Article by Sharissa Ellyn
New draft OSFI guideline: enterprise-wide model risk management
OSFI released a new draft Guideline E-23 – Enterprise-Wide Model Risk Management on December 21, 2016. Once finalized, Guideline E-23 will apply to banks, foreign bank branches, bank holding companies, and federally regulated trust and loan companies.
The draft guideline sets out OSFI’s expectations for a governance structure in connection with the development, review, approval, use and modification of internal risk management models. OSFI recognizes that smaller and less complex institutions might apply the controls set out in the guideline only in materially relevant areas.
Once the guideline is in effect, federally regulated financial institutions (FRFIs) will be expected to develop and operationalize enterprise-wide model risk management policies and to create and maintain inventories of risk management models they currently use and have recently decommissioned. OSFI has asked for comments on the draft guideline by February 28, 2017.
New FinTRAC guidance: PEPs and HIOs
On December 20, 2016, FinTRAC released new guidance for financial entities regarding politically exposed persons (PEPs) and heads of international organizations (HIOs). This guidance addresses the new requirements under Canada’s anti-money laundering (AML) regulations in connection with domestic PEPs and HIOs, which will be in force on June 17, 2017, (described in our post) as well as the existing requirements in connection with foreign PEPs.
In this guidance, FinTRAC states that regulated entities are not expected to assess all existing account holders immediately upon the coming into force date (June 17) of the new PEP and HIO obligations, but rather, a process must be established to assess existing account holders over time. One issue with the new requirements relates to the requirement (which arises in various circumstances) to take reasonable measures to determine whether a person is closely associated with a PEP or HIO. The government had indicated FinTRAC would provide guidance regarding the meaning of “close associate.” This new guidance is apparently intended to do that, however, institutions may find it is not particularly helpful in this regard. The guidance provides that the term “close associate” is not intended to capture every person who has been associated with a PEP or HIO. The guidance provides some examples of close associations – including business partners, romantic relationship partners, those involved in financial transactions, those who serve on the same boards, and those who closely carry out charitable works with a PEP or HIO.
According to the guidance, institutions must have a means to determine if a person associated with a PEP or HIO is or is not a close associate; it is unclear what this will entail. In line with previous guidance, this guidance provides (somewhat unhelpfully) that reasonable measures to determine whether a person is a PEP, HIO or a close associate of one of them include, but are not limited to (1) asking the client; (2) conducting an open source search; and (3) consulting a source of commercially available information.
Review of OSFI expectations for boards of FRFIs
OSFI recently advised all federally regulated financial institutions (FRFIs) that it plans a comprehensive review of its expectations for boards of directors of FRFIs. This review aims to ensure that boards can continue to be effective in their role.
The notice suggests that as part of this review, OSFI may consolidate expectations of boards and directors that are currently set out in its Corporate Governance Guideline as well as in many other specific guidelines and supervisory letters. Feedback, especially from smaller institutions, had indicated that the total of the expectations of boards and directors can be difficult to navigate. OSFI will begin its consultation by speaking directly to certain boards that represent a cross-section of the industry. These targeted discussions will be followed by a broader consultation. Anyone who wishes to participate in this consultation may contact OSFI at the phone number indicated in the notice.
Bank Act financial consumer protection framework
As described in our post, Bill C-29 would have amended the Bank Act to include a new consumer protection framework (which was promised for many years by successive federal governments). The amendments would have consolidated many current consumer protection provisions and added certain new requirements. However, following objections from Quebec, the proposed amendments to introduce the new framework were withdrawn before the bill was passed on December 15, 2016.
The controversial aspects of the proposed amendments provide that the new framework is intended to be a comprehensive and exclusive regime that is paramount to any province’s consumer protection laws. We understand that the proposed amendments will be reviewed by the Financial Consumer Agency of Canada to ensure they provide consumer protections that are at least as strong as those available under Quebec law. Following this review (and possible revision), it is expected the proposed amendments will be reintroduced as a new bill in the House of Commons.
FCAC to update supervision framework and principles for publishing decisions
On September 29, 2016, the Financial Consumer Agency of Canada (FCAC) released for public comment a proposed new Supervision Framework and proposed new Publishing Principles for FCAC Decisions. It appears the Supervision Framework, once finalized, will replace FCAC’s existing Compliance Framework. The Compliance Framework outlines how FCAC supervises and monitors regulated entities for compliance with regulatory requirements. Of note is FCAC’s new classification of regulated entities as Tier 1 or Tier 2 on the basis of their relative inherent risks of breaching their market conduct obligations. Tier 1 entities are those that present higher inherent risks as a result of their business models and service offerings. Tier 2 entities will be monitored less intensively than Tier 1 entities.
The new Supervision Framework will be supported by additional guidance documents and redesigned internal processes that will be developed and phased in over time. In the proposed new Publishing Principles, FCAC indicates that it makes public information about all violations and breaches of voluntary codes and public commitments. For violations, the commissioner of FCAC will decide on a case-by-case basis whether or not to publish the name of the regulated entity that committed the violation. For breaches of voluntary codes and public commitments, FCAC will publish anonymous information about the non-adherence. The consultation period has closed, but these documents have not yet been published in final form.
Further amendments to proceeds of crime regulations expected
As described in our post, various amendments to regulations under Canada’s AML legislation were published in final form in 2016. Certain of these amendments came into force on June 30, 2016, while the remaining amendments will be in force on June 17, 2017. A second package of amendments to Canada’s AML regulations to address prepaid payment products, virtual currencies and money services businesses without a physical presence in Canada was expected to be published in draft in fall 2016, but has not yet been released.
Review of the federal financial sector framework
On August 26, 2016, the federal government’s Department of Finance launched a consultation to review the federal financial sector framework. Each of the federal financial institutions statutes includes sunset clauses that require the government to review these statutes every five years. The current sunset dates were extended in 2016 by two years to 2019. The stated purpose of this review is to allow the government to consider whether the current framework effectively supports growth and positions the sector to meet the government’s stated policy objectives of stability, efficiency and utility.
The consultation paper provides useful background information about Canada’s financial services sector and information about the policy context and trends that influence the financial sector. Some of the trends discussed are the macroeconomic conditions in Canada (such as low interest rates and high household debt), increased concentration in the financial sector, the changing competitive landscape, the internationalization of financial institutions, financial innovation, and the emergence of fintech. The consultation paper concludes by setting out broad questions, which ask for comments on the trends and challenges that influence the financial sector, whether the current framework effectively balances the policy objectives, and what actions could be taken to strengthen the sector, promote economic growth and ensure the legislative framework remains modern and technically sound. The consultation period closed on November 15, 2016.
The consultation document indicates that the Department of Finance may make public some or all of the responses or may provide summaries of responses in public documents and that responses will be used in developing a policy paper for further consultation in 2017. This further consultation may lead to proposed amendments to the federal financial institutions statutes and regulations.