On October 27, 2020, the Office of the Superintendent of Financial Institutions (OSFI), Canada's federal financial institutions regulator, launched a public consultation on new Draft Guideline E-4: Foreign Entities Operating in Canada on a Branch Basis (Draft Guideline). The long-awaited Draft Guideline sets out OSFI's updated expectations on the governance and supervision of foreign bank branches and foreign insurance company branches operating in Canada (Branches). Once adopted, the new Draft Guideline will replace two existing OSFI guidelines issued in 2005: Guideline E-4A: Role of the Chief Agent and Record Keeping Requirements, which applies to foreign insurance company branches in Canada and Guideline E-4B: Role of the Principal Officer and Record Keeping Requirements, which applies to foreign bank branches in Canada (Guidelines E4A and E4B).
Guidelines E4A and E4B currently focus on the role and
accountability of the principal officer and chief agent for the
oversight and management of the business of the Branch in Canada.
In the new Draft Guideline, OSFI shifts its attention to the Branch
management as bearing the overall responsibility for overseeing the
business of the foreign bank or insurer in Canada. Branch
management “may include” the principal officer/chief
agent as well as other senior officers of the foreign bank or
insurer who are located in or outside Canada. It is noteworthy that
OSFI expressly contemplates that Branch management may include
senior head-office representatives.
OSFI expects the Branch management to be responsible for implementation and oversight of key aspects of Branch operations, including business objectives, risk management policies, procedures and controls, policies relating to asset and liability management, and independent assessments of the adequacy and effectiveness of these policies and controls. OSFI expects the Branch management to have a thorough understanding of all Canadian legislation and regulatory guidance applicable to the Branch and must establish sufficiently comprehensive and frequent reports.
Given OSFI's focus on Branch management responsibilities in the new Draft Guideline, foreign bank and insurer Branches in Canada should consider documenting the composition and responsibilities of Branch management in a separate mandate and assessing whether corresponding changes are necessary to other policies and procedures.
Branches will be required under the Draft Guideline to provide an early advance notice to OSFI of potential changes to the members of Branch management, and any circumstances that may adversely affect their suitability. This notice requirement appears to expand the scope of senior officers whose appointment is currently required to be reported to OSFI on OSFI 658 Return and will include head office members of Branch management.
All members of Branch management will also likely be expected to be subject to the background check requirements for responsible persons under OSFI Guideline E-17.
Similar to OSFI's approach taken in 2018 with the Corporate Governance Guideline, OSFI has indicated that it will make consequential amendments to other OSFI guidance to reflect the new emphasis on Branch management. We note that the roles of principal officer and chief agent, which are set out in the legislation, have not been eliminated, and foreign banks and insurers are required to continue maintaining these positions.
HEAD OFFICE ARRANGEMENTS
Consistent with current practice, the Draft Guideline reiterates
OSFI's expectation that where head office performs material
functions on behalf of the Branch, the Branch management is
responsible for ensuring the arrangement is documented in written
service-level agreements that meet the requirements of OSFI
Guideline B-10: Outsourcing of Business Activities, Functions
The Draft Guideline also places an emphasis on clearly documenting any arrangements that involve the flow of funds between the Branch and the head office. The Branch is required to provide the details of such arrangements to OSFI. Branch management must also give OSFI 30 days' notice of any proposed fund transfers to the head office that deviate materially from the documented process provided to OSFI.
Branches are required by legislation to maintain certain records
in Canada. These include accounting records and records showing,
for each customer, particulars of the transactions with the
customer and the balance owing to, or by, the Branch in respect of
that customer. In a welcome move, the Draft Guideline abandons the
approach used in Guidelines E4A and E4B of providing a list of
broad categories of records that OSFI considered to be captured by
this legislative requirement. Instead, OSFI notes that it expects
the records to be sufficiently detailed to enable OSFI to conduct
an examination of the business of the Branch and to enable the
management of the Branch's assets in the event of insolvency
or regulatory intervention.
The Draft Guideline also acknowledges that under the recently amended provisions of the Bank Act and the Insurance Companies Act, Branches from certain listed jurisdictions, including the United States, will be exempt from the requirement to hold records in Canada. These amendments, which were introduced in connection with Canada's implementation of the United States-Mexico-Canada Agreement, are expected to take effect in July 2021. These exempt Branches must instead provide OSFI with “immediate, direct, complete and ongoing” access to the records that are stored outside Canada.
CALL FOR COMMENTS
OSFI has called for comments on the Draft Guideline to be
submitted by December 18, 2020. OSFI expects to issue the final
version of the new Guideline E-4 in spring 2021.
Originally published by Blakes, November 2020
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