Canada: OSFI Releases New Guideline for Federally Regulated Financial Institutions that Outsource Business Functions

Last Updated: February 4 2004
Article by Stephanie M. Robinson

The Office of the Superintendent of Financial Institutions ("OSFI") recently released for comment a draft of a new Guideline B-10 – Outsourcing of Business Functions. The new Guideline will apply to federally regulated financial institutions such as banks and insurance companies, subsidiaries and parent companies of such institutions, and foreign financial institution branches, as well as bank holding companies (collectively, for the purposes of this bulletin, "FRFIs").

Outsourcing arrangements involve an agreement between a FRFI and a service provider pursuant to which the service provider performs a business function that would otherwise be performed by the FRFI. Some business functions which are commonly outsourced are information system management and maintenance, document processing, application processing, loan administration and human resources functions.

The new Guideline sets out OSFI’s expectations for FRFIs that outsource business functions to service providers. Although the current Guideline B-10 was released as recently as May 2001, OSFI believes that the new Guideline is necessary due to the increase in outsourcing activity and the increasing reliance by FRFIs on such arrangements.

What’s New?

  • Guideline B-10 has been reorganized and streamlined.
  • OSFI clarifies how foreign financial institution branches are expected to manage the risks associated with services provided by the home office or third parties.
  • The new Guideline introduces more flexible expectations for federally incorporated financial institutions that obtain services from wholly owned subsidiaries or a federally regulated parent.
  • Institutions will be expected to apply more comprehensive criteria to determine the materiality of outsourcing arrangements and to ensure the management of the risks is commensurate with the materiality of the arrangements.
  • Institutions will be prohibited from outsourcing certain internal audit and actuarial services to the external auditor.
  • OSFI’s expectations for data processing outside of Canada will be incorporated into the new Guideline, and Guideline E-3 – Processing Information Outside Canada, will be revoked.
  • Institutions will be expected to maintain a centralized list of material outsourcing arrangements and to exercise more centralized control over outsourcing.

OSFI has invited FRFIs to comment on the new Guideline through their respective industry associations by October 15, 2003. The following is a general overview that has been prepared to help FRFIs understand the changes to the Guideline and the obligations they will face under the new Guideline.

Application of the New Guideline

The new Guideline will apply to all outsourcing arrangements of a FRFI, whether entered into in Canada or in foreign jurisdictions, with a few exceptions. Clearing arrangements, sales of financial products by independent agents or brokers, ceded insurance and reinsurance ceded, and loan syndications are not subject to the new Guideline.

FRFIs are expected to design a risk management program that applies to all of their outsourcing arrangements except for those outsourcing arrangements which are clearly immaterial to the FRFI. However, this requirement will apply to all outsourcing arrangements that involve the processing of specified information or data outside of Canada, regardless of the materiality of the data processing outsourcing arrangement.

Generally, an outsourcing arrangement is immaterial if it does not have the potential to have an important quantitative or qualitative influence on the FRFI. OSFI acknowledges that outsourcing arrangements exhibit varying degrees of materiality and that while risk management programs must apply to all material outsourcing arrangements, the vigour of the FRFI’s management of outsourcing risks should be proportionate to the materiality of the arrangement.

Accordingly, OSFI’s specific expectations for a FRFI will vary depending on the degree of materiality of the particular outsourcing arrangement.

Framework of the New Guideline

It is a premise of both the current Guideline B-10 and the new Guideline that FRFIs must retain ultimate accountability for all of their outsourced business activities and that reliance on a third party service provider must not compromise OSFI’s ability to supervise a FRFI. Outsourcing business functions to a service provider introduces new risks to an organization. As part of OSFI’s risk-focused supervisory process, the current Guideline B-10 requires FRFIs to develop a risk-management program to identify and manage those risks. The new Guideline builds on this requirement and provides a more comprehensive set of criteria for FRFIs to apply in evaluating the risks associated with outsourcing arrangements and implementing a program to ensure that the management of those risks is commensurate with the significance of the outsourcing arrangement. OSFI suggests that FRFIs evaluate their policies and procedures against the expectations set out in the new Guideline.

Evaluation of Risk - Materiality and Risk Management Programs

The new Guideline introduces greater flexibility into the regulatory regime because it allows OSFI to apply reduced expectations for risk management programs in circumstances where the outsourcing arrangement has a low degree of materiality, where the outsourcing arrangement is between a foreign financial institution branch and its home office, or where the arrangement is between FRFIs that are affiliated with one another. It should also be noted that OSFI advises FRFIs that individual outsourcing arrangements may be subject to supervisory scrutiny.

Another way in which the new Guideline introduces greater flexibility into the regulatory regime is that it takes a principle based approach to assessing the materiality of outsourcing arrangements, rather than a quantitative approach. The new Guideline eliminates specific materiality thresholds for the materiality criteria. For example, the current Guideline B-10 provides a bright-line test where contractual expenditures for an outsourcing arrangement exceed one per cent of a FRFI’s net assets. Such expenditures increase the materiality of the outsourcing arrangement and also the likelihood that the arrangement will be subject to the provisions in the Guideline. In contrast, under the new Guideline FRFIs will be expected toconsider the size of contractual expenditures as a share of the non-interest expenses of the FRFI or the line of business in assessing the materiality of an outsourcing arrangement, but there is no threshold set out to indicate whether the expenditure increases the materiality of the arrangement.

The current Guideline provides a framework which FRFIs may use to evaluate the significance of their outsourcing activities. The new Guideline builds on this framework by providing a more comprehensive set of criteria to consider in assessing outsourcing arrangements, so that FRFIs may identify their expectations regarding the costs and benefits of outsourcing arrangements and ensure that their risk management programs are appropriate. In this respect, the new Guideline is more instructive and more useful to FRFIs.

Responsibilities and Accountabilities of Management

The new Guideline sets out in greater detail the responsibilities of management regarding the FRFI’s risk management policies and practices, and also includes particular responsibilities for the chief agent or principal officer of a foreign financial institution branch. With regard to the latter, the changes to the new Guideline parallel proposed changes to Guideline E-4 – Role of the Canadian Chief Agent and Record Keeping Requirements, which will clarify OSFI’s expectations regarding the role of the chief agent or principal officer in corporate governance and compliance activities.

Prohibitions Regarding Outsourced Business Activities

One important change in the new Guideline is that FRFIs will be prohibited from outsourcing to an external auditor certain business functions, including actuarial services and internal audit services related to internal accounting controls, financial systems, or financial statements. There is an exception where it is reasonable to conclude that the results of the outsourced

function would not be subject to audit procedures during an audit of the FRFI’s financial statements. This amendment reflects provisions in the draft Independence Standards for Auditors issued by the Canadian Institute of Chartered Accountants.

Contents of an Acceptable Contract for Services

OSFI has expanded the elements of the outsourcing arrangement that should be included in the outsourcing contract. Material outsourcing arrangements should be documented by a written contract that addresses all elements of the arrangement, which elements will include, where applicable, provisions regarding the ownership of and access to all assets related to the outsourcing arrangement, enhanced audit rights and access rights for OSFI in respect of the service being performed and any rules or limitations regarding subcontracting by the service provider. The contract should also require the service provider to disclose general information regarding its insurance coverage and notify the FRFI about significant changes in its insurance coverage.

Data Processing in Foreign Jurisdictions

Currently, the approval of the Superintendent is required if a FRFI wishes to process certain types of information outside Canada. Guideline E-3 – Processing Information Outside Canada describes the circumstances in which OSFI may exempt a FRFI from the statutory requirement that the FRFI maintain and process in Canada any information or data relating to the preparation and maintenance of certain records.

Outsourcing arrangements that involve data processing in foreign jurisdictions will be required to follow the risk management program set out in the new Guideline, whether the arrangement is material or not. Three months after the final version of the new Guideline is posted, Guideline E-3 – Processing Information Outside Canada will be revoked and the Superintendent may consider the criteria set out in the new Guideline in assessing applications for approval to process information outside Canada.

Centralized List of Material Outsourcing Arrangements

Another new requirement is that OSFI will expect FRFIs to maintain a centralized list of all material outsourcing arrangements, which is to be provided to OSFI upon request. The list should summarize the key elements of the outsourcing arrangements.

Transition Period – What is Expected of FRFIs

The new Guideline specifies the timing of the application of the various requirements for both new and existing outsourcing arrangements. FRFIs will be required to comply with the requirements of the new Guideline in stages during the six months after the final version of the new Guideline is posted.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2003 McMillan Binch LLP

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Stephanie M. Robinson
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.