On October 15, 2024, the Office of the Superintendent of Financial Institutions (“OSFI”) published its 2023-2024 Annual Report, highlighting its key developments from April 1, 2023 to March 31, 2024, as summarized below.
1. Expansion of Mandate
On June 22, 2023, Parliament passed Bill C-47, the Budget Implementation Act, which expanded OSFI's mandate to include ensuring that institutions have adequate policies and procedures to protect themselves against threats to their integrity and security, including foreign interference. In response, OSFI issued the final Integrity and Security guideline in January 2024, which broadens its regulatory scope beyond traditional prudential risk management by recognizing the impact of integrity and security on financial stability. For more information on OSFI's expanded mandate and guideline, please see our previous updates from September 12, 2023 and February 6, 2024.
2. Supervisory Framework Update
In February 2024, OSFI introduced a major update to its Supervisory Framework, which took effect on April 1, 2024. The updated framework reflects OSFI's new risk appetite and enhances its ability to address both financial and non-financial risks. It also provides greater flexibility for OSFI supervisors in their decision-making processes. Notable changes in the new Supervisory Framework include:
- Expanded risk rating scale to provide for earlier risk detection
- Improved rating information on risk drivers, size, and complexity
- Established new risk assessment categories for financial and non-financial risks
- Utilized data analytics to generate insights for timely interventions
For more information on this Supervisory Framework, please see our previous update from February 14, 2024.
3. Risk Strategy and Governance
In April 2023, OSFI published its second Annual Risk Outlook (“ARO”), followed by a semi-annual update to the ARO in October 2023. The publications identified nine key risks to the Canadian financial system and outlined OSFI's regulatory responses. For more information on the ARO, please see our previous update from April 19, 2023.
To further promote sound management practices, OSFI implemented measures in the following areas:
a) Housing Market Downturn and Commercial Real Estate Risk
- RESL Regulatory Notice: In March 2024, OSFI issued a targeted regulatory notice on real estate secured lending to reinforce its risk management expectations and complement its B-20 Guideline. The notice emphasizes the need for proactive identification and management of vulnerable accounts, portfolio segments, and concentrations.
- Loan-to-Income (LTI) Limits: During the 2023-2024 fiscal year, OSFI transitioned from developing a macro to a micro-prudential LTI limit, and established institution specific LTI limits on the portfolios of federally regulated lenders for new uninsured real estate secured loans. The LTI limits will take effect at the commencement of an institution's 2025 fiscal year.
b) Climate Risk
- Guideline B-15: In March 2023, OSFI published updates to the final Guideline B-15 on Climate Risk Management and Final Climate Risk Data return instructions to ensure standardized climate-related data on emissions and exposures from institutions.
c) Cyber Risk and Third-Party Risk
- Intelligence-led Cyber Resilience Testing (“I-CRT”) Framework: In April 2023, OSFI published its I-CRT Framework, which identified areas where the financial sector could be vulnerable to cyber-attacks. The I-CRT framework provides a methodology and serves as an implementation guide for institutions conducting I-CRT assessments.
- Guideline B-10: In April 2023, OSFI published the final Guideline B-10, outlining its expectations for managing risks associated with third-party arrangements. For more information on the final B-10 guideline, please see our previous update on April 26, 2023.
d) Culture and Behavior Risk
- Culture and Behavior Risk Guideline: In February 2023, OSFI issued a draft Culture and Behavior Risk Guideline and initiated a public consultation, which closed on May 31, 2023. The final guideline has yet to be published. For more information on the draft guideline, please see our previous update on March 7, 2023.
4. Regulatory Capital
During the 2023-2024 fiscal year, OSFI continued to monitor institutions' regulatory capital positions to ensure sound risk management practices. Key developments include:
- Crypto-assets exposure: In July 2023, OSFI announced two draft guidelines on the regulatory capital treatment of crypto-asset exposures for federally regulated deposit-taking institutions and insurers. A public consultation was launched on the same date. The final guideline, expected in 2024-2025, will ensure that banks and insurers hold adequate capital and implement the appropriate liquidity treatment for their crypto-asset exposures. For more information on the draft guidelines, please see our previous update on August 1, 2023.
- Parental Stand-Alone (“Solo”) Total Loss Absorbing Capacity (“TLAC”) Framework: In September 2023, OSFI published the final Solo TLAC Framework for domestic systematically important banks, and the Parental Solo Capital Framework for life Internationally Active Insurance Groups. These frameworks focus on the loss-absorbing capacity of the Canadian parent bank or Canadian parent operating life insurer, instead of its entire consolidated operations, allowing OSFI to assess the financial strength of the parent and its ability to act as a source of strength for its subsidiaries and branches.
- Revised Capital Adequacy Requirements Guideline: In October 2023, OSFI published the revised Capital Adequacy Requirements Guideline, mandating institutions to hold additional capital for mortgages where payments do not cover the interest portion of the loan.
- Life Insurance Capital Adequacy Test (“LICAT”): During the fiscal year, OSFI published two LICAT adjustments and clarifications1 to ensure consistent and appropriate interpretation of the updated capital guideline and its implementation under IFRS 17. These publications focused on the new segregated fund guarantee capital approach.
Footnote
1. Life Insurance Capital Adequacy Test 2024 – Adjustments and clarifications and Life Insurance Capital Adequacy Test 2023 – Adjustments and clarifications
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 2024
