Canada: OSFI Updates Guidance On Regulatory Compliance Management

Last Updated: June 3 2014
Article by Carol Lyons and Jared Grossman, Student-at-Law

Introduction

More than 10 years have passed since OSFI1 first issued Guideline E-13 entitled Legislative Compliance Management (LCM) (the "LCM Guideline"). After implementing its revised and updated Corporate Governance guideline in 2013, OSFI has now turned its attention to the LCM Guideline. In April 2014, OSFI published a draft revised Guideline E-13 entitled Regulatory Compliance Management (RCM) (the "RCM Guideline"). The purpose of the update is to better align OSFI's guidance on regulatory compliance management with the revised Corporate Governance guideline as well as with OSFI's Supervisory Framework and Assessment Criteria.2 OSFI has invited interested parties to provide comments on the draft RCM Guideline by June 20, 2014.

The LCM Guideline

In the early 2000's, invigorated concepts of compliance and corporate governance burst upon the scene, partly in reaction to a number of major corporate and accounting scandals affecting the United States that culminated in the enactment of the Sarbanes-Oxley Act of 2002. In addition to measures relating to financial reporting, enhanced disclosure and the role of the auditors, Sarbanes-Oxley brought with it a heightened awareness of corporate governance, including the Board's paramount role in independent oversight. In Canada, the same issues were on OSFI's radar and OSFI instituted, among other things, supplements to its Supervisory Framework in the form of a Ratings Assessment Criteria, the LCM Guideline and the Corporate Governance guideline.

The LCM Guideline first came into effect in March of 2003 requiring OSFI-regulated financial institutions,3 including insurers ("financial institutions"), to implement a set of controls for managing regulatory compliance risk. This system of risk controls was referred to as "legislative compliance management". At the time, the concept of an enterprise-wide framework of legislative risk management controls was relatively new. Also in 2003, OSFI issued the first version of its Corporate Governance guideline.

Ever since the LCM Guideline was implemented in 2003, financial institutions have been required to manage compliance risk by providing a control framework that includes a process for identifying and assessing regulatory compliance risks, and implementing key controls through which such risks are to be managed and mitigated. Financial institutions implemented the requirements of the current LCM Guideline in various ways, largely depending on their size, complexity of operations, nature of business, structure and ownership. Banks already had compliance systems in place, going back to the time they were first permitted to acquire securities dealers. The compliance efforts of Canadian life insurers were assisted by their trade association through a checklist approach. Some foreign-owned insurers borrowed from or adapted their corporate group's international compliance systems. Many institutions purchased software solutions from third party vendors in the form of computer automated compliance systems.

The RCM Guideline

Much has transpired in the past 10 years, including the global financial crisis of 2008 that affected not only corporate America, but also financial institutions all over the world. OSFI has worked closely with and/or listened to kindred regulatory bodies, global organizations and think tanks4 both since the crisis and for years before, with a view to introducing new and improved regulatory standards in Canada that are in step with emerging international best practices. As stated above, in 2013, OSFI implemented the revised Corporate Governance guideline noting that the 2003 version was no longer consistent with current industry best practices and international standards. This year, the RCM Guideline has been issued.

Although updated, there is nothing brand new in RCM Guideline. Except for some additional wording and expansion on a few concepts, the RCM Guideline does not materially diverge from its original counterpart. Essentially, it refines and restates OSFI's goals and expectations as originally articulated in the LCM Guideline.

Highlights

The following are highlights of some of the refinements and restatements found in the RCM Guideline:

Regulatory Compliance

The RCM Guideline specifies that a financial institution's compliance management framework is to address regulatory compliance risk. The compliance objectives of the current LCM Guideline apply to "legislation, regulations and regulatory directives". The same wording is used in the RCM Guideline, except that the term regulatory directives has been defined as "rules, guidelines, expectations, and guidance issued by applicable regulators". Arguably the application of the current LCM Guideline has always been equally broad, since regulatory directives are rooted in legislation. But it could be said that the RCM Guideline ends all argument by defining regulatory directives.

Emphasis on Independent Monitoring Procedures

Even though the importance of monitoring a financial institution's adherence to the LCM framework figures prominently in the LCM Guideline, the RCM Guideline takes monitoring to a new level. In the RCM Guideline, the adequacy and effectiveness of, and adherence to, compliance procedures, including monitoring and testing procedures should be independently monitored and tested on an ongoing basis by the compliance and other oversight functions, employing a risk-based approach. Verification of information used in key reports should be included as part of the monitoring and testing program. In addition, OSFI expects internal audit or other independent review function to validate the effectiveness of, and adherence to, the RCM Framework by regular risk-based testing. Generally, the review function is to be independent of the activities it reviews (although OSFI acknowledges that in smaller and less complex financial institutions one person may have more than one oversight responsibility).

Role of the Chief Compliance Officer (CCO)

The CCO's status and the formality of the CCO's role have been enhanced in a fashion similar to the new Corporate Governance guideline's treatment of the Chief Risk Officer. For example, the RCM Guideline states that the CCO should:

  • have a clearly defined and documented mandate, sufficient resources, unfettered access and a direct reporting line to the Board (or a Board Committee) for functional purposes;
  • meet with the Board on a regular basis, including, as appropriate, in camera meetings;
     
  • provide an "opinion" to the Board on the adequacy and effectiveness of the RCM framework and the status of the financial institution's compliance;
  • establish general areas of content and frequency of RCM reports made to the CCO by operational management;
  • not be directly involved in a revenue-generating function or in the management of any business line or product; and
  • be "independent from operational management".

Role of Internal Audit/Other Independent Review Function

The RCM Guideline expands the scope of work of the independent oversight of the RCM framework (e.g. internal audit) and articulates required elements of this function's mind-set. The RCM Guideline provides that:

  • the scope of the independent review function's work should include consideration of the reliability of the RCM framework and accuracy of the reporting to Senior Management and the Board as well as an assessment of how the compliance oversight function fulfills its responsibilities;
  • reports should include results of audits assessing the work of the CCO as well as recommendations for correcting deficiencies, management's response and remedial action plans;
  • reports are to assist the Board in assessing the reliability of assurances provided to the Board by the compliance oversight function and Senior Management; and
  • internal audit methodologies need to be supplemented by effective challenge and an attitude of "professional skepticism" by internal auditors.

Role of Senior Management

The RCM Guideline similarly expands the description of Senior Management's role with respect to the RCM framework. For example, Senior Management should:

  • ensure that those who "need to know" are provided with reports on the financial institution's status of compliance, remedial action taken and regulatory compliance risk management;
  • ensure that policies, procedures and practices are regularly updated so that they remain applicable in light of changing circumstances and regulatory compliance risks;
  • proactively consider whether RCM deficiencies identified in one area of the institution's operations may also be present in other areas; and
  • ensure that the compliance oversight function has the appropriate resources and support to fulfill its duties, is sufficiently independent of operational management, and has the capacity to offer objective opinions and advice to Senior Management and the Board.

Role of the Board

One interesting difference between the RCM Guideline and the current LCM Guideline is that the RCM Guideline does not specifically contemplate Board "approval" of the RCM framework. Rather, the RCM framework is to be "reviewed and discussed" with the Board. By contrast, OSFI's updated Corporate Governance guideline requires the Board to approve the institution's overall internal control framework as well as the enterprise-wide risk appetite framework that guides the risk-taking activities of the institution.

Enhanced responsibilities of the Board in the RCM Guideline include:

  • an overt statement that the Board is ultimately responsible for effective enterprise-wide regulatory compliance management;
  • requirements that the Board review and understand:
    • remedial actions for instances of material non-compliance or control weakness;
    • the financial institution's exposure to material regulatory compliance risk;
    • significant RCM policies; and
    • the RCM framework and its overall effectiveness;
  • requirements that the Board approve:
    • the mandate, resources and budget for the compliance oversight function; and
    • "where appropriate", the appointment, performance review and compensation of the CCO.

The RCM Guideline also states that:

"OSFI expects the Board to think critically about and challenge CCO reports and Internal Audit or other independent review function reports...and satisfy itself that the Board receives the information required to perform its RCM oversight responsibilities, including seeking assurances from Senior Management that the RCM controls have been implemented and are effective."5

Comment

In a nutshell, OSFI's updated RCM Guideline emphasizes the importance of the CCO's independence from operational management and independent review of the regulatory compliance management function by the internal auditor or other independent review function. It also articulates ultimate responsibility of the Board for effective management of enterprise-wise regulatory compliance. Somewhat similar emphasis was placed on risk governance in the updated Corporate Governance guideline. Yet, unlike the Corporate Governance guideline, the RCM Guideline appears to stop short of specifically suggesting external third party reviews of the RCM framework and its effectiveness.

There may be room for academic debate on the ultimate efficacy and appropriateness of some aspects of OSFI's approach. Nevertheless, OSFI is clearly striving to keep in step with emerging best practices. On March 25, 2014, Deputy Superintendent Andrew Kriegler defended OSFI's emphasis on the "three lines of defense"(namely, business, oversight and internal audit) as being in line with a truly global regulatory agenda.6 He maintained that the three lines of defense are not about duplication of controls and oversight functions and an "ever increasing regulatory burden", but rather about ensuring that financial institutions have complementary responsibilities that work together to support "safety, soundness and profitable risk-taking". He also mentioned that OSFI will begin to review the capabilities of internal audit later in 2014 (stay tuned).

In the context of the RCM Guideline, regardless of whether Mr. Kriegler's remarks mean that OSFI may be concentrating more on the internal auditor's – as opposed to a third party's – function as the independent reviewer of the CCO (who in turn is the independent reviewer of the operational business line), third parties may play a meaningful role in regulatory compliance management. As the prudential regulator, OSFI has the benefit of inside knowledge of all of the various compliance systems used and requires a robust system, as opposed to a checklist approach. Having a truly effective system in place overseen by a knowledgeable CCO is even more important now that the updated RCM Guideline has been issued.

Footnotes

1 Office of the Superintendent of Financial Institutions Canada (OSFI).

2 These documents are available on OSFI's website and outline, among other things, OSFI's risk-based approach to assessing an institution's safety and soundness.

3 The financial institutions that OSFI regulates include banks, insurers and trust and loan companies.

4 For example, Basel Committee on Banking Supervision, International Association of Insurance Supervisors, Financial Stability Board, International Monetary Fund, and Group of Thirty.

5 OSFI Draft Guideline E-13 at p. 10.

6 Speech to the National Bank Financial 12th Annual Canadian Financial Services Conference

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2014

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
Carol Lyons
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
Blake, Cassels & Graydon LLP
Blake, Cassels & Graydon LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
Blake, Cassels & Graydon LLP
Blake, Cassels & Graydon LLP
Related Articles
 
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
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions