Draft OSFI guideline for foreign banks with Canadian branches reflects changes to banking laws

Guideline provides OSFI’s expectations for Canadian branches of foreign banks and insurers

Draft OSFI guideline for foreign banks with Canadian branches reflects changes to banking laws
OFSI has drafted new guidelines for branches of foreign banks and insurers operating in Canada.

The Office of the Superintendent of Financial Institutions has released its draft guideline for foreign banks and insurers operating in Canada on a branch basis, which lays down the federal regulator’s expectations concerning these entities and their branches.

“The Draft Guideline sets out OSFI’s expectations in three substantive areas: branch management, administration of the business in Canada, and supervision of branches,” stated an article on McCarthy Tétrault LLP’s website, which was authored by Nancy J. Carroll, Hartley Lefton and Hilary Smith.

The article said that the proposed guideline also aims to reflect recent changes to the Bank Act, SC 1991, c 46, and to the Insurance Companies Act, SC 1991, c 47, which are in turn consistent with the Canada-United States-Mexico Trade Agreement.

In the draft guideline, OSFI clarifies that its supervisory role encompasses the business of these foreign entities in Canada, which includes evaluating whether their branch operations comply with the Bank Act, with the Insurance Companies Act and with OSFI guidance. OSFI is empowered to take additional supervisory and regulatory measures if it determines that the expectations and requirements in the guideline have not been met.

The proposed guideline states that OSFI expects the management of branches to have a composition commensurate with the size and complexity of the foreign entity’s business in Canada and to retain responsibility over effectively implementing and overseeing certain key matters such as business strategies and risk management policies. Branch management is also expected to comprehend the applicable Canadian legislation, regulations, guidelines and the results of OSFI’s supervisory work and to receive the reports needed to meet the OSFI’s expectations.

The draft guideline also provides that OSFI expects branch management to maintain open and ongoing communications with OSFI, to punctually and thoroughly respond to OSFI’s communications and requests for information and to promptly notify OSFI of substantive issues and changes affecting the branch’s management and operations.

If there are arrangements where the foreign entity’s home office performs material functions on the branch’s behalf, OSFI asks in the draft guideline that these arrangements be documented in written service level agreements. If the arrangement concerns the flow of funds between the home office and the branch, OSFI will ideally be informed of the details of the arrangement and be notified 30 days in advance of proposed fund transfers materially deviating from the documented process offered to OSFI.

Records required under the Bank Act and the Insurance Companies Act should be updated and accurate as of the end of every business day, as well as sufficiently detailed, while electronic records should be accessible, intelligible and capable of being reproduced, according to the draft guidelines. Records for reinsurance arrangements and complex activities are also subject to certain expectations.

Pursuant to the Bank Act, branches should keep copies of the records at the principal bank office in Canada or at any other place in the country that the principal officer deems fit, while the Insurance Companies Act requires copies to be kept at the chief agency in Canada. If exceptions apply, branches should still ensure that OSFI has immediate, direct, complete and ongoing access to records stored abroad.

Interested individuals may send OSFI their comments on the draft guideline until Dec. 18. If passed, the guideline is expected to be released in Spring 2021.

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