2014 was another year of considerable regulatory change for Canadian financial institutions. In recent years, Canadian regulators have been focused, to some extent, on adapting the initiatives of international bodies with regulatory responsibilities to the Canadian regulatory environment, and so we start with an outlook into the expected activities of these bodies in 2015.
FINANCIAL STABILITY BOARD (FSB)
In a November 2014 communiqué of Mark Carney, the Chairman of the FSB, he noted that the job of agreeing on measures to fix the fault lines that caused the last financial crisis is now substantially complete. He indicated that strengthened international standards are building more resilient financial institutions and more robust markets. This means the FSB will adjust its focus towards addressing new and constantly evolving risks and vulnerabilities. For 2015, areas of work include developing a common international standard on the total loss absorbing capacity of globally systemic banks; an industry agreement to overcome the lack of a global framework to prevent cross-border counterparties taking their money before others when a bank needs to be resolved; and an agreement to prevent cross-border derivative contracts being disruptively terminated in the event of a globally systemic bank entering resolution. Mr. Carney also indicated that in 2015, the FSB will begin an annual reporting process on implementation of reforms by G-20 members. In addition, the FSB will begin the reporting of implementation progress on shadow banking reforms, drawing on monitoring and peer review work undertaken by relevant monitoring bodies.
BANK FOR INTERNATIONAL SETTLEMENTS (BASEL COMMITTEE ON BANK SUPERVISION)
With the backing of the G-20, the Basel Committee on Bank Supervision has a very active program to promote greater consistency in the implementation of global standards, and improved transparency of instances where national differences exist. Areas on current consultation leading to potential further reforms include revisions to the standardized approach for credit; capital floors: the design of a framework based on standardized approaches; fundamental review of the trading book; criteria for identifying simple, transparent and comparable securitizations; net stable funding ratio disclosure standards; and reducing excessive variability in banks' regulatory capital ratios.
In the November 2014 speech at the Federal Reserve Bank of Chicago, Mr. Stefan Ingves, Chairman, Basel Committee on Banking Supervision and Governor, Sveriges Riksbank, noted that a major issue is how to ensure that global systemically important banks have sufficient capacity to absorb losses in resolution, without having to ask taxpayers to foot the bill (total loss absorbing capacity). In addition, he noted that ensuring consistency in the implementation by member countries of risk-based capital standards will therefore be a key factor in restoring confidence in banks and the Committee is thus assessing bank capital ratios with a view to ensuring that they appropriately reflect the risks that banks face.
INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS (IAIS)
The IAIS is currently consulting on a number of issues. First, given an increasing international focus on bribery and corruption, and in view of the risks they pose to the insurance sector, the Financial Crime Working Group of the IAIS considered it timely to explore how this activity affects insurers and insurance intermediaries as well as how insurance supervision can help to ensure that insurers and insurance intermediaries manage such risks effectively. In addition, the IAIS is also consulting on group corporate governance with the objective to create awareness for insurers and supervisors of the challenges of centralized and decentralized governance approaches and possible solutions for these challenges, which should be taken into account when setting up and assessing the corporate governance framework of an insurance group.
The IAIS has concluded development of the first-ever global insurance capital standard: the Basic Capital Requirements (BCR) for global systemically important insurers (G-SIIs). Beginning in 2015, the BCR will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for purposes of refining the BCR. During this reporting period, the IAIS will review the suitability of the BCR factors to ensure that the BCR remains fit for its purpose. From 2019, G-SIIs will be required to hold capital no lower than the BCR plus a requirement for Higher Loss Absorption.
U.S. REGULATORY AUTHORITIES AND DERIVATIVES
For Canadian financial institutions and other market participants in Canada executing over-the-counter (OTC) derivatives within the jurisdiction of U.S. regulators, there will be at least three critical developments in 2015. The U.S. Securities and Exchange Commission (SEC), which is the lead securities regulator in the U.S. and the second of two primary U.S. regulators of OTC derivatives and the lead securities regulator in the U.S. will issue long-awaited, proposed and final rules for most OTC put and call options and other OTC derivatives falling within the definitions of Security-Based Swaps (such as many credit default swaps) and Mixed Swaps, (as those capitalized terms are defined in the U.S. Commodity Exchange Act, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ). Also in 2015, both the SEC, U.S. banking regulators and the lead U.S. derivatives regulator, the Commodity Futures Trading Commission (CFTC), will have promulgated final collateral rules for un-cleared derivatives which will require substantial operational and legal documentation changes this year; this will be an exceedingly difficult process given differences today in regulatory approaches in this important area. Finally, in addition to having to address capital requirements, Canadian banks (as well as financial services and other firms) triggering the Volcker Rule will need to have standard or enhanced compliance programs up and running and must comply with many other requirements prior to July 21, 2015 (among other key U.S. compliance dates throughout the year). While we also expect to receive in the first quarter of 2015 guidance from the CFTC on a key residency issue, the foregoing developments this year should be front and center in the minds of all Canadian market participants executing and settling derivatives within the jurisdiction of these U.S. regulators.
The Canadian Government will continue the process of developing a comprehensive risk-based approach to, and framework for, the oversight of the Canadian payments system. To this end, it will strengthen the Code of Conduct for the Credit and Debit Card Industry in Canada to address new developments and mobile payments. In addition, it will continue to advance the development of a comprehensive financial consumer code and will seek to ensure public confidence in the use of electronic payment methods. This code will streamline the existing and dispersed mix of legislation and regulations. The Canadian Government has made it clear that it is closely watching the new and innovative service delivery channels that are emerging in the use of mobile devices. As such, this will result in a financial consumer protection framework that is technology-neutral in its approach and more adaptable to changes in the marketplace, products and technology so that no matter how a service is offered to consumers, consumer protections continue to apply. The Canadian Government will also be taking steps to implement the changes relating to the governance and oversight of the Canadian Payments Association to address accountability and payment system risk, some of which is outlined in Bill C-43, Economic Action Plan 2014 Act, No. 2, which received Royal Assent on December 16, 2014.
OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS (CANADA)
Having spent the last few years focused on ensuring that Canada has adopted enhancements to its regulatory regime that have been developed in the international fora noted above, in 2015 OSFI appears to be more focused on monitoring the impact of recent reforms and addressing a number of issues that have domestic relevance, with the exceptions noted below. For example, work is being done to update guidance on the incorporation of banks and trust companies and the foreign entry regime and to provide information and guidance to provincial credit unions seeking to continue federally. OSFI has announced plans to consider consolidation of the various forms of directions provided to regulated entities from the current menu of regulations, guidelines, advisories, rulings and other, to something that is perhaps less complex. Regulatory review processes that are expected in 2015 include amendments to the Related Party Transactions Regulations and Assessment of Financial Institutions Regulations, and Substantial Investment Advisory. In addition to the domestic focus noted above, OSFI continues to be very much involved in international capital adequacy processes related to the securitization rules and market risk review and plans to engage in consultations with respect to such issues as credit risk subject to the standardized approach, the interest rate risk in the banking book and the requirements for use of internal ratings-based (IRB) methodology and minimum regulatory capital calculations.
Changes in approach to capital adequacy assessment and self-assessment will consume the federal prudential regulator and the industry whether it is the full implementation of Own Risk Solvency Assessment (ORSA) or changes to minimum regulatory capital requirements. Cyber security will remain top of mind for OSFI and the industry will continue to devote resource to this issue both to address regulatory expectations and reputational risk. Changes to Guideline E-4A with respect to the Role of the Chief Agent and Record Keeping Requirements are expected to be developed and this may have significant implications for the business models of some branches of foreign companies operating in Canada. In addition, the Canadian Government has indicated its intention to put in place demutualization regulations for the property and casualty sector.
CANADA DEPOSIT INSURANCE CORPORATION (CDIC)
The 2014 Budget of the Canadian Government included an announcement of a planned review of Canada's deposit insurance program to help ensure deposit insurance continues to meet the needs of Canadians. As indicated in the CDIC's Summary of the Corporate Plan 2014/2015 to 2018/2019, building on the corporation's recent and extensive work on developing resolution plans for its largest member institutions, in 2014/2015, CDIC will expand the scope of its resolution planning to include selected mid-sized member institutions. The CDIC has also indicated that it will implement a plan to enhance processes and procedures aimed at further improving the corporation's readiness in the event of the failure of one of its largest member institutions. In 2014/2015, CDIC has indicated that it will develop coordination protocols to strengthen its cooperative relationships with resolution authorities in the United States and the United Kingdom, and potentially other regions where Canadian financial institutions have a significant presence.
FINANCIAL CONSUMER AGENCY OF CANADA (FCAC)
The Government is committed to working with stakeholders to develop a National Strategy for Financial Literacy that takes into consideration ways to meet the needs of Canadians at different stages of their lives. FCAC is leading the consultation process. It has been reported that the full National Strategy for Financial Literacy will be released in 2015.
THE FINANCIAL TRANSACTIONS AND REPORTS ANALYSIS CENTRE OF CANADA (FINTRAC)
Bill C-43 (noted above) included legislative amendments to strengthen Canada's anti-money laundering and anti-terrorist financing regime and improve Canada's compliance with international standards. In 2015 the regulations required to implement the legislative changes enacted in 2014 will be published including regulations to regulate virtual currencies, such as Bitcoin.
PROVINCIAL INSURANCE REGULATION
In the wake of the Supreme Court of Canada decision in Autorité des marchés financiers (AMF) c. Souveraine (La), compagnie d'assurance générale  3 SCR 756, 2013 SCC 63 and an increased focus on market conduct regulation, we expect an increase in both the frequency and severity of administrative monetary penalties imposed on insurers at the provincial level for market conduct and compliance matters. Developments in the forum of the International Association of Insurance Supervisors will continue to impact the regulatory lens and outcomes here in Canada at both the federal and provincial levels of insurance regulation.
PROVINCIAL CREDIT UNION REGULATION
Ontario is reviewing the Credit Unions and Caisses Populaires Act, 1994 in a process led by Laura Albanese, the Parliamentary Assistant to the Ontario Minister of Finance. Final recommendations are expected to be provided to the government by the fall of 2015. The review is seeking input from the public on ways to strengthen the regulatory framework, protect consumers and enable credit unions and caisses populaires to continue to meet the needs of their members.
In November 2014, Central 1 Credit Union, Concentra Financial Services Association and SaskCentral signed a Memorandum of Understanding to explore opportunities to consolidate their trust services and wholesale financial lines of business. It was reported that these discussions may advance the establishment of a national, credit-union-owned, wholesale financial and trust provider.
There is a tremendous velocity of change in the regulatory requirements for Canada's regulated banking and insurance sectors. The importance of experienced professionals with regulatory compliance responsibilities has never been greater, as are the risks to institutions that fail to adapt to changing requirements. We look forward to supporting the sector in meeting all regulatory requirements in 2015.
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