Vol. 150, No. 24 — November 30, 2016

Registration

SOR/2016-297 November 18, 2016

OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS ACT

Assessment of Financial Institutions Regulations, 2017

P.C. 2016-985 November 18, 2016

His Excellency the Governor General in Council, on the recommendation of the Minister of Finance, 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), makes the annexed Assessment of Financial Institutions Regulations, 2017.

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

A is the minimum assessment that was applicable for the previous fiscal year;

B is the Consumer Price Index for the 12-month period that ends on December 31 immediately preceding that fiscal year; and

C is the Consumer Price Index for the 12-month period immediately preceding the period referred to in the description of B.

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

A is the capital of the institution in respect of that fiscal year,

B is the aggregate of the amounts determined for A for all banks, authorized foreign banks, trust and loan companies and retail associations, other than those referred to in subsection 2(2), and

C is the amount by which the amount of expenses, ascertained under subsection 23(1) of the Act, incurred for or in connection with the administration of the Bank Act, the Trust and Loan Companies Act and the Cooperative Credit Associations Act and attributable to banks, authorized foreign banks, trust and loan companies and retail associations in respect of that fiscal year exceeds the total of any service charges, assessment surcharges and other revenues relating to the administration of those Acts and attributable to those institutions in respect of that fiscal year; or

D⁄E × (C − F)

where

C is as described in paragraph (a),

D is the amount by which the amount determined by the formula in paragraph (a) exceeds the minimum assessment applicable to the institution in respect of that fiscal year,

E is the aggregate of the amounts determined for D for all banks, authorized foreign banks, trust and loan companies and retail associations, other than those referred to in subsection 2(2), and

F is the aggregate of the minimum assessments applicable to all banks, authorized foreign banks, trust and loan companies and retail associations, other than those referred to in subsection 2(2).

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

A is the capital of the institution in respect of that fiscal year,

B is the aggregate of the amounts determined for A for all cooperative credit associations, other than those referred to in subsection 2(2), and

C is the amount by which the amount of expenses, ascertained under subsection 23(1) of the Act, incurred for or in connection with the administration of the Cooperative Credit Associations Act and attributable to cooperative credit associations in respect of that fiscal year exceeds the total of any service charges, assessment surcharges and other revenues relating to the administration of that Act and attributable to those institutions in respect of that fiscal year; or

D⁄E × (C − F)

where

C is as described in paragraph (a),

D is the amount by which the amount determined by the formula in paragraph (a) exceeds the minimum assessment applicable to the institution in respect of that fiscal year,

E is the aggregate of the amounts determined for D for all cooperative credit associations, other than those referred to in subsection 2(2), and

F is the aggregate of the minimum assessments applicable to all cooperative credit associations, other than those referred to in subsection 2(2).

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

A is the capital of the institution in respect of that fiscal year,

B is the aggregate of the amounts determined for A for all life companies, societies, foreign life companies and foreign fraternal benefit societies, other than those referred to in subsection 2(2), and

C is the amount by which the amount of expenses, ascertained under subsection 23(1) of the Act, incurred for or in connection with the administration of the Insurance Companies Act and attributable to life companies, societies, foreign life companies and foreign fraternal benefit societies in respect of that fiscal year exceeds the total of any service charges, assessment surcharges and other revenues relating to the administration of that Act and attributable to those institutions in respect of that fiscal year; or

D⁄E × (C − F)

where

C is as described in paragraph (a),

D is the amount by which the amount determined by the formula in paragraph (a) exceeds the minimum assessment applicable to the institution in respect of that fiscal year,

E is the aggregate of the amounts determined for D for all life companies, societies, foreign life companies and foreign fraternal benefit societies, other than those referred to in subsection 2(2), and

F is the aggregate of the minimum assessments applicable to all life companies, societies, foreign life companies and foreign fraternal benefit societies, other than those referred to in subsection 2(2).

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

A is the capital of the institution in respect of that fiscal year,

B is the aggregate of the amounts determined for A for all property and casualty insurers, other than those referred to in subsection 2(2), and

C is the amount by which the amount of expenses, ascertained under subsection 23(1) of the Act, incurred for or in connection with the administration of the Insurance Companies Act and the Green Shield Canada Act and attributable to property and casualty insurers in respect of that fiscal year exceeds the total of any service charges, assessment surcharges and other revenues relating to the administration of those Acts and attributable to those institutions in respect of that fiscal year; or

D⁄E × (C − F)

where

C is as described in paragraph (a),

D is the amount by which the amount determined by the formula in paragraph (a) exceeds the minimum assessment applicable to the institution in respect of that fiscal year,

E is the aggregate of the amounts determined for D for all property and casualty insurers, other than those referred to in subsection 2(2), and

F is the aggregate of the minimum assessments applicable to all property and casualty insurers, other than those referred to in subsection 2(2).

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

A is the capital of the institution in respect of that fiscal year,

B is the aggregate of the amounts determined for A for all mortgage insurance companies, other than those referred to in subsection 2(2), and

C is the amount by which the amount of expenses, ascertained under subsection 23(1) of the Act, incurred for or in connection with the administration of the Insurance Companies Act and attributable to mortgage insurance companies in respect of that fiscal year exceeds the total of any service charges, assessment surcharges and other revenues relating to the administration of that Act and attributable to those institutions in respect of that fiscal year; or

D⁄E × (C − F)

where

C is as described in paragraph (a),

D is the amount by which the amount determined by the formula in paragraph (a) exceeds the minimum assessment applicable to the institution in respect of that fiscal year,

E is the aggregate of the amounts determined for D for all mortgage insurance companies, other than those referred to in subsection 2(2), and

F is the aggregate of the minimum assessments applicable to all mortgage insurance companies, other than those referred to in subsection 2(2).

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

A is the capital of the institution in respect of that fiscal year;

B is the aggregate of the amounts determined for A for all approved mortgage insurers, other than those referred to in subsection 2(2); and

C the amount of expenses, ascertained under subsection 23(1) of the Act, incurred for or in connection with the administration of the Protection of Residential Mortgage or Hypothecary Insurance Act in respect of that fiscal year.

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.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The Assessment of Financial Institutions Regulations, 2017 (the amended Regulations) replace the Assessment of Financial Institutions Regulations, 2001 (the current Regulations) and 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 better aligns 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 (IFRS) that many countries have chosen to adopt, including Canada. As of January 1, 2011, in Canada, publicly accountable entities, including FRFIs, were required to adopt IFRS in favour of Canadian Generally Accepted Accounting Principles (CGAAP). IFRS is being developed and implemented in phases, some of which have yet to be finalized.

The impacts of moving from CGAAP to IFRS vary depending on the type of institution and its activities. However, it is clear that IFRS affects 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 CGAAP. IFRS also affects the definition of an insurance contract, and has 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 are redesigned to be less prone to accounting 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 (OSFI 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 OSFI 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
(2) Base assessments

Objectives

The main objects of the amended Regulations are 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 major impacts resulting from future accounting 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 amended Regulations and the current Regulations can be grouped into four categories, each of which is summarized below.

1. Proxy for measuring OSFI time and resource expenditures

The amended Regulations change 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 new proxies for each type of FRFI are

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 amended Regulations 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 amended Regulations update the minimum assessments as summarized below.

4. “Housekeeping” amendments

The amended Regulations clarify the application of assessments 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 clarify the following:

“One-for-One” Rule

The “One-for-One” Rule does not apply to the amended Regulations. 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 the amended Regulations, as there are no costs on small business.

Consultation

The amended Regulations were subject to two distinct public consultation processes: (a) OSFI issued two public consultation papers to introduce the amendments to the assessment methodologies and discuss anticipated impacts; and (b) as part of the formal regulation-making process, OSFI sought public comment on the draft Regulations as prepublished in the Canada Gazette, Part I. Each consultation process is discussed below.

(a) OSFI public consultation papers

OSFI has published two consultation papers on the 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 amendments, OSFI provided individual FRFIs with their anticipated institution-specific results under the new assessment 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 amendments, 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 amendments (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 new 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:

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:

(b) Prepublication in the Canada Gazette, Part I

The amended Regulations were prepublished in the Canada Gazette, Part I, on May 28, 2016, followed by a comment period of 30 days. OSFI concurrently published notice of the consultation on its website, and sent an email to subscribers of OSFI’s email notification service.

OSFI received two formal submissions as part of the Canada Gazette consultation.

Rationale

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

The amended Regulations achieve each of the stated objectives, directly addressing the identified issues. More specifically, the amended Regulations will achieve the following results:

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

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

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

The amended Regulations may 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 amended Regulations come into effect on April 1, 2017, which allows OSFI to apply the new assessment methodologies to recover its 2016–2017 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