and on reviewing the impacts of expected accounting rule changes and auditing reforms.

OSFI is currently in year two of the implementation of its approved five-year IM/IT Strategy. The focus for this planning period is to advance the ITR initiative with the updating of OSFI's ageing technologies and annual investments to upgrade systems and renew core infrastructure and selected applications. Accordingly, small increases to the resource levels presented in these tables are necessary, primarily in the Regulation and Supervision of Federally Regulated Financial Institutions program activity where expertise in technical skills are required to address the issues outlined above.

($ millions except for percentages)	Actual Spending 2010-2011	Forecast Spending 2011-2012	Planned Spending
			2012-2013	2013-2014	2014-2015
Gross Expenditures	105.9	124.8	$127.7	$130.2	$134.5
Change from previous year		17.8 %	2.3 %	2.0 %	3.3 %
Less:
Respendable Revenue	90.1	123.9	126.8	129.3	133.6
Total Planned Spending	15.8	0.9	0.9	0.9	0.9

Total gross expenditures in 2011-2012 are forecasted to increase by 17.8% from the previous year, to $124.8 million, due to the increase in human resources and the full-year impact in 2011-2012 of employees hired during 2010-2011 (which in combination, result in a growth of 30 full-time equivalent positions), normal inflation and merit adjustments, investments in the ITR project, and the retrofit of new and existing office space to accommodate the additional staff. In order to successfully retain and attract necessary talent, OSFI also updated its executive³ compensation structure to keep pace with compensation paid in the financial services sector, from which OSFI recruits the experience and knowledge required to keep current.

Total gross expenditures in 2012-2013 are planned to increase by 2.3% over 2011-2012 forecast, to $127.7 million, mainly due to normal inflationary and merit adjustments and continued investments in the ITR project. The growth in 2013-2014 and 2014-15 is due to normal inflationary and merit adjustments.

Net of Respendable Revenues, total planned spending is $0.9 million for each of the planning years. This amount is assumed to remain unchanged over the planning horizon but may be adjusted by Treasury Board to reflect changes in collective agreements or continued cost constraint measures.

Figure 1 provides a trend of OSFI's actual and planned expenditures and full-time equivalents (FTEs) over the fiscal years 2006-2007 to 2014-2015. The growth in FTEs starting in late 2007-2008 through to 2009-2010 was driven by the global financial market turmoil, which began in August 2007, and the serious economic downturn in the following year while financial market turmoil still prevailed. During this period, OSFI added staff in specialized areas in order to more intensely monitor and assess risk in the financial sector. OSFI further increased its staff complement in 2011 to address the increased volume and complexity of its work, new initiatives as a result of the lessons learned from the global financial crisis, and to implement the significant regulatory reforms and implement OSFI's approved ITR program. Driven by a fundamental change in how OSFI supervises insurance companies, OSFI also expects to increase its staff complement slightly in 2013 to ensure adequate resources related to the regulation and supervision of the insurance industries. OSFI's level of resources today is higher than pre-crisis levels as many of the new initiatives and commitments have become permanent demands. At the time of writing this Report on Plans and Priorities, current budget assumptions are that FTE estimates will hold constant beyond 2012-2013.

OSFI continues to manage its human and financial resources judiciously and in optimal ways. Recent steps taken to maximize efficiencies include remaining within OSFI's pre-2008 Toronto office footprint despite increases in supervisory resources since the financial crisis, indefinitely suspending OSFI's biennial employee training and development conference, and actively participating in and supporting the shared financial systems initiative for Small Departments and Agencies.

[text version]

Estimates by Vote

Estimates by Vote are presented in the 2012-2013 Main Estimates which can be found on the Treasury Board of Canada Secretariat's web site at:

http://www.tbs-sct.gc.ca/est-pre/20122013/p2-eng.asp.

• Previous Page
• Table of Contents
• Next Page