Sometimes it feels as though there are so many regulations being followed by financial institutions in Canada. There’s the Bank Act and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The list also includes the OSFI regulations courtesy of the Office of Superintendent of Financial Institutions.
OSFI is a government body operating under the OSFI Act. It’s currently headed by Superintendent Peter Routledge who was appointed to the position. It's an independent department from the Government of Canada with a mandate that’s distinct from the Bank Act and the PCLMTFA.
Primary mandate of OSFI
OSFI regulations are primarily for the purpose of regulating and supervising banks, trust and loan companies, and federal insurance companies. Its overall goal is to make sure that these financial institutions are in sound financial condition. To do this, OSFI regulations can touch on any of the following matters:
- encouraging best risk management practices by creating a regulatory framework designed to control and manage risk
- supervise and intervene, if necessary, in cases of material deficiencies in banks or require that institutions address certain situations
- balance the rights and interests of policyholders, depositors, beneficiaries, and creditors while ensuring that financial institutions remain competitive
- evaluating and monitoring system-wide or sectoral developments that could negatively impact the financial condition of covered entities
OSFI regulations are often read together with other financial legislation like the Bank Act. This is because OSFI also interprets the Banks Acts and issues directives accordingly. But what about FINTRAC? FINTRAC is a special body that addresses anti-money laundering and terrorist financing specifically.
Ideally, all these laws related to financial institutions must be read together by a competent lawyer who can harmonize the provisions. Since banking is imbued with public interest, the margin for error in these cases is very minimal.
Here’s a great explainer about OSFI regulations:
To learn more about these regulations, you can consult with the best banking and financial institutions lawyers in Canada as ranked by Lexpert.
Working with the Minister of Finance
The Minister of Finance is responsible for OSFI for the purpose of reporting to Parliament. Day-to-day operations, however, are handled by the Superintendent who exercises powers different from the Minister.
So what exactly does each one do for banking institutions? The Superintendent has the following powers and authorities:
- considered the Deputy Head of OSFI
- has full discretionary and statutory powers except in taking control of financial institution; in case of taking control, the Minister of Finance must agree
- can order financial institutions to take measures necessary to resolve a prudential risk
- reports on the findings on its covered entities every year
- reports on the effectiveness of the policies and procedures in place against threats
- provides the following reports to the Minister of Finance: annual report, department plan, and departmental results report
- processes all applications for ministerial approval
- administers the approvals process to conduct business of financial institutions
Here’s the Superintendent himself talking about the agendas of OSFI:
Scope of OSFI regulations
OSFI is designed to keep public confidence in banks secure. Here's the scope of institutions it regulates:
- all Canada banks
- insurance companies
- fraternal benefit societies
- federally incorporated trust and loan companies
- 1,200 federally regulated private pension plans
Under OSFI regulations, these financial institutions must comply with rules or face massive sanctions. Currently, there are several active OSFI regulations under the OSFI Act. These includes:
- Administrative Monetary Penalties (OSFI) Regulations (SOR/2005-267)
- Assessment of Financial Institutions Regulations, 2017 (SOR/2016-297)
- Assessment of Pension Plan Regulations (SOR /2011-317)
- Charges for Services Provided by the Office of the Superintendent of Financial Institutions Regulations 2002 (SOR/2002-337)
These reports can include a variety of personal information from borrowers. On the plus side however, OSFI is obliged to follow data privacy laws, ensuring that their borrowers remain safe despite the exchange of data.
OSFI compliance in banks
So how exactly do OSFI regulations impact day-to-day bank operations? Principles of OSFI can be found in different aspects of financial institutions. Here are just some of the tasks banks do for compliance:
Filing framework
All federally regulated financial institutions are required to file certain information with OSFI. This information will be used to carry out their mandate. Failure to file exposes banks to penalties. Reports are also subject to review, which means that any errors could also lead to sanctions on the bank. The violation could be minor, serious, or very serious.
Depending on the gravity of violation, banks may have to pay:
- per diem penalty of $500 if the total asset of the financial institution is more than $10 billion
- per diem penalty of $250 if the total asset of the financial institution is more than $250 million but less than $ 10 billion
- per diem penalty of $100 if the total asset of the financial institution is less than or equal to $250 million
Basically, financial institutions who want to avoid these penalties must make sure that their reports are complete, error-free, and filed by the required due date and in the form required. Note that OSFI does not have discretion when it comes to penalties because they are set by regulations. Waivers and the like are not available under OSFI regulations.
Other matters handled by OSFI
OSFI regulations heavily matter when considering how banks deal with their clients. In fact, they can impact the daily borrower because the department is responsible for setting the standard for bank borrowings.
Here are just some of the things OSFI regulations handles on behalf of banks:
Minimum qualifying rate for uninsured mortgages
Ever wonder how exactly banks figure out if a person is qualified for a loan or a mortgage? OSFI regulations oblige lenders to apply the stress test when determining the capacity of borrowers to pay. The stress test basically ensures that borrowers, despite financial setbacks, can still pay off their mortgages.
Loan to income limit
OSFI regulations also help set the standards for loan to income limit. This determines how much money a bank can safely lend a borrower based on their income. The computation also takes into consideration other factors such as:
- pre-existing loans
- cost of living expenses
- current economic conditions
Regulating loan to income limit helps OSFI maintain the financial integrity of institutions. By setting a standard, banks can lower their risks while ensuring that those who need to borrow money can do so.
Setting domestic stability buffer
Domestic stability buffer is like the rainy-day fund for banks. It refers to the special monetary reserve of banks to help protect the financial system in case something bad happens. This special reserve is calculated through OSFI regulations and depends on different factors such as the size of the bank or the services it provides.
Domestic stability buffers come into play if a bank has too many non-paying borrowers. If numerous borrowers default, banks can dip into their reserve to “buffer” operations until everything becomes stable again.
Assessing risks
OSFI regulations also assess the risks faced by banks and provide guidelines for maneuvering those risks. In line with this, the agency publishes annual and semi-annual risks outlooks. These risks include:
- real estate secured lending
- wholesale credit risks
- funding and liquidity risks
- integrity, security, and foreign interference
- climate risks
- digital and crypto risks
- technology and cyber risk management
OSFI came up with these reports after a thorough study of the market. Since the banking economy changes from year to year, OSFI has to evaluate on a routine basis to keep up with the changes. This is the very reason why timely and accurate reporting from banks is critical for the department.
Taking control
As a general rule, OSFI only regulates financial institutions but more or less leaves them to make important internal decisions. In rare cases, OSFI will take control of the bank if, based on their assessment, intervention is necessary to prevent loss. The Superintendent can only take control of a financial institution of the Minister of Finance agrees.
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How OSFI compliance works with the Bank Act
OSFI regulations are implemented to meet the primary mandate of the department, which is to strike the balance between security and risk. By setting the standards on what rates or factors banks can charge for transactions, OSFI ensures that banks remain viable without hurting the borrowing public.
But how does OSFI compliance work side-by-side with the Bank Act? Think of the Bank Act as the primary law governing banks in Canada. OSFI is the body that makes sure that the governing law is followed. To do this, OSFI issues its own regulations, which comply with the primary objectives of the Bank Act.
OSFI is primarily concerned with day-to-day operations or activities that keep the bank operating for the purpose of intended use. The Bank Act’s scope covers even the establishment of the bank as well as what transactions are covered by the banking business.
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Best practices for OSFI compliance
So, what should banks do if they want to maintain compliance with OSFI regulations? The penalties associated with failure to comply can be incredibly high. Even if banks can afford it, the damage to their reputation can be costly. Here are some practical tips to ensure compliance with OSFI regulations:
Stay on top of updates
The very nature of industry requires constant updating to ensure that it moves with the financial climate. This creates the challenge of always being on top of the latest updates from OSFI. This is especially true if there are changes in the minimum qualifying rates or loan-to-income ratio.
Have a dedicated team for compliance
Perhaps the best way to stay on top of OSFI regulations is by having a dedicated team monitor changes. The team can be composed of administrative staff with a legal director who can make decisions based on existing law. Having an in-house or a consulting lawyer for the organization can go a long way in avoiding possible sanctions due to violations.
Set a schedule for regular reporting
Even late reporting can expose the bank to penalties. For this reason, it’s important to have a solid timeframe of how information is collected, arranged, and submitted. Banks that manage to create a solid procedure often find it easier to consistently comply with OSFI regulations.
Training and monitoring
Of course, don’t forget to keep relevant employees updated with recent changes. Banks can join seminars, conventions, or some other events to keep the relevant departments informed. With consistent training, OSFI compliance can be built into the culture of the bank. This ensures that even the smallest players know what to do.
Staying compliant with bank laws
Ultimately, OSFI regulations are just one of the many bank laws financial institutions have to plan around. The burden on banks is heavy, which makes it critical for financial institutions to take compliance seriously. Finances outside, the reputational impact of non-compliance can place banks in a negative light among their clients.
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