Vol. 150, No. 22 — May 28, 2016

Assessment of Financial Institutions Regulations, 2017

Statutory authority

Office of the Superintendent of Financial Institutions Act

Sponsoring agency

Office of the Superintendent of Financial Institutions

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The proposed Assessment of Financial Institutions Regulations, 2017 (the proposed Regulations) would replace the Assessment of Financial Institutions Regulations, 2001 (the current Regulations) and would target three issues.

1. Best proxy of OSFI time and resources

The policy objective supporting the design of the current assessment methodologies is to allocate the expenses of the Office of the Superintendent of Financial Institutions (OSFI) among federally regulated financial institutions (FRFIs) in a way that accurately reflects the time and resources OSFI spends supervising individual institutions. When the current Regulations were developed in 2001, the size of a FRFI was viewed as a sound proxy by which to allocate OSFI’s expenses (i.e. the larger the FRFI, the larger the proportionate share of OSFI’s expenses allocated to that institution). More specifically, “average total assets,” “net premiums,” and “net revenues” were selected as the size-based units of measure on which to base assessments.

OSFI has observed that the risk profile of a FRFI is a more significant driver of OSFI’s resource expenditures than the size of an institution. Therefore, an assessment methodology that reflects the risk profile of the institution would better align with OSFI’s risk-based supervisory framework, which drives OSFI’s supervisory planning processes and resource allocation decisions.

2. Implications of the International Financial Reporting Standards

The International Accounting Standards Board develops International Financial Reporting Standards (IFRSs) that many countries, including Canada, have chosen to adopt. As of January 1, 2011, in Canada, publicly accountable entities, including FRFIs, have been required to adopt IFRSs rather than follow Canadian Generally Accepted Accounting Principles (CGAAPs). The IFRSs are being developed and implemented in phases, some of which have yet to be finalized.

The impacts of moving from CGAAPs to IFRSs vary depending on the type of institution and its activities. However, it is clear that IFRSs affect reported assets and premiums — the two primary measures that form the basis of the current assessment methodologies. With respect to assets, the new accounting standards require that many Canadian securitizations and other off-balance sheet structures now be reported on the balance sheet, and permit fewer assets to be derecognized in comparison to those permitted previously under CGAAPs. IFRSs also affect the definition of an insurance contract, and have resulted in some contracts being accounted for as investments or services contracts, which affects the presentation and reporting of premiums.

These accounting changes thus have the potential to adversely affect the distribution of OSFI’s expenses across FRFIs relative to the actual time and resources OSFI devotes to supervising these institutions. These impacts, and potential future impacts, could be mitigated if OSFI’s assessment methodologies were redesigned to be less prone to be affected by accounting changes and other changes to international standards.

3. Outdated minimum assessments

Regardless of an institution’s size, OSFI performs a minimum amount of supervision for all financial institutions. The prescribed minimum assessment amounts have not been updated in 15 years, and have not kept pace with necessary increases in OSFI’s minimum supervisory expenses. Further, the current minimum assessment methodologies are unnecessarily complex, with many different minimum assessment categories.

Background

The Office of the Superintendent of Financial Institutions Act provides that before the end of each calendar year, the Superintendent shall ascertain the total amount of expenses incurred during the immediately preceding fiscal year in connection with the administration of the Bank Act, the Trust and Loan Companies Act, the Cooperative Credit Associations Act, the Insurance Companies Act, and the Protection of Residential Mortgage or Hypothecary Insurance Act. The Office of the Superintendent of Financial Institutions Act also provides that the Governor in Council may make regulations prescribing the assessment methodology for each type of financial institution, and that each financial institution shall be assessed in accordance with the methodology prescribed by those regulations.

The prescribed methodologies break assessments into two components for each industry sector: (1) minimum assessments, which prescribe the minimum amount to be assessed on each type of institution; and (2) base assessments, which currently rely on the size-based proxies to determine each FRFI’s pro-rata share of OSFI’s expenses.

(1) Minimum assessments
(a) Banks, authorized foreign banks, trust and loan companies, and cooperative credit associations

The current Regulations prescribe the methodology for determining the applicable minimum assessment for FRFIs subject to the Bank Act and Trust and Loan Companies Act, whereby one of 10 different minimum assessments is applied in accordance with specified classes of average total assets. These minimum assessments range from $10,000 for a FRFI with average total assets equal to or less than $50 million to as much as $275,000 for a FRFI with average total assets greater than $50 billion.

The current Regulations prescribe a minimum assessment of $10,000 for FRFIs subject to the Cooperative Credit Associations Act.

(b) Insurers

The current Regulations establish a minimum assessment of $10,000 for life insurance companies, property and casualty insurance companies, and foreign companies (i.e. foreign companies operating in Canada on a branch basis), and $1,000 for fraternal benefit societies and foreign fraternal benefit societies.

(2) Base assessments
(a) Banks, authorized foreign banks, trust and loan companies, and cooperative credit associations

The current Regulations provide that the basis of calculation will be the following:

After having regard for minimum assessments, assessment surcharges, service charges, and other revenues relating to the administration of these statutes, the formulae calculate each FRFI’s share of the remaining expenses based on its pro-rata share of average total assets for each assessment sector. FRFIs subject to the Bank Act and the Trust and Loan Companies Act are grouped together as one assessment sector, and those FRFIs subject to the Cooperative Credit Associations Act are addressed distinctly as a separate assessment sector.

The current Regulations do, however, limit the base assessment to $10,000 for a loan company and for an authorized foreign bank that is subject to the restrictions and requirements referred to in subsection 524(2) of the Bank Act (commonly referred to as a “lending branch”).

A FRFI’s fixed minimum assessment is added to the base assessment to arrive at its total assessment for a fiscal year.

(b) Insurers

The current Regulations provide that the basis for calculating Green Shield Canada’s base assessment will be the total amount of the net revenue received during the immediately preceding calendar year from its prepayment plans, other than its “administrative services only” plans.

For companies other than Green Shield Canada, societies, and provincial companies that are subject to the Insurance Companies Act, the Regulations establish that the basis of calculation will be the aggregate of the total amount of net premiums received in Canada and an amount equal to 25% of net premiums received outside Canada, during the immediately preceding calendar year.

The current Regulations also provide that the basis for calculating the base assessments for foreign companies will be the aggregate of the total amount of net premiums received in Canada during the immediately preceding calendar year.

To determine an insurer’s total assessment, a separate minimum assessment premium threshold is established. This threshold varies each year as it is derived from total industry premiums and total OSFI costs. Institutions below the threshold are assessed the minimum charge, while those above the threshold are assessed an amount in excess of the minimum charge in accordance with the relevant formula. Insurers are either assessed a minimum amount or a pro-rata amount using the applicable proxy. This is a notable departure from the approach described above for banking institutions whereby they are assessed both a minimum amount and a pro-rata amount using the applicable proxy.

Objectives

The main objects of the regulatory proposal are to replace the current Regulations to address the three above-noted issues:

  1. Best proxy — implement a better proxy by which to measure OSFI’s time and resource expenditures to ensure a fair and accurate distribution of OSFI’s expenses across FRFIs.
  2. Greater stability — revise the assessment methodologies to make them less prone to be affected by major impacts resulting from future accounting changes and other changes to international standards.
  3. Update minimum assessments — update the minimum amounts assessed, ensure that they remain up-to-date over time, and reduce unnecessary complexity.

Description

The differences between the proposed Regulations and the current Regulations can be grouped into four categories, each of which is summarized below.

1. Best proxy for measuring OSFI time and resource expenditures

The regulatory proposal would amend the proxy that is used for determining each institution’s pro-rata share of OSFI’s expenses — from the size-based measures of “average total assets,” “net premiums,” and “net revenue” to the risk-based capital adequacy or capital equivalency measures applicable to the institution. More specifically, the proposed proxies for each type of FRFI would be

Each of the above-noted measures is a risk-based capital adequacy or capital equivalency framework. These frameworks assess the risks associated with a FRFI’s business and operations and require institutions to meet minimum prudential solvency requirements to offset those risks.

Different capital adequacy and equivalency frameworks are necessary given the different types and structures of FRFIs. For example, a foreign company that operates in Canada on a branch basis does not issue shareholders’ equity in Canada. Consequently, the applicable capital equivalency framework (e.g. the capital equivalency deposit for authorized foreign banks, or the minimum required margin of assets in Canada for foreign insurance companies) would require the institution to hold assets in Canada to offset the risks related to the institution’s Canadian business. For prudential regulatory purposes, these assets held in Canada by foreign companies are a form of capital equivalency.

2. Create a new assessment sector for mortgage insurers

The current Regulations divide FRFIs into four assessment sectors: (a) banks, authorized foreign banks, and trust and loan companies; (b) cooperative credit associations; (c) life insurance companies and fraternal benefit societies; and (d) property and casualty insurance companies.

The current Regulations do not differentiate between types of property and casualty insurers, which include mortgage insurers, when allocating OSFI’s expenses to the property and casualty sector. Since the risk-based capital adequacy requirements for mortgage insurers are markedly different than those of all other types of property and casualty insurers, the regulatory proposal would create a new assessment sector for mortgage insurers to ensure that these institutions are not assessed a disproportionately higher share of OSFI expenses relative to their property and casualty peers.

3. Update minimum assessments

In addition to modifying the proxies for calculating base assessments, the proposed Regulations would also update minimum assessments as summarized below.

4. “Housekeeping” amendments

The regulatory proposal seeks to clarify the application of the Regulations to newly established institutions, and in relation to troubled institutions that are subject to additional assessment surcharges, which surcharges are designed to reflect the increasing intensity of supervision. More specifically, the housekeeping amendments would clarify the following:

“One-for-One” Rule

The “One-for-One” Rule does not apply to this proposal. Assessment-type fees are not considered to be a form of administrative or compliance cost.

Small business lens

The small business lens does not apply to this proposal, as there are no costs to small business.

Consultation

OSFI has published two consultation papers on the proposed amendments to the assessment methodologies — one consultation paper for each of the banking and insurance sectors, which can be found at the following links, respectively:

These two consultation papers

Further, to facilitate understanding and discussion of the anticipated impacts of the proposed amendments, OSFI provided individual FRFIs with their anticipated institution-specific results under the proposed new methodologies, which were modelled over a historic two-year period and were contrasted with actual assessment results for the same period.

Generally, the majority of FRFIs are expected to benefit from the regulatory proposal, with approximately two-thirds of institutions projected to experience decreases in their assessments. Institutions whose assessments are projected to increase did not challenge the underlying policy objectives of the regulatory proposal (i.e. best proxy, stability of proxy, and ensuring that the regulations remain up-to-date), nor the move to a risk-based proxy. Some respondents did propose modifications to the proposed methodologies to address perceived concerns.

What follows are highlights of industry comments and OSFI’s responses, the latter of which were communicated to individual institutions.

Banking sector consultation

The 45-day banking sector consultation was launched in October 2013, and a total of eight submissions were received. Noteworthy industry comments include the following:

OSFI acknowledges that standardized banks are required to calculate higher risk-weighted assets for credit risk; however, AIRB banks are also subject to additional capital charges for market risk, which additional capital charges contribute to a significant increase in AIRB banks’ share of total sectoral assessments. OSFI thoroughly assessed the appropriateness of the companies’ proposed increases relative to actual time spent supervising the institutions, and relative to their peers, and concluded that the proposed increases fairly reflect the time and resources spent on the institutions.

OSFI considered the companies’ concerns in detail, reviewing all time logged against all trust companies over a three-year period. The data clearly illustrated that OSFI spends less time on trust companies whose business activities are limited to fiduciary activities. Therefore, OSFI reduced the proposed minimum assessment from $30,000 to $15,000, which would be the same minimum currently proposed for other types of limited service banking institutions, such as lending branches.

Insurance sector consultation

The 45-day insurance sector consultation was launched in July 2012. A total of nine submissions were received. Noteworthy industry comments include the following:

OSFI thoroughly assessed the appropriateness of the company’s proposed increase relative to actual time spent supervising the institution, and relative to its peers, and concluded that the proposed increase fairly reflects the time and resources spent on the conglomerate group. OSFI supervises FRFIs on a consolidated basis, and the international scale of the insurance group introduces additional risk and necessitates additional OSFI effort that should be appropriately captured under any assessment methodology. It is OSFI’s view that an insurer should not benefit from a reduced assessment simply because its domestic presence may be small relative to its global operations.

OSFI is of the view that it is a business decision to allow a company’s foreign business to fall below the threshold to gain a capital credit, and one that is likely not influenced nor dictated by the impact it may have on assessments. Further, if there is less reliance by OSFI on a foreign supervisor, the company should not benefit from an adjustment that impacts the allocation of assessments.

OSFI has reservations about the degree to which conservative reserving would have a material impact on one company’s assessment relative to its peers. Further, being too conservative can introduce risk, something that OSFI and company auditors assess when reviewing the appropriateness of reserves. The opportunity cost of excess capital held as reserves is likely greater than the incremental assessment charge. OSFI does not expect companies to adopt less conservative reserving practices as a result of the proposed amendments to the insurance assessment methodology.

OSFI believes that since its supervisory framework appropriately captures risks on both sides of the balance sheet, so should the assessment methodology. Further, if companies are investing excess capital in high-risk assets, such investments are likely to require additional due diligence from OSFI, which should be reflected in the proposed assessment methodology through higher required capital.

Rationale

The proposed Regulations would not fundamentally change the main steps involved in administering OSFI’s assessments. OSFI would continue to allocate expenses to each sector, and would then assess each institution based on a proxy that measures each institution’s pro-rata share of applicable sectoral expenses.

The regulatory proposal would achieve each of the stated objectives, directly addressing the identified issues. More specifically, the regulatory proposal would achieve the following results:

There would be no foreseeable or anticipated impacts on other sectors. The proposed Regulations would not impose standards on industry to regulate a particular risk; they would prescribe the methodologies by which OSFI can recover its expenses from industry.

The regulatory proposal would not impose any additional regulatory cost or administrative burden on industry. While FRFIs are assessed to recover OSFI’s expenses, the regulatory proposal would be binding on OSFI, as it administers the assessment framework.

It is important to highlight that the proposed Regulations would only impact the allocation of OSFI’s expenses across institutions and not the total amount assessed by OSFI. Therefore, the proposed Regulations would not generate additional revenue for OSFI.

The regulatory proposal could result in modest savings to government by reducing the likelihood/need for future regulatory amendments (i.e. by moving to a more stable proxy better insulated from future accounting and other changes to international standards, and by indexing the minimum assessments).

Implementation, enforcement and service standards

The proposed Regulations would come into effect on April 1, 2017, which would allow OSFI to apply the new assessment methodologies to recover its 2016–17 expenses.

Contact

Darren Gault
Manager
Legislation and Policy Initiatives
Legislation and Approvals Division
Office of the Superintendent of Financial Institutions
255 Albert Street
Ottawa, Ontario
K1A 0H2
Telephone: 613-998-9868
Email: Darren.Gault@osfi-bsif.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Governor in Council, pursuant to subsection 23(3) (see footnote a) and section 38 (see footnote b) of the Office of the Superintendent of Financial Institutions Act (see footnote c), proposes to make the annexed Assessment of Financial Institutions Regulations, 2017.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Darren Gault, Manager, Legislation and Policy Initiatives, Legislation and Approvals Division, Office of the Superintendent of Financial Institutions, 255 Albert Street, Ottawa, Ontario K1A 0H2 (tel.: 613-998-9868; email: darren.gault@osfi-bsif.gc.ca).

Ottawa, May 19, 2016

Jurica Čapkun
Assistant Clerk of the Privy Council

Assessment of Financial Institutions Regulations, 2017

Interpretation

Definitions

1 The following definitions apply in these Regulations.

Act means the Office of the Superintendent of Financial Institutions Act. (Loi)

approved mortgage insurer means an approved mortgage insurer within the meaning of section 2 of the Protection of Residential Mortgage or Hypothecary Insurance Act or a corporation or company that is treated as if it were an approved mortgage insurer in accordance with subsection 6(4) or 7(1) of that Act, respectively. (assureur hypothécaire agréé)

authorized foreign bank has the same meaning as in section 2 of the Bank Act. (banque étrangère autorisée)

capital means the amount determined in respect of a financial institution in accordance with section 4. (fonds propres)

cooperative credit association means an association, other than a retail association, to which the Cooperative Credit Associations Act applies and includes a central cooperative credit society for which an order has been made under subsection 473(1) of that Act. (association coopérative de crédit)

foreign fraternal benefit society has the same meaning as in section 571 of the Insurance Companies Act. (société de secours étrangère)

foreign life company has the same meaning as in section 571 of the Insurance Companies Act. (société d’assurance-vie étrangère)

life company has the same meaning as in subsection 2(1) of the Insurance Companies Act. (société d’assurance- vie)

minimum assessment means the amount determined in accordance with subsection 3(1) in respect of a financial institution, as adjusted in accordance with subsection 3(2). (cotisation minimale)

mortgage insurance company means a company to which the Insurance Companies Act applies and whose activities are restricted to insuring risks within the class of mortgage insurance. (société d’assurance hypothécaire)

property and casualty insurer means a company, provincial company or foreign company to which the Insurance Companies Act applies — other than a life company, society, foreign life company, foreign fraternal benefit society or mortgage insurance company — or Green Shield Canada. (assureur multirisque)

retail association has the same meaning as in section 2 of the Cooperative Credit Associations Act. (association de détail)

society has the same meaning as in subsection 2(1) of the Insurance Companies Act. (société de secours)

trust and loan company means a company to which the Trust and Loan Companies Act applies. (société de fiducie et de prêt)

Determination of Assessment Amount

Calculation

2 (1) For the purpose of subsection 23(3) of the Act and subject to subsection (2), the amount assessed by the Superintendent against each financial institution in respect of any fiscal year is equal to the aggregate of the base assessment amount determined for the financial institution in accordance with sections 5 to 9 and any applicable assessment surcharge determined for the financial institution in accordance with section 10, less any interim assessment prepared against the financial institution under subsection 23(4) of the Act.

No assessment payable

(2) No assessment is payable in any fiscal year by a financial institution with respect to which, before the beginning of that fiscal year,

Determination of Base Assessment Amount

Minimum Assessment
Applicable amount

3 (1) For the purpose of determining, under sections 5 to 9, the base assessment amount for a financial institution, the minimum assessment applicable to the financial institution is

Adjustment

(2) Subject to subsections (3) and (6), each minimum assessment referred to in subsection (1) is to be adjusted for inflation in respect of each fiscal year in accordance with the following formula, with the result being rounded to the nearest multiple of 10:

A × (B/C)

where

No adjustment

(3) If the amount determined by dividing B by C in subsection (2) is less than 1 in respect of a fiscal year, no adjustment is to be made to the minimum assessment applicable for that year and the minimum assessment applicable for the preceding fiscal year continues to apply.

Consumer Price Index

(4) In subsection (2), the Consumer Price Index for any 12-month period is the amount determined by aggregating the Consumer Price Index for all items for Canada, as published by Statistics Canada under the authority of the Statistics Act, for each month in that period and dividing the aggregate by 12.

Publication

(5) The Superintendent must, before the beginning of each fiscal year, publish on the Office’s website each of the minimum assessments adjusted in accordance with subsection (2) that are applicable in respect of that year.

No adjustment in first year

(6) Subsection (2) does not apply in respect of the fiscal year that begins on April 1, 2016.

Capital
Amount

4 For the purpose of determining, under sections 5 to 9, the base assessment amount for a financial institution, the capital of the financial institution in respect of a fiscal year is

Banks, Authorized Foreign Banks, Trust and Loan Companies and Retail Associations
Calculation

5 The base assessment amount for a financial institution that is a bank, an authorized foreign bank, a trust and loan company or a retail association is, for any fiscal year, equal to

A/B × C

where

D/E × (C - F)

where

Cooperative Credit Associations
Calculation

6 The base assessment amount for a financial institution that is a cooperative credit association is, for any fiscal year, equal to

A/B × C

where

D/E × (C - F)

where

Insurance Companies

Life Companies, Societies, Foreign Life Companies and Foreign Fraternal Benefit Societies
Calculation

7 The base assessment amount for a financial institution that is a life company, a society, a foreign life company or a foreign fraternal benefit society is, for any fiscal year, equal to

A/B × C

where

D/E × (C - F)

where

Property and Casualty Insurers
Calculation

8 The base assessment amount for a financial institution that is a property and casualty insurer is, for any fiscal year, equal to

A/B × C

where

D/E × (C - F)

where

Mortgage Insurance Companies
Calculation

9 (1) Subject to subsection (2), the base assessment amount for a financial institution that is a mortgage insurance company is, for any fiscal year, equal to

A/B × C

where

D/E × (C - F)

where

Exception — approved mortgage insurers

(2) The base assessment amount for a financial institution that is an approved mortgage insurer is, for any fiscal year, equal to the aggregate of the amount determined under subsection (1) and the amount determined by the formula

A/B × C

where

Assessment Surcharge

Stage rating assigned

10 (1) Subject to subsections (2) and (4), the amount of the surcharge to be assessed for any fiscal year in respect of a financial institution that has been assigned a stage rating in accordance with the Office’s guides to intervention for federally regulated financial institutions is equal to the aggregate of

Affiliates

(2) Subject to subsection (4), the amount of the surcharge to be assessed for any fiscal year in respect of a financial institution that has been assigned a stage rating for the sole reason that it is an affiliate within the meaning of section 2 of the Bank Act of another financial institution that has also been assigned a stage rating is equal to the aggregate of

If no base assessment

(3) If no base assessment was made against a financial institution for the preceding fiscal year, the surcharge referred to in subsection (1) or (2) is to be calculated using the minimum assessment that would have been applicable to that institution for that year.

Maximum

(4) The amount of the surcharge to be assessed for any fiscal year in respect of a financial institution must not exceed an amount equal to

Multiple stage ratings

(5) The maximum amount referred to in paragraph (4)(b) is to be applied if a financial institution was assigned more than one stage rating during a fiscal year.

Notice of Assessment

Written notice

11 The Superintendent must send to each financial institution a notice in writing of the assessment against it.

Repeal

12 The Assessment of Financial Institutions Regulations, 2001 (see footnote 1) are repealed.

Coming into Force

April 1, 2017

13 These Regulations come into force on April 1, 2017.

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