Canada: OSFI Issues Updated Incorporation Guidance For Bank And Trust Company Applicants

The Canadian Office of the Superintendent of Financial Institutions (OSFI) assesses applications for incorporation and makes recommendations to the Canadian Minister of Finance (Minister), who has the ultimate responsibility for approving the incorporation of a federally regulated financial institution (FRFI) under the Bank Act (BA) or Trust and Loan Companies Act (TLCA).

The Government of Canada has indicated its interest in promoting the entry and growth of small deposit – taking institutions. In response, OSFI has sought to make regulatory priorities and the application process more transparent. To that end, OSFI has issued updated guidance that sets out the three phases of the application process, along with the information that applicants are generally expected to submit in support of the requisite applications (Revised Guide). The Revised Guide is an excellent source of information for potential applicants and their professional advisers and brings up to date public disclosure of the substantial revisions of the application process that was implemented by OSFI in 2014.

APPLICATION PROCESS

The phased approach is intended to provide applicants with increased guidance and feedback both at the initial stages of the proposed application and throughout the application process. The phased approach outlined in the Revised Guide will help those considering establishing a bank or trust company identify at an early stage whether they have a solid basis on which to proceed, before they incur the significant costs of preparing and filing a full application.

INITIAL DISCUSSION WITH OSFI

Prior to submitting the formal application, prospective applicants are to contact the Legislation and Approvals Division of OSFI to schedule an initial in-person meeting to discuss the proposed entity and the application process. This discussion provides an opportunity for OSFI to identify those persons who should be considered applicants for the purpose of the Revised Guide and the requisite approvals, as well as to provide preliminary feedback regarding any apparent or potential regulatory, prudential or public policy issues. To facilitate the initial discussion, prospective applicants will generally be expected to provide the following written submissions prior to the meeting: (i) the reason(s) for which they intend to apply to establish an entity; (ii) a brief overview of the proposed bank or trust company's business strategy and target market; (iii) a description of the proposed ownership structure, including details regarding potential impediments to the eligibility of any proposed owners and sources of capital for initial and on-going financial support; and (iv) a description of the proposed management team.

The initial discussion will also provide an opportunity for OSFI to clarify its processes and expectations regarding applications to establish a bank or trust company generally, along with any unique considerations that may be applicable to that particular prospective applicant.

SUBMISSION OF INFORMATION

OSFI will request the following information from prospective applicants who, after the initial discussion, wish to proceed with the application. OSFI's primary purpose in reviewing this information is to identify any fundamental issues that should be considered by the prospective applicant, including any: (i) material risks that may impact the core viability of the applicants' business plan; and (ii) significant prudential or policy concerns that may prevent OSFI from making a positive recommendation to the Minister for the issuance of Letters Patent.

The prospective applicant is generally expected to provide: (i) the name of the jurisdiction and date of incorporation or establishment of the prospective applicant; (ii) the current organization chart (with percentages owned) of the prospective applicant's corporate group, including entities in which the prospective applicant (and any of its parents that are not also prospective applicants) beneficially owns 10% or more of the voting rights; (iii) details regarding any voting agreement or other similar arrangements that involve persons exercising direct or indirect control over the prospective applicant; (iv) the names of all persons owning more than 10% of any class of shares or ownership interests in the prospective applicant (and in any of its parents that are not also prospective applicants), and the percentage of shares or ownership interests held; (v) details of any shares or ownership interests of the prospective applicant (and any of its parents that are not also prospective applicants) that are held by a government or a political subdivision, an agent or agency thereof, together with a summary of its involvement in the operation and affairs of the prospective applicant, (vi) a summary of the current and proposed financial services and other key activities carried on by the prospective applicant and its affiliates (other than the proposed bank or trust company), including a list of jurisdictions in which they operate and the nature and degree of regulatory oversight applicable to the financial services activities; (vii) a copy of the most recent annual report of the prospective applicant (and of any of its parents that are not also prospective applicants); (viii) the audited consolidated financial statements of the prospective applicant (and of any of its parents that are not also prospective applicants) for the last three years; and (ix) details of whether the prospective applicant (and any of its affiliates that are not also prospective applicants) has been: (a) denied a request to establish a financial institution or a branch in any jurisdiction; and (b) the subject of any criminal proceedings or administrative sanctions.

The prospective applicant is generally expected to provide a minimum five-year business plan for the proposed FRFI, including: (i) the reasons why the prospective applicant is seeking to establish the proposed FRFI; (ii) an analysis of target markets and opportunities that the proposed FRFI will pursue and the plans to address them; (iii) an analysis of competitors, showing both challenges and opportunities, and plans to address them; (iv) the reasons why the prospective applicant believes that the proposed FRFI will be successful, and the overall strategy for achieving this success, including a discussion of key assumptions; (v) the location(s) of the proposed branch(es) and head office of the proposed FRFI in Canada; (vi) a detailed description of each line of business to be conducted by the proposed FRFI and the products and services to be offered, including how the lines of business interrelate; (vii) for each year in the five-year business plan, details regarding the implementation of the Liquidity Adequacy Requirements, including on-going reporting on the Net Cumulative Cash Flow and Liquidity Coverage Ratio; (viii) the risk-based capital and leverage ratios for each year of the five-year business plan, including a breakdown of key elements used to calculate those ratios on a Basel III basis; (ix) five-year pro forma financial statements (base case) for the proposed FRFI, including balance sheet, income statement, details regarding key assumptions and an identification of major asset, liability, income and expense categories; (x) contingency plans resulting from variations associated with key assumptions used in developing the base case business plan, including a sensitivity analysis showing the results of changes in key assumptions on the base case business plan under a worst case scenario and a discussion of the changes in assumptions; (xi) details regarding the proposed organizational structure including senior management reporting lines key responsibilities within the organization; (xii) details regarding the proposed composition of the board of directors and senior management, and details regarding any persons selected or sought for those positions; (xiii) a description of any proposed material outsourcing arrangements involving the proposed FRFI, how these arrangements would be managed, and copies of any material outsourcing arrangement contracts; and (xiv) a copy of any proposed shareholders' agreement.

In addition, the prospective applicant is generally expected to provide: (i) details regarding the proposed FRFI's (a) credit products and the underwriting criteria for those products, (b) trading and investment strategy, (c) information technology environment, and (d) exit-strategy in the event that it is unable to execute its business plan; and (ii) in the case of a continuance from another Act (e.g., Canada Business Corporations Act), details regarding the incremental costs associated with being regulated as a FRFI for each year in the five-year business plan.

OSFI REVIEW AND FOLLOW UP MEETING

A second in-person meeting with the prospective applicant will be scheduled once OSFI has had an opportunity to consider the information described above. The purpose of this second meeting is for the prospective applicant to demonstrate an understanding of the material risks associated with its business plan and the methods by which it intends to mitigate those risks. Prior to the meeting, OSFI will provide the prospective applicant with an agenda and specific issues that the prospective applicant will be expected to address at the meeting.

Following the second in-person meeting with OSFI, the prospective applicant will receive a letter setting out OSFI's views and expectations regarding: (i) any material risks or concerns with the proposed business plan and whether OSFI will expect those risks or concerns to be resolved in the application process; and (ii) additional information requirements, in addition to those already set out in the Revised Guide, that the prospective applicant will be required to submit as part of its formal application. OSFI will also request that the prospective applicant provide a written timeline for its submission of a formal application.

PUBLICATION OF NOTICE OF APPLICATION

Assuming the application has merit in the eyes of OSFI and the applicant is comfortable that it can satisfy OSFI's requirements, the applicant is required to publish a notice of intention to apply for Letters Patent. After publishing the notice, the applicant submits its formal application for Letters Patent for review and consideration. The Revised Guide, in the same manner as earlier versions, sets out the detailed information requirements of the formal application. The Revised Guide has been updated to reflect various new regulatory requirements that have been adopted over the past several years including the requirements of Basle III, the Internal Capital Adequacy Assessment Process, risk appetite statement requirements, and current regulatory compliance management expectations.

OSFI notes that it will generally request further information or details from the applicant and will meet with the applicant during the course of its review of the application.

LETTERS PATENT AND COMMENCEMENT ORDER

Upon completion of the review of the application, OSFI submits its recommendation to the Minister regarding the issuance of Letters Patent. If Letters Patent are issued by the Minister, OSFI continues its review and consideration of the application with respect to the issuance of an Order to Commence and Carry on Business (Commencement Order). Prior to the issuance of the Commencement Order, OSFI will generally make additional requests for information or details and will have further meetings with the applicant.

If OSFI is satisfied that any material issues or concerns identified have been adequately addressed, the Superintendent of Financial Institutions issues the Commencement Order.

APPLICATION TIMEFRAMES

While there is no specific time limit on the assessment of applications, OSFI indicates that it endeavours to complete all application assessments as quickly as possible. The assessment of each application will depend on the specific facts and circumstances, and OSFI indicates that it will communicate regularly with the applicant throughout this process. The Revised Guide reminds applicants that a newly incorporated bank or trust company may require several months to prepare for the on-site review prior to receiving its Order. Both the BA and the TLCA specify that the Superintendent shall not make an Order more than one year after the issuance of Letters Patent.

TERMINATING REVIEW OF APPLICATION

While many new FRFIs have been formed successfully in the past number of years, many parties seeking to establish FRFIs have been unsuccessful. OSFI indicates in the Guide that it may terminate its review of an application where, in OSFI's view, based on the quality of the applicant's submissions, and despite significant feedback from OSFI, the applicant is unable to satisfy the information requirements in support of the application. In this regard, OSFI notes that applicants should note that they bear the onus of satisfying OSFI's information requirements in a timely, clear and complete manner.

FINAL COMMENTS

The application process outlined in the Revised Guide will ensure that applicants receive important guidance and feedback at the initial stages and that material risks are identified prior to submission of a formal application. In addition, the application process reflects a more structured internal OSFI review process. These are important enhancements to the application process and will hopefully lead to better utilization of resources by both applicants and OSFI.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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