Canada: OSFI Updates Financial Assessment Criteria For Composite Risk Rating

Last Updated: December 4 2015
Article by Pat Forgione, Sean Brandreth and David Zhou

Since 2002, the Office of the Superintendent of Financial Institutions ("OSFI") has been providing the Federally Regulated Financial Institutions ("FRFIs") it supervises and regulates with what is known as the Composite Risk Rating ("CRR"). Developed by OSFI under its supervisory framework (the "Supervisory Framework"), CRR is a key measure of a FRFI's safety and soundness with respect to its depositors and policyholders which must be kept confidential pursuant to the Supervisory Information Regulations.1 The determination of the CRR is guided by a set of assessment criteria (the "Assessment Criteria") available on the OSFI website2.

On September 30, 2015, OSFI issued updated Financial Assessment Criteria (the "Updated Financial Assessment Criteria"). This update follows the introduction of new actuarial assessment criteria in April, 2014 - both developments were for the purpose of reflecting the revisions made to the Supervisory Framework in 2010.

Background: OSFI's Supervisory Framework

OSFI's Supervisory Framework is based on an understanding of its supervisory goal as being primarily "to safeguard depositors and policyholders from loss."3 More specifically, OSFI points to risk assessment as "the fundamental work activity of supervision."4 The Supervisory Framework sets out the approach, principles, concepts and core process used by OSFI to conduct risk assessment.

The CRR is the end-product of a chain of assessments that OSFI conducts on a FRFI. This chain of assessment begins with the identification of the FRFI's significant activities, defined as lines of business, units or processes that are fundamental to the FRFI's business model and its ability to meet its overall business objectives5. For each significant activity, OSFI determines the inherent risks, each being "the probability of a material loss due to exposure to, and uncertainty arising from, current and potential future events."6 OSFI expects the FRFI to manage the inherent risks of each significant activity at two levels: operational management (day-to-day controls), and oversight functions (enterprise wide oversight of operational management). The revised Supervisory Framework identifies seven oversight functions: financial, compliance, actuarial, risk management, internal audit, senior management and board of directors.

OSFI assesses the quality of a FRFI's operational management and oversight functions in relation to the inherent risks of each significant activity, and obtains the net risk of that activity. Because the significant activities are of varying importance to the FRFI, OSFI weighs each net risk based on the relative importance of the significant activity, and aggregates the weighted net risks of all significant activities to arrive at the overall net risk of the FRFI. OSFI treats the overall net risk as a measure of the potential adverse impact that the FRFI's significant activities as a whole could have on the three sources of the FRFI's financial support: earnings, capital adequacy, and balance sheet liquidity.7 If a FRFI has a higher overall net risk, OSFI requires that the FRFI have more effective generation of internal capital, higher level and quality of capital, and/or stronger capital management policies and processes, to ensure its safety and soundness. Therefore, as the final step of its risk assessment, OSFI examines the FRFI's earnings, capital and liquidity in relation to the FRFI's overall net risk. The result is the CRR, which represents the overall risk profile of the FRFI.

OSFI describes its assessment of the oversight functions using four rating categories: strong, acceptable, needs improvement, and weak. In order to ensure "consistency and comparability"8 of such assessments, OSFI developed Assessment Criteria specific to each oversight function. The Assessment Criteria define the meaning of each rating category, identify the essential elements that OSFI looks for, and specify the criteria and examples for each essential element. The Assessment Criteria guide OSFI's reviews and also help the FRFI comprehend the ratings given to them.

Updated Financial Assessment Criteria

The title of the Updated Financial Assessment Criteria has been modified from "Financial Analysis" to "Financial". This name change is meaningful in that it reflects the expansion of the role of the financial oversight function (the "Financial Function") to include not only the in-depth analysis of the operational results of a FRFI's operating units, but also "the timely and accurate reporting ... of the operational results."9 The objective of such analysis and reporting is "to support planning, strategy, performance measurement and decision-making by senior management and the board of directors."10 Nevertheless, OSFI makes it clear that its overall rating of a FRFI's Financial Function will be contextualized by the "nature, size, complexity, and risk profile of the FRFI."11 Such contextualization is consistent with OSFI's "principles-based" approach to supervision, as stated in the Supervisory Framework.

The overall rating of the Financial Function remains a two-part assessment of the quality of the function in terms of (1) the characteristics of the Financial function, and (2) the effectiveness of its performance in executing its mandate.12 In assessing the characteristics of the Financial Function, the Updated Financial Assessment Criteria retain most of those relating to the following "essential elements": mandate, organization structure, resources, senior management and board oversight, and policies, practices and methodology.

With respect to the mandate of the Financial Function, OSFI's evaluating criteria historically focused on the extent to which the Financial Function's mandate establishes clear objectives and enterprise-wide authority for its activities, independence from its business units, a right of access to information and a requirement to provide recommendations on opportunities, management information systems and changes to enhance decision making. OSFI will now also consider the extent to which the mandate establishes authority to oversee the operating units' financial practices and to follow up on management's response to the Financial Function's recommendations for enhancing the FRFI's financial management information system.13

Regarding the policies, practices and methodologies of the Financial Function, OSFI will now consider the extent to which they are consistent with the FRFI's strategic, capital and liquidity management policies, communicated to and adopted by the operating units and are adequate to facilitate an effective financial management system.

In addition to the criteria discussed above, OSFI has introduced new criteria relating to the Financial Function's reporting, internal audit oversight, and relationships with other oversight functions.14 With respect to reporting, OSFI will consider its adequacy, as measured by the nature, level and timeliness of the required reporting to senior management, the board of directors and operating units in appropriate circumstances, and by the amount of reporting on the effectiveness of the financial processes or the resolution of issues identified by the Financial Function. Internal audit oversight refers to the reviews of, and recommendations regarding, the Financial Function's effectiveness. Finally, OSFI is interested in assessing whether the Financial Function's role and responsibility are integrated adequately with other oversight functions.

The performance of the Financial Function is assessed in terms of its effectiveness in providing oversight of operating unit analysis and reporting and independent analysis and reporting to senior management and the board.15 OSFI conducts its assessment by reference to certain indicators of effective performance. The Updated Financial Assessment Criteria provides seven new "examples of indicators" for a total of 12 examples. The examples illustrate a few common themes: being proactive in obtaining input from the operating units, conducting assessment and analysis, responding to identified issues, providing recommendations to senior management and the board, and updating its policies, practices and methodologies; regular collaboration with senior management and the board to develop a risk appetite framework that is consistent with the FRFI's strategic, financial and capital plans; and effective implementation of the Financial Function's policies, practices and methodologies to ensure that they are consistent with the FRFI's strategic, capital and liquidity management policies and integrated with the activities of the operating units.


1. Canada, Office of the Superintendent of Financial Institutions, Supervisory Framework, at 7.

2. Canada, Office of the Superintendent of Financial Institutions, Composite Risk Rating and Assessment Criteria.

3. Ibid at 1.

4. Ibid at 3.

5. Ibid at 4.

6. Ibid at 5.

7. Ibid at 7.

8. Canada, Office of the Superintendent of Financial Institutions, Introduction to the Supervisory Framework Ratings Assessment Criteria, at 1.

9. Canada, Office of the Superintendent of Financial Institutions, Financial Assessment Criteria, at 1.

10. Ibid.

11. Supervisory Framework at 2.

12. Financial Assessment Criteria at 2.

13. Ibid.

14. Ibid at 3.

15. Ibid at 4.

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 2015

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

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

Pat Forgione
Sean Brandreth
David Zhou
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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 (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

To Use 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.


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.


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