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,

• (a) the Superintendent did not make an order to commence and carry on business or, in the case of a foreign company to which the Insurance Companies Act applies, an order to insure in Canada risks;
• (b) the Minister approved an application for voluntary liquidation and dissolution; or
• (c) a court made a winding-up order under the Winding-up and Restructuring Act.
  

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

• (a) $30,000, in the case of a bank;
• (b) $30,000, in the case of an authorized foreign bank that is not subject to the restrictions and requirements referred to in subsection 524(2) of the Bank Act;
• (c) $15,000, in the case of an authorized foreign bank that is subject to the restrictions and requirements referred to in subsection 524(2) of the Bank Act;
• (d) $15,000, in the case of a trust and loan company whose activities are restricted to carrying on any of the fiduciary activities referred to in section 412 of the Trust and Loan Companies Act and any ancillary activities;
• (e) $30,000, in the case of a trust and loan company not referred to in paragraph (d);
• (f) $30,000, in the case of a retail association;
• (g) $15,000, in the case of a cooperative credit association;
• (h) $15,000, in the case of a company, a provincial company or a foreign company to which the Insurance Companies Act applies; or
• (i) $2,000, in the case of a society or a foreign fraternal benefit society.

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

• (a) in the case of a bank, a trust and loan company or a retail association, the total risk-weighted assets that it reported during the preceding fiscal year in the financial return prepared in respect of the fourth quarter of its financial year in accordance with section 628 of the Bank Act, section 495 of the Trust and Loan Companies Act or section 431 of the Cooperative Credit Associations Act, respectively;
• (b) in the case of an authorized foreign bank, the minimum capital equivalency deposit that it reported during the preceding fiscal year in its annual return prepared in accordance with section 601 of the Bank Act;
• (c) in the case of a cooperative credit association, an amount equal to 1/20 of the total borrowings that it reported during the preceding fiscal year in the financial return prepared in respect of the fourth quarter of its financial year in accordance with section 431 of the Cooperative Credit Associations Act;
• (d) in the case of a company, society or provincial company to which the Insurance Companies Act applies, the minimum required capital that it reported during the preceding fiscal year in its annual return prepared in accordance with subsection 665(1) of that Act; and
• (e) in the case of a foreign company to which the Insurance Companies Act applies, the minimum required margin of assets in Canada that it reported during the preceding fiscal year in its annual return prepared in accordance with subsection 665(2) of that Act.
  

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) the minimum assessment applicable to the institution, if it is greater than 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 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

• (b) in any other case, the aggregate of the minimum assessment and the amount determined by the formula

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) the minimum assessment applicable to the institution, if it is greater than 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 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

• (b) in any other case, the aggregate of the minimum assessment and the amount determined by the formula

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) the minimum assessment applicable to the institution, if it is greater than 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 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

• (b) in any other case, the aggregate of the minimum assessment and the amount determined by the formula

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) the minimum assessment applicable to the institution, if it is greater than 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 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

• (b) in any other case, the aggregate of the minimum assessment and the amount determined by the formula

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) the minimum assessment applicable to the institution, if it is greater than 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 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

• (b) in any other case, the aggregate of the minimum assessment and the amount determined by the formula

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

• (a) for each month during which the institution was rated at stage 1, the aggregate of $3,000 and an amount equal to 1/12 of 10% of its base assessment amount for the preceding fiscal year; and
• (b) for each month during which the institution was rated at stage 2, stage 3 or stage 4, the aggregate of $5,000 and an amount equal to 1/12 of 15% of its base assessment amount for the preceding fiscal year.

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

• (a) for each month during which the institution was rated at stage 1, an amount equal to 1/12 of 10% of its base assessment amount for the preceding fiscal year; and
• (b) for each month during which the institution was rated at stage 2, stage 3 or stage 4, an amount equal to 1/12 of 15% of its base assessment amount for the preceding fiscal year.

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

• (a) in the case of a surcharge referred to in paragraph (1)(a) or (2)(a), 0.2% of the assets of the institution as reported during the preceding fiscal year in the financial or annual return referred to in paragraphs 4(a) to (e); and
• (b) in the case of a surcharge referred to in paragraph (1)(b) or (2)(b), 0.4% of the assets of the institution as reported during the preceding fiscal year in the financial or annual return referred to in paragraphs 4(a) to (e).

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

• (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:
    • • Banks and trust and loan companies — the average total assets during the fiscal year ending on March 31 of that year.
    • • Authorized foreign banks — the average total assets in Canada during the fiscal year ending on March 31 of that year.
    • • Cooperative credit associations — the average total assets during the immediately preceding calendar year.
  • 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 current 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 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

• (a) in the case of a bank, a trust and loan company or a retail association, total risk-weighted assets;
• (b) in the case of an authorized foreign bank, the minimum capital equivalency deposit;
• (c) in the case of a cooperative credit association, an amount equal to 1/20 of the total borrowings;
• (d) in the case of an insurance company (including Green Shield Canada), society or provincial insurance company, the minimum required capital; and
• (e) in the case of a foreign insurance company, the minimum required margin of assets in Canada.
  

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.

• (a) Reduce the number of minimum assessment categories — the amended Regulations reduce the complexity of the Regulations by decreasing the number of minimum assessment categories for banks, authorized foreign banks, and trust and loan companies from 10 to 2.
• (b) Update minimum amounts assessed — the amended Regulations increase the remaining minimum amounts assessed to recover OSFI’s expenses at current market rates. The minimum assessments of banking institutions, other than lending branches, cooperative credit associations, and trust companies whose activities are limited to fiduciary activities, are increasing from $10,000 to $30,000. The minimum assessments for lending branches, cooperative credit associations, and trust companies whose activities are limited to fiduciary activities, are increasing from $10,000 to $15,000.
• The minimum assessments of life, property and casualty, and foreign companies are increasing from $10,000 to $15,000, and the minimum assessments of fraternal benefit societies and foreign fraternal benefit societies are increasing from $1,000 to $2,000.
• (c) Index minimum assessments — to ensure that the proposed minimum assessments keep pace with increases in overall assessments, the amended Regulations annually index the minimums in accordance with increases in the Consumer Price Index.
  

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:

• New FRFIs that have not yet commenced business during an assessment year shall not be assessed.
• The assessment surcharges applicable in paragraphs 8(1)(a) and (b) of the current Regulations [paragraphs 10(1)(a) and (b) of the amended Regulations] are, respectively, for each month, $3,000 and an amount equal to 1/12 of 10%, and $5,000 and an amount equal to 1/12 of 15%. As currently drafted, some FRFIs have inappropriately interpreted the $3,000 and $5,000 components of the surcharges to only be charged once (i.e. in the first month).
• In cases where no base assessment was levied against a FRFI in the preceding fiscal year (e.g. the institution did not exist), all calculations performed under section 8 of the current Regulations (section 10 of the amended Regulations) should use the minimum assessment that would have otherwise been applicable for that year.

“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:

• http://www.osfi-bsif.gc.ca/Eng/fi-if/in-ai/Pages/DTI-ACP.aspx
• http://www.osfi-bsif.gc.ca/Eng/fi-if/ic-sa/Pages/inscnsregs.aspx

These two consultation papers

• provided a brief overview of the current assessment methodologies for FRFIs;
• identified and discussed key considerations in developing new assessment methodologies;
• proposed new measures on which to base assessments;
• proposed updates to the minimum assessment methodologies; and
• summarized the aggregate impact of the proposed changes on FRFIs.

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:

• Risk-based methodology — Many respondents expressed support for all aspects of the move to the risk-based assessment methodology.
• Standardized versus Advance Internal Ratings Based (AIRB) banks — Small- and medium-sized banks measure credit risk and calculate their corresponding capital requirements using a standardized approach, which approach uses assessments from qualifying rating agencies to determine the risk weights for certain assets. Conversely, larger banks that have received supervisory approval of their AIRB approach may rely on their own internal estimates of risk components to determine the capital requirements for a given exposure. Two banks expressed concerns that OSFI may not achieve its policy objective to link assessments to risk. They submitted that greater risk lies within the larger AIRB banks and yet standardized banks calculate higher risk-weighted assets (i.e. required capital) than AIRB banks for similar credit exposures.
  OSFI acknowledged 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’ anticipated increases relative to actual time spent supervising the institutions, and relative to their peers, and concluded that the increases fairly reflect the time and resources spent on the institutions.
• Minimum assessment — Two small trust companies advocated for a smaller increase in the minimum assessment. The companies expressed concern that the increase in the minimum assessment from $10,000 to $30,000 would have a significant impact on their bottom lines. They further argued that, since their activities are limited to fiduciary activities, OSFI’s resource expenditures should be less, on average, than that spent on other banking institutions that, for example, take deposits.
  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 minimum assessment from $30,000 to $15,000, which is now the same as the new minimum 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:

• Risk-based methodology — Respondents generally expressed support for the move to a risk-based assessment methodology.
• Foreign premiums — One internationally active life insurance company expressed concern that the new methodology does not differentiate between foreign and Canadian business, as is the case under the current premiums-based assessment methodology. The current methodology only captures 25% of net premiums received outside of Canada — an attempt to recognize, for assessment purposes, that there is some OSFI reliance on foreign supervisors. The company suggested that the anticipated increase in its assessment, which does not recognize the limited extent of its domestic operations, is inappropriate.
  OSFI thoroughly assessed the appropriateness of the company’s increase relative to actual time spent supervising the institution, and relative to its peers, and concluded that the anticipated 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.
• Capital deduction for substantial foreign business — A life insurance company suggested that it may now be disadvantaged relative to its peers because it has scaled back its foreign operations to a point that they now comprise less than the 25% threshold that would qualify the company for a capital deduction under OSFI’s capital rules. Loss of the deduction would increase the company’s required capital and thus increase its pro-rata share of OSFI’s expenses under the new assessment methodology.
  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.
• Conservative reserving — Three companies suggested that the new methodology would penalize those insurers that have more conservative reserving practices.
  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 amendments to the insurance assessment methodology.
• Excess capital — To avoid penalizing a company for investing excess capital, an insurance company recommended that OSFI consider an assessment methodology that allocates OSFI’s expenses based solely on the capital required to support liabilities (versus the capital required to support both liabilities and assets).
  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 new assessment methodology through higher required capital.

(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.

• Consolidated or unconsolidated proxy — One submission sought confirmation on the calculation of assessments in the circumstance where there is more than one FRFI in a conglomerate group. More specifically, the institution sought clarity on whether the applicable risk-based proxy in the amended Regulations (e.g. required capital) is based on an institution’s consolidated figure (i.e. aggregating the amounts reported by its subsidiaries) or its unconsolidated figure (i.e. subtracting the amounts reported by its subsidiaries).
  OSFI confirmed that, pursuant to the OSFI Act, it must assess each institution individually. OSFI further confirmed that both the current and amended Regulations must therefore be administered using unconsolidated figures, as applicable.
• Standardized versus AIRB banks — The second respondent offered its perspective on the differences in the measurement of risk and calculation of capital requirements between standardized and AIRB banks. The institution expressed the same views during OSFI’s 2013 consultation.
  The institution’s perspective and OSFI’s response remain unchanged — both are summarized above under the subheading “Banking sector 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:

• The capital adequacy and capital equivalency requirements are risk-sensitive measures that are aligned with OSFI’s risk-based approach to supervision and, therefore, serve as a better proxy for the time and resources OSFI dedicates to supervising individual institutions.
• Compared to the current assessment measures of assets, premiums, and revenue, OSFI’s risk-based capital adequacy and capital equivalency frameworks are largely unaffected by adverse developments in international standards. Any future adjustments to these frameworks would only serve to better refine the allocation of OSFI’s expenses.
• The minimum amounts assessed have been updated to reflect current market rates, will remain up-to-date through indexing, and have been simplified by reducing the number of minimum assessment categories.

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

• Footnote a
  S.C. 2001, c. 9, s. 473(2)
• Footnote b
  S.C. 2001, c. 9, s. 477
• Footnote c
  R.S., c. 18 (3rd Supp.), Part I
• Footnote 1
  SOR/2001-177