OSFI Annual Report 2014-2015 · Instruments for Domestic Systemically Important Banks advisory ......

OSFI ANNUAL REPORT2014-2015

Office of the Superintendent of Financial Institutions Canada255 Albert Street, 16th floor, Ottawa, ON K1A 0H2Telephone: 613-990-7788 Facsimile: 613-952-8219Toll-free line: 1-800-385-8647 Web site: www.osfi-bsif.gc.caCat. No. IN1-2015E-PDF ISSN 1701-0810© Minister of Public Works and Government Services

1 OSFI AnnuAl RepoRt 2014-2015

• OSFIwasestablishedin1987tocontributetopublicconfidenceintheCanadianfinancialsystem.ItisanindependentagencyoftheGovernmentofCanadaandreportstoParliamentthroughtheMinisterofFinance.

• OSFIprovidesprudentialregulationandsupervisiontoover400banksandinsurers,andsome1,200 federallyregisteredprivatepensionplans.

• TheOfficeoftheChiefActuary,whichisanindependentunitwithinOSFI,providesactuarialvaluationandadvisoryservicesfortheCanadaPensionPlan,theOldAgeSecurityprogram,the CanadaStudentLoansProgramandotherpublicsectorpensionandbenefitplans.

• OSFIrecoversitscosts,whichin2014-2015totalled$144.9million.OSFIisfundedmainlythroughasset-based,premium-basedormembership-basedassessmentsonthefinancialservicesindustryandauser-payprogramforselectedservices.AverysmallportionofOSFI’srevenueisreceivedthroughanappropriationfromtheGovernmentofCanadaforactuarialvaluationandadvisoryservicesrelatingtovariouspublicsectorpensionandbenefitplans.

• AsofMarch31,2015,OSFIemployed704peopleinofficeslocatedinOttawa,Montréal,TorontoandVancouver.

1 OSFI AnnuAl RepoRt 2014–2015

OSFI at a Glance


Superintendent’s Message


IthasbeenaprivilegetoservemyfirstyearasSuperintendentofFinancialInstitutions,andtohelmanagencythatplaysacentralroleinmaintainingthesafetyandsoundnessofCanada’sfinancialsystemforthebenefitofallCanadians.Mycolleagueshavebeenmostwelcoming

anditisapleasuretoleadsuchacommittedandcapableteam.

In2014-2015,OSFIundertookanumberofinitiativestofurtherstrengthenCanada’ssystemoffinancialregulationandsupervision.

Withaviewtoreinforcingprudentmortgageinsuranceunderwriting,inNovember2014,OSFIissuedtheResidentialMortgageInsuranceUnderwritingPracticesandProceduresguideline,followingextensiveconsultationwiththeindustry.Theguidelineenhancesdisclosurepracticesformortgageinsurersandoutlinessoundriskmanagementprinciples,includingsettingprudentrequirementsforlendersandapplyingappropriateduediligencetolenders’practices.AsmortgagesformthemajorportionofCanadianhouseholddebt,thisisanimportantareaofOSFIoversight.Thisisparticularlytrueinthecurrentlow-interestrateenvironment,giventhe

potentialimpactrisingrateswouldhaveonhouseholddebtlevels.

Theglobalfinancialcrisisunderlinedtheimportanceoftheneedforfinancialinstitutionstohaveenoughqualitycapitalandliquiditytoabsorbseverelosses.Inthepastyear,OSFIissuedneworupdatedguidelinesonLeverageRequirementsandLiquidityAdequacyRequirementsfordeposit-takinginstitutions,MinimumContinuingCapitalandSurplusRequirementsforlifeinsurers,andtheMinimumCapitalTestforpropertyandcasualtyinsurers.

OperationalriskatfinancialinstitutionswasanotherpriorityareaforOSFIin2014-2015.Workinthisareaincludedconductingsupervisoryreviewsoncybersecurityandoutsourcingrisks.

3 OSFI AnnuAl RepoRt 2014-2015 3 OSFI AnnuAl RepoRt 2014-2015

Wealsocontinuedtomonitortheglobaleconomy,withaspecialemphasisonassessingthepotentialimpactofvariouseventsontheriskprofilesoffederallyregulatedfinancialinstitutionsandpensionplans.Thereremainanumberofpotentialriskstocontinuedglobaleconomicrecovery,includingsovereigndebtissuesandlowgrowth.Further,theInternationalMonetaryFund(IMF)hasnotedthatprotractedlowinflation,orevendeflation,poserisksinsomeadvancedeconomies.

OSFIdoesnotworkinisolation.Canada’sstrongregulatoryregimeisaresultofthecooperationandcollaborationthatexistsamongourgovernmentpartners,whoaretheBankofCanada,theDepartmentofFinance,CanadaDepositInsuranceCorporation,andtheFinancialConsumerAgency ofCanada.Thiscollaborationwashighlightedinthe2014reportoftheIMF’sFinancialSector AssessmentProgramreviewofCanada,whichspokefavourablyoftheeffectivenessofthe oversightofCanada’sfinancialsystem.

Internally,OSFIcontinuestoenhancebothoursupervisorycapacityandprocesses.In2014-2015,welaunchedamulti-yearprojectthatwillleadtoimprovedsupervisorytools,andwecontinuedthedevelopmentofasupervisiontrainingprogramtosupporttheneedsofsupervisoryemployees.

InmyfirstyearasSuperintendent,IhaveobservedcloseathandthesustaineddedicationofmyOSFIcolleagues.Theirprofessionalism,knowledgeandintegritycontinuetocontributetoourcollectivesuccessandallowCanadianstocontinuetohaveconfidenceinCanada’sfinancialsystem.

Jeremy Rudin


Performance against Priorities 2014-2015

OSFIidentifiedfiveprioritiesfor2014-2015throughwhichtoachieveitsmandate.Thissectionreportskeyaccomplishmentsundereachofthosepriorities.OSFIachievedits

goalsforthereportingyearandcontinuestoworkonthesemulti-yearpriorities.Moredetailsareavailableinsubsequentchaptersofthisreport.

PRIORITY A – Anticipating and Responding to Risks Emanating from the Economy and Financial System

Steps Taken

• IssuedthefinalversionoftheResidentialMortgageInsuranceUnderwritingPracticesandProceduresguideline

• Continueddevelopmentofanewcapitalframeworkformortgageinsurers

• Conductedstresstestsforthelargestbanksandlifeinsurersthatincludedtheimpactofhighconsumerdebtandotheradverseshocks

• Conductedsupervisoryreviewsfocusedoncybersecurityself-assessmentsandoutsourcing

• RespondedtorecommendationsfromtheInternationalMonetaryFund(IMF)FinancialSectorAssessmentProgram(FSAP)updateforCanada

PRIORITY B – Enhancing Supervisory Processes

Steps Taken • Embarkedonamulti-yearprojecttoimproveOSFI

supervisorytoolsandtechnology,withPhase1completedandPhase2launched

• Conductedapilotassessmentofriskcultureatafederallyregulatedfinancialinstitution(FRFI),withplanstodevelopandrolloutanOSFIapproachovertimeatlargecomplexinstitutions

• Completedreviewsoftheinternalauditfunctionofa numberofFRFIs(banksandinsurancecompanies)inthecontextoftheirriskmanagementpractices

PRIORITY C – Anticipating and Responding to Risks Emanating from Regulatory Reform

Steps Taken• Issuednew/revisedguidelines,advisoriesorletters,

including• LiquidityAdequacyRequirementsguideline• LeverageRequirementsguideline• MinimumContinuingCapitalandSurplus

Requirements(MCCSR)guideline• MinimumCapitalTest(MCT)guideline• DerivativesSoundPracticesguideline• ChangestotheMembershipoftheBoard

or SeniorManagementadvisory


• EarlyAdoptionofIFRS9FinancialInstruments forDomesticSystemicallyImportantBanksadvisory

• IssuedapolicypaperfortheLifeInsuranceCapitalFrameworkStandardApproach,aswellasQuantitativeImpactStudyNo.6onvariousaspectsoftheframework

• Participatedactivelyonvariousinternationalcommitteesthatdevelopregulatoryframeworksfor banksandinsurers,including

• FinancialStabilityBoard(FSB)• BaselCommitteeonBankingSupervision

(BCBS)• InternationalAssociationofInsurance

Supervisors(IAIS)

PRIORITY D – A High-Performing and Effective Workforce

Steps Taken

• Initiatedthedevelopmentofamulti-yearSupervisiontrainingprogramtosupporttheneedsofSupervisionSectoremployees

• EnsuredchangemanagementworkstreamswerebuiltintoallIM/ITprojects

• ContinuedenhancementstothecorporateplanningprocessestofurtherintegrateHumanResourcesplanningandEnterpriseRiskManagementprocesses

• Implementedtargetedactionplanswherenecessarytoaddressareasidentifiedforimprovementinthe2013-1014employeesurvey

PRIORITY E – An Enhanced Corporate Infrastructure

Steps Taken

• Completedthefive-yearInformationTechnologyRenewalprogram,includingimplementationof

• anintegratedEnterpriseandResourcePlanningmoduleforFinance-relatedprocesses (SAP)

• aCorrespondenceandEnquiryManagementsystemforexternalinquiries

• aRegulatoryReturnsSystem(jointlywiththeBankofCanadaandCanadaDepositInsuranceCorporation)forvalidationandprocessingofallregulatoryreturndata

• anupgradedBusinessIntelligencesolutiontoproviderobustinsuranceindustrydataforanalysis

• ContinuedtoapplytheRegulatoryDataGovernanceFrameworktoapproveandprioritizeOSFIregulatorydatarequests

Theabovefiveprioritieswillalsoguidetheachievementofstrategicoutcomesfor2015-2016.DetailscanbefoundonOSFI’swebsite.


Corporate Overview

Role and Mandate

OSFIwasestablishedin1987byanActofParliament:theOffice of the Superintendent of Financial Institutions Act(OSFIAct).OSFIsupervisesand

regulatesallbanksinCanadaandallfederallyincorporatedorregisteredtrustandloancompanies,insurancecompanies,cooperativecreditassociations,fraternalbenefitsocietiesandprivatepensionplans.UndertheOSFIAct,theSuperintendentissolelyresponsibleforexercisingOSFI’sauthoritiesandisrequiredtoreporttotheMinisterofFinancefromtimetotimeontheadministrationofthefinancialinstitutionslegislation.

OSFI’smandateisto:

• Supervisefederallyregulatedfinancialinstitutionsandprivatepensionplanstodeterminewhethertheyareinsoundfinancialconditionandmeetingminimumplanfundingrequirementsrespectively,andarecomplyingwiththeirgoverninglawandsupervisoryrequirements;

• Promptlyadviseinstitutionsandplansintheeventtherearematerialdeficienciesandtake,orrequiremanagement,boardsorplanadministratorstotake,necessarycorrectivemeasuresexpeditiously;

• Advanceandadministeraregulatoryframeworkthatpromotestheadoptionofpoliciesandproceduresdesignedtocontrolandmanagerisk;

• Monitorandevaluatesystem-wideorsectoralissuesthatmayhaveanegativeimpactoninstitutions.

Fromitsmandate,OSFIhasidentifiedtwostrategicoutcomes:

1. AsafeandsoundCanadianfinancialsystem

2. AfinanciallysoundandsustainableCanadianpublicretirementincomesystem

OSFI’slegislationacknowledgestheneedtoallowinstitutionstocompeteeffectivelyandtakereasonablerisks.Italsorecognizesthatmanagement,boardsofdirectorsandplanadministratorsareultimatelyresponsibleandthatfinancialinstitutionsandpensionplanscanfail.

OSFIworkswithanumberofkeypartnersontheFinancialInstitutionsSupervisoryCommittee(FISC),whichtheSuperintendentchairs,includingtheDepartmentofFinance,theBankofCanada,CanadaDepositInsuranceCorporationandtheFinancialConsumerAgencyofCanada.Together,theseorganizationsconstituteCanada’snetworkoffinancialregulationandsupervision,andprovideasystemofdepositorandpolicyholderprotection.

TheOfficeoftheChiefActuary(OCA),whichisanindependentunitwithinOSFI,providesactuarialvaluationandadvisoryservicestotheGovernmentofCanadaintheformofreportstabledinParliament.WhiletheChiefActuaryreportstotheSuperintendent,


heissolelyresponsibleforthecontentandactuarialopinionsinreportspreparedbytheOCA.HeisalsosolelyresponsiblefortheactuarialadviceprovidedbytheOCAtotherelevantgovernmentdepartments,includingtheexecutivearmofprovincialandterritorialgovernments,whichareco-stewardsoftheCanadaPensionPlan(CPP).

Financial Resources

OSFIrecoversitscosts,asstipulatedundertheOSFIAct.Theorganizationisfundedmainlythroughasset-based,premium-basedormembership-basedassessmentsonthefinancialservicesindustryandauser-payprogramforselectedservices.AverysmallportionofOSFI’srevenueisreceivedthroughanappropriationfromtheGovernmentofCanada,primarilyforactuarialvaluationandadvisoryservices

relatingtotheCanadaPensionPlan,theOldAgeSecurityprogram,theCanadaStudentLoansProgramandvariouspublicsectorpensionandbenefitplans.

Human Resources

AsatMarch31,2015,OSFIemployed704peopleinofficeslocatedinOttawa,Montréal,Torontoand Vancouver.

Accountability

Auditing

OSFI’sAuditCommitteemetfivetimesin2014-2015.TheCommitteeiscomprisedofthreeindependentmembers,oneofwhomistheChair,andtheSuperintendent.ThemandateoftheCommittee

Evelyne GionetManager, HR OperationsHuman Resources and AdministrationCorporate Services Sector

Liz AmorimClassification AdvisorHuman Resources and AdministrationCorporate Services Sector


is to provideobjectiveadviceandrecommendationstotheSuperintendentregardingtheadequacyandproperfunctioningofOSFI’sriskmanagement,controlandgovernanceframeworksandprocesses,includingaccountabilityandauditingsystems.During2014-2015,theAuditCommitteereceivedinformationand,asappropriate,providedadviceandguidanceonkeyactivitiesincludingbutnotlimitedto:EnterpriseRiskManagement;QuarterlyandAnnualFinancialStatements;IM/ITStrategy;PerformanceMeasurementReporting;InternalControloverFinancialReporting;ValuesandEthics;InternalAuditreports;andInternalAuditoperations.

Surveys and Consultations

OSFIroutinelyundertakesconsultationswiththefinancialinstitutionsitregulatestohelpassessitsperformanceandeffectivenessasaregulator.CopiesoftheresearchreportsareavailableonOSFI’swebsite.

• Inthefallof2014,EnvironicsResearchGroupconductedonOSFI’sbehalfitsbiennialFinancialInstitutionsSurvey,anonlinetrackingsurveyofCEOsacrossallfederallyregulatedfinancialinstitutions.

• Inthefallof2014,Harris-DecimaactingonOSFI’sbehalfconductedOSFI’sPensionPlansSurvey,anonlinetrackingsurveyofplanadministratorsand

professionaladvisorsoffederallyregulatedprivatepensionplans.

• Inthewinterof2014,TheStrategicCounselconductedonOSFI’sbehalfanin-depthconsultationwiththepropertyandcasualty(P&C)insurancesector.TheconsultationispartofOSFI’sthree-year,rotating,sectorconsultationprogram.Theconsultationcomprisedaseriesofconfidential,one-on-oneinterviewswithasampleofseniorexecutivesrepresentingacross-sectionofP&CcompaniesregulatedbyOSFI.

Theoverallresultsoftheseconsultationswerepositive,withparticipantsindicatinghighlevelsofsatisfactionwithOSFI.Someareasforimprovementwerealsoidentifiedand,whereappropriate,OSFIhasdevelopedactionplanstoaddressthese.

Benefits to Canadians

OSFI’sstrategicoutcomes,supportedbyourplansandpriorities,areintrinsicallyalignedwithbroadergovernmentpriorities,specificallystrongeconomicgrowth,andincomesecurityandemploymentforCanadians.AproperlyfunctioningfinancialsystemthatinspiresahighdegreeofconfidenceamongconsumersandotherswhodealwithfinancialinstitutionsmakesamaterialcontributiontoCanada’seconomicperformance.


Mark Zelmer, Deputy Superintendent, Regulation Sector • Jeremy Rudin, Superintendent of Financial Institutions • Gary Walker, Assistant Superintendent, Corporate Services Sector

Jamey Hubbs was named Assistant Superintendent, Deposit-taking Supervision Sector, in April 2015.


Federally Regulated Financial Institutions

Risk Assessment and Intervention

OSFIsupervisesfederallyregulatedfinancialinstitutions(FRFIs),monitorsthefinancialandeconomicenvironmenttoidentifyissuesthatmayhaveanegativeimpact

on theseinstitutions,andintervenesinatimelymannertoprotectdepositorsandpolicyholdersfromloss.Indoingso,OSFIrecognizesthatmanagementandboardsofdirectorsofFRFIsareultimatelyresponsibleandthatthoseinstitutionscanfail.

In2014-2015,highlevelsofdomestichouseholdindebtedness,exceptionallylowinterestrates,fallingoilpricesandongoingglobalfinancialuncertaintycontinuedtobeseenassourcesofpotentialsystemicvulnerability.OSFItookactiontoaddressthepossibleimpactofthesechallengesandachieveitsstrategicprioritiesbycommunicatingitsexpectationsforriskmanagementtoFRFIsandconductingsignificantreviewsinseveralareas,includingstresstesting,cybersecurity,riskdataaggregation,outsourcing,andinternalaudit.WecontinuedtodevelopsupportingguidanceforOSFI’sSupervisoryFrameworkandinitiatedareviewofoursupervisoryprocessesandtools.

Review by Sector

Deposit-Taking Institutions

TheCanadianbankingindustryiscomprisedofsixlargedomesticbanksdesignatedasdomesticsystemicallyimportantbanks(D-SIBs)andmanysmaller

deposit-takinginstitutions(DTIs).Thesixlargestbanksaccountforapproximately90%oftotalassetsamongCanada’sfederallyregulatedDTIs.Theirdiversifiedbusinesslinesextendbeyondtraditionaldeposit-takingandlendingactivitiesintotrading,investmentbanking,wealthmanagementandinsurance.Inadditiontotheirprimarydomesticfocus,theselargebanksalsohaveoperationsinmanycountriesacrosstheglobe.

Theremaining10%ofCanadianbankingassetsareheldbysmallerinstitutionswithnichemarketandbusinessstrategies,suchasmortgagelending,commercialrealestateorcreditcards.

Overall,returnonequityfortheindustrywasroughlyunchangedin2014from2013,remainingaround16%.Themaincontributingfactorswerehigherrevenues,offsetbyhighernon-interestexpenses,andastablecreditenvironmentthatdrovesolidprofitability.Whileloanlossprovisionsforcorporateandretaillending(mortgages,autoloans,creditcards)remainedlow,vulnerabilitiescontinuerelatedtoloweroilandgaspricesandothereconomicrisks,aswellashighhouseholddebtlevels.

OSFIfullyimplementedtheBaselIIIcapitalrules,andbanksbeganreportingthenewCommonEquityTier1(CET1)capitaladequacyratiosin2013.Canadianbankcapitalratiosremainabovethetargetlevelof7% forCET1;andthesixlargedomesticbanksremainabovetheirhigher(8%)capitalrequirements.OSFIimplementedanewliquidityadequacyframework–whichincludestheBaselIIILiquidityCoverageRatio(LCR)requirement–thatcameintoeffectin


January2015.Atthesametime,theBaselIIIleverageframeworkandassociatedminimum3%LeverageRatio(LR)requirementreplacedtheAssetstoCapitalMultiple(ACM)leverageconstraint.Canadianbanksthathavereportedfirstquarterresults(e.g.D-SIBs,andotherbankswithOctoberyear-ends)showratioswellabovetheminimumrequirements.

Life Insurance

ThecapitalmetricusedtoassesscapitaladequacyforsupervisorypurposesistheMinimumContinuingCapitalandSurplusRequirement(MCCSR)forfederallyregulatedCanadianlifeinsurancecompanies,andtheTestofAdequacyofAssetsandMargin(TAAM)forbranchesofforeigncompaniesoperatinginCanada.Therequirementsforcalculatingthemetricsareupdated eachyear.

InJanuary2015,OSFIreleasedapolicypaperoutlininganewstandardapproachforthelifeinsuranceregulatorycapitalframework.Thisframeworkconsidersrecentdevelopmentsinfinancialreporting,actuarialmethodology,economiccapitalandfinancialtheory.Theframeworkisintendedtoprovideanimprovedassessmentofsolvencyrisk,andpromoteimprovedriskmanagementandbusinessdecisions.Industryinputisbeingsoughtonthepolicypaper.Inaddition,quantitativeimpactstudiesarebeingconductedtoassessthepotentialeffectofthechangesonthelifeinsuranceindustry.ThisnewregulatorycapitalframeworkwillbeimplementedinJanuary2018.

Theaggregatecapitalratioforthelifeinsuranceindustryatyear-end2014was239%comparedto242%for2013.TheaggregatelevelhasbeenwellaboveOSFI’sminimumrequirementsforthelastseveralyearsasaresultofimprovementandstabilityincapitalandequitymarkets,decreasingproductguarantees,andproductre-pricing.Whilelowlong-terminterestratespresentacontinuingstrainonprofitability,companieshavestrengthenedtheirbalancesheetsandpersistinglowlong-terminterestrateswillnotaffectsolvency.

Returnonequityfortheindustrywas11%andnetincomewas$10.8billionin2014,comparedto10%and$8.1billionrespectivelyin2013.Approximately75%oftheindustrynetincomeisattributabletothethreelargeconglomerates.Netincomebenefittedfromimprovingequitymarketsandre-pricingofproductstoreflectchangedmarketconditions.Challengesremainwithpersistentlylowinterestrates,whichmakeasset/liabilitymanagementmoredifficultandstrainin-force

productprofitabilityasmanyoftheseproductscannotbere-pricedduetocontractualprovisions.Thereisalsothepotentialforfutureadverseequitymarketchangesduetoinstabilityintheglobaleconomy.However,thosecompanieswithlargeexposuretoproductswithmarketguaranteeshaveadequatecapitaltowithstanda substantialdeclineintheequitymarkets.

Property and Casualty Insurance (excluding mortgage insurance)

Thefinancialperformanceofthepropertyandcasualty(P&C)industryinCanadain2014improvedoverthatofthepreviousyear,whichhadbeenunderminedbylargeinsuranceclaimsarisingfromtheCalgaryfloodandtheTorontorainstormin2013.Lowerclaimsin2014increasedunderwritingprofitabilityto$732millionfrom

James LainSenior Supervisor Vancouver Regional OfficeSupervision Sector

Winnie LeeSenior SupervisorVancouver Regional OfficeSupervision Sector


$109millionin2013.NetincomefortheP&Cindustryof$4.0billionincreased60%overthepreviousyear’snetincome,bolsteredbyunderwritingprofitsfortheindustryaswellasinvestmentreturnsatafewselectFRFIs.

Akeymeasureoftheindustry’scoreprofitabilityisthe‘combinedratio’,whichmeasurestherevenuefrompremiumsrelativetothesumofclaimsplusexpenses.Acombinedratiounder100%indicatesthatpremiumincomeexceedsclaimsandexpenses,andthatanunderwritingprofithasbeenearned.In2014,thecombinedratiowas98.7%,animprovementover2013’s break-evencombinedratioof100.2%.

FortheP&Cindustry,investmentincomebeforerealizedgainsof$3.2billionin2014wasapproximatelya25%improvementover2013,anddrivenbyafewinsurersholdingtheirinvestmentsatfairvalue.Mostinsurerscontinuedtorecordlowinvestmentyieldsin2014,reflectingtheloweryieldsavailableastheportfolioisreinvestedandhighlightingtheimportanceofcoreunderwritingtoachieveandsustainfinancialresults.

TheMinimumCapitalTest(MCT)isthecapitalmetricforCanadianP&CcompanieswhiletheBranchAdequacyofAssetsTest(BAAT)isusedforforeign-ownedP&CoperationsinCanada.CapitalratiosfortheP&Cindustryin2014improvedover2013,increasingto269%froma257%industry-weightedMCT/BAATratio–wellaboveOSFI’ssupervisorytargetof150%.

WithnearlyhalfoftheCanadianP&Cinsuranceindustry(bypremiumvolume)beingforeignowned(ultimateparentsaretypicallylocatedintheUnitedStatesorEurope),marketconditionsinthehomejurisdictioncanaffectCanadianoperations;consequently,OSFIcontinuestomonitorparentcompanyconditions.

Domestically,personalautoinsurancecontinuedtobethemajorunderwritingchallenge,astheautoinsurancelossratiocontinuestodeteriorate.Whileanticipatedimpactsofthe2010Ontarioautoinsurancereformshavebeenrealized,pressureonOntariolossratiosisexpectedtocontinuewith7%ofthetargeted15%reductionslatedforAugust2015takingeffectin2015.In AlbertaandsomeAtlanticprovinces,autoinsurancelossratiosalsoincreasedin2014.

Mortgage Insurance

TheprivatemortgageinsuranceindustryinCanadaexperiencedstablefinancialresultsduring2014.Thenetincomeoffederallyregulatedprivatemortgage

insurersinCanadarose7%to$454million,reflectinghigherunderwritingincomethatoffsetamodestdeclineininvestmentreturns.TheMCTcapitalratioalsoremainedlargelystable,risingone(1)pointto221%,andaboveOSFI’ssupervisoryrequirementof150%.Notwithstandingthecurrentlyfavourablefinancialresults,mortgageinsuranceremainsvulnerabletobothconsumerdebtlevelsandthepotentialimpactof sustainedlowoilpricesincertainCanadianregions.

Supervisory Tools

Managing Risk Effectively

In2014-2015,OSFIcontinuedupdatinginternalguidancetosupportitsrisk-basedSupervisoryFramework,whichconsidersaninstitution’sinherentbusinessrisks,riskmanagementpractices(includingcorporategovernance)andfinancialcondition.

OSFIagainheldannualriskmanagementseminarsin2014-2015fortheindustriesitregulates(DTIs,lifeinsurance,andP&Cinsurance)toreinforcetheneedforstrongriskmanagementandtosharelessonslearned.ThegoalistocommunicateOSFI’sexpectationsrelatedtokeyriskmanagementareasbasedondetailedworkOSFIhasundertakenduringtheyear,andtoshareinformationonissuesbeingdiscussedinternationallybyregulators.TheseminarsalsoprovideparticipantswiththeopportunitytoaskquestionsofOSFI’sseniorsupervisoryandregulatoryteams.

ContinuingthepracticeoforganizingCollegesofSupervisors,in2014-2015OSFIhostedacollegeforeachofCanada’sfivelargestbanks.InlinewithFinancialStabilityBoardrecommendations,thecollegesbroughttogetherexecutivesfromeachbankwithsupervisorsfromjurisdictionswheretheydobusiness.OSFIalsohostedasupervisorycollegeforalargelifeinsurancecompany.Crisismanagementandindustryinformationsessionswereagainheldforthesevenlargestdeposit-takinginstitutions,inconjunctionwithCanadaDepositInsuranceCorporation.

Composite Risk Ratings

TheCompositeRiskRating(CRR)representsOSFI’soverallassessmentofaninstitution’ssafetyandsoundness.Beginningin2013-2014,aBranchRiskRating(BRR)wasassignedtoForeignBankBranches(FBBs)operatinginCanada,ratherthanaCRR,reflectingOSFI’slimitedaccesstotheinformationneededtoassesstheFBB’ssafetyandsoundness.


Therearefourpossibleriskratings:‘low’,‘moderate’,‘aboveaverage’and‘high’.TheCRRisreportedtomostinstitutionsatleastonceayear(certaininactiveorvoluntarywind-upinstitutionsmaynotberated).The SupervisoryInformationRegulationsforbothbanksandinsurancecompaniesprohibitinstitutions(orOSFI)frompubliclydisclosingtheirrating.AsattheendofMarch2015,OSFIhadassignedCRRratingsoflowormoderateto91%andaboveaverageorhighto9%ofallCRR-ratedinstitutions.Thesepercentagesareunchangedfromthepreviousyear.

Intervention Ratings

Financialinstitutionsarealsoassignedanintervention(stage)rating,asdescribedinOSFI’sguidestointerventionforFRFIs,whichdeterminesthedegreeofsupervisoryattentiontheyreceive.Broadly,theseratingsarecategorizedas:normal;earlywarning(stage1);risktofinancialviabilityorsolvency(stage2);

futurefinancialviabilityinseriousdoubt(stage3);andnon-viable/insolvencyimminent(stage4).AsatMarch31,2015,therewere23stagedinstitutions.Withafewexceptions,mostofthestagedinstitutionswereintheearlywarning(stage1)category.

Regulation and GuidanceOSFIprovidesaregulatoryframeworkofguidanceandrulesthatmeetsorexceedsinternationalminimumsforfinancialinstitutions.Inadditionto issuingguidance,OSFIprovidesinputintothe developmentoffederallegislationandregulationsaffectingfederallyregulatedfinancialinstitutions(FRFIs)andcommentsonaccounting,auditingandactuarialstandardsdevelopment,whichincludesdetermininghowtoincorporatethemintoourregulatoryframework.OSFIalsoparticipatesina numberofinternationalanddomestic rule-making activities.

Trenton Haggard ManagerProperty and Casualty Insurance GroupSupervision Sector

Shelina Visram ManagerMFC TeamSupervision Sector


DOMESTIC RULE MAKING

Accounting, Auditing and Actuarial Standards

OSFIisamemberoftheCanadianAccountingStandardsBoard’s(AcSB)UserAdvisoryCouncilandanobserverontheInsuranceAccountingTaskForce.Withrespecttoauditingstandards,OSFIisanon-votingmemberoftheAuditingandAssuranceStandardsOversightCouncil,whichoverseestheactivitiesoftheCanadianAuditingandAssuranceStandardsBoard(AASB).OSFIalsoholdsaseatontheCanadianPublicAccountabilityBoard(CPAB)CouncilofGovernorswhichcarriesoutanannualhigh-levelassessmentofCPABagainstitsmandate.

In2014-2015,OSFIissuedindustry-wideletterspromotingrelevantdomesticandinternationalexternalauditqualityinitiativestoassistauditcommittees,

orthosechargedwithgovernance,intheiroversightresponsibilitieswithrespecttotheexternalauditorand thestatutoryaudit.

Inadditiontoapositionondomesticauditqualityinitiatives,OSFIissuedanadvisoryoutliningexpectationsregardingearlyadoptionofIFRS9FinancialInstruments.

OSFIworkscloselywiththeCanadianInstituteofActuaries(CIA)andtheActuarialStandardsBoard(ASB)toensurethatactuarialstandardsareappropriateandleadtoacceptablepracticeinareassuchasvaluation,riskandcapitalassessmentatentitiesregulatedbyOSFI.In2014-2015,wecontinuedtoparticipateonseveralCIApracticecommitteesandtoconsultwiththeCIAondevelopmentsrelatedtoourworkonanewsolvencyframeworkforlifeinsurancecompanies.

OSFIalsoworkswiththeInternationalActuarialAssociation(IAA)andsupportstheprofessioninestablishingguidancerelatedtoinitiativesoninsurancecompanyvaluationforInternationalFinancialReportingStandards(IFRS)andtheInternationalAssociationofInsuranceSupervisors(IAIS)InsuranceCapitalStandard(ICS).

Capital and Liquidity Guidance

Deposit-Taking Institutions

CapitalAdequacyRequirements

InOctober2014,OSFIreleasedthefinalversionofitsLeverageRequirementsguideline,whichtransposedtheleveragerequirementsissuedbytheBaselCommitteeonBankingSupervision(BCBS)intoguidanceappropriateforCanadianbanks,federallyregulatedtrustandloancompaniesandretailassociations.EffectiveJanuary2015,theguidelinereplacedtheformerlyusedAssetsto CapitalMultiplebytheleverageratiorequirement.

LiquidityRequirements

InMay2014,OSFIreleasedthefinalversionofitsLiquidityAdequacyRequirementsguideline,whichcameintoeffectasofJanuary2015.Theguidelinereflectsinternationallyagreedminimumstandardsforthemeasurementofshort-termliquidityunderastressscenariothatwillbeappliedtoallbanks,bankholdingcompanies,andtrustandloancompaniesinCanada.In theareaofliquidity-relateddisclosures,OSFIissueda guidelineinJuly2014.

Jennifer ShonAnalystCapital BankingRegulation Sector

Anthony HaddadSenior EconomistLegislation and Policy InitiativesRegulation Sector


Life Insurance Companies

OSFIundertookitsannualupdateoftheMinimumContinuingCapitalandSurplusRequirements(MCCSR)guidelineduring2014,withtherevisedversioncomingintoeffectforthe2015fiscalyear.Withstakeholderinputconsidered,theguidelinewasupdatedtoclarifyanumberofelements.Furthermore,asixthQuantitativeImpactStudy(QIS)wasissuedinNovember2014togatherinformationrelatedtopotentialmethodsfordeterminingthecapitalrequirementsforcredit,market,insuranceandoperationalriskcalculations.Industrysubmissionswerereceivedinearly2015andtheresultsarebeinganalyzed.OtherelementsofthenewLifeInsuranceSolvencyFrameworkStandardApproach,suchascapitalresourcesandsegregatedfunds,arealsounderdevelopmentincollaborationwiththeindustry.Thewholeframeworkisscheduledforimplementationin2018.

Property and Casualty Insurance Companies

InSeptember2014,afterextensiveindustryconsultation,OSFIissuedthefinalversionofitssignificantlyrevisedMinimumCapitalTest(MCT).TherevisedguidelineisinkeepingwithOSFI’slong-termplanandprioritiestoensuretheMCTremainsrisksensitiveandforward-looking.

Thepropertyandcasualty(P&C)MCTAdvisoryCommitteecontinuedtodevelopaframeworkfortheuseofcompany-specificmodelstodeterminecapitalrequirementsforP&Cinsurancecompanies.

OSFIisalsodevelopingnewcapitalrulesformortgageinsurers.Thesemorerisk-basedcapitalrequirementsare expectedtobeimplementedin2017.

Other Guidance

Changes to the Membership of the Board or Senior Management

InMay2014,OSFIissueditsfinalguidanceonChangestotheMembershipoftheBoardorSeniorManagement,whichoutlinestheprocessforFRFIstonotifyOSFIaboutpotentialmembershipchangestotheirboardorseniormanagement.ItfurtherreinforcesthatdecisionsonsuchchangesremainwithFRFIsthemselves,clarifyingthatOSFI’sapprovalorvettingisnotrequired.InpermittingeffectiveregulatoryengagementandrespectingFRFIs’needtomakeindependentdecisions,theadvisorystrikestheappropriatebalanceintheCanadiancontext.

Derivatives Sound Practices

InJanuary2015,OSFIissuedthefinalversionofitsrevisedguidelineonDerivativesSoundPractices,Therevisedguidelinereflectstheover-the-counter(OTC)derivativesmarketreformsinitiatedbyG20leaders,andcommunicatesOSFI’sexpectationsforcentralclearingofstandardizedOTCderivativesandreportingofderivativesdatatoatraderepository.Theguidelinealsomirrorscurrentriskmanagementpracticeswithrespecttoderivativesactivities.

Regulatory Compliance Management

InNovember2014,OSFIreleasedthefinalversionofitsupdatedguidelineonRegulatoryComplianceManagement.Theguideline,whichsetsoutOSFI’sexpectationswithrespecttothemanagementofregulatorycomplianceriskinherentinFRFIs’businessactivities,receivednumerousupdatestoensurebetteralignmentwithsomeofOSFI’smorerecentlyupdatedguidance,suchastheCorporateGovernanceguidelineandtheSupervisoryFramework.

Residential Mortgage Insurance Underwriting

Asafollow-uptotheResidentialMortgageUnderwritingPracticesandProceduresguidelineissuedinJune2012,OSFIreleasedthefinalversionofitsguidelineonResidentialMortgageInsuranceUnderwritingPracticesandProceduresinNovember2014.Thisguidelinereinforcesprudentmortgageunderwritingby introducingexpectationsformortgageinsurersthatcomplementthoseapplicabletolenders.ThedateforfullimplementationoftheguidelinebymortgageinsurerswassetforJune30,2015,withtherelevantpublicdisclosuresbeginningwiththequarterendingSeptember30,2015.

Anti-Money Laundering (AML) and Anti-Terrorism Financing (ATF)

Attheinternationallevel,workonstrengtheningthefinancialsystemagainstmoneylaunderingandterrorismfinancingisledbytheFinancialActionTaskForce(FATF).During2014-2015,OSFIcontinueditssupportofFATFguidancedevelopmentonmoneylaundering/terroristfinancingrisksandriskmanagement.Inaddition,OSFIcontributedafinancialassessortothemutualevaluationbytheFATFofcompliancebySpainwiththeFATF’s2012AML/ATFstandards.AsamemberoftheBaselCommitteeonBankingSupervision’sAMLExpertsGroup,OSFIparticipatedinupdatingguidanceonAML/ATFriskmanagement.


Nationally,OSFIisoneofanumberoffederaldepartmentsandagencies,ledbytheDepartmentofFinance,whichparticipatedinthedevelopmentofanassessmentofinherentmoneylaunderingandterroristfinancingrisksinCanada.Inaddition,wecontributedtopreparationsforCanada’snextmutualevaluationbytheFATF,tobeconductedin2015-2016.During2014-2015,OSFIcontinuedconsultationswiththeDepartmentofFinanceondraftAML/ATFlegislationandregulationsthatwillimpactthefinancialsector.

During2014-2015,OSFIcontinueditsAML/ATFsupervisoryassessmentprogramandregularfollow-upworkatawidevarietyoflargeandsmallfinancialinstitutions.TheassessmentprogramisconductedinpartnershipwiththeFinancialTransactionsandReportsAnalysisCentreofCanada(FINTRAC).Asfinancialinstitutions’AML/ATFprogramshavebecomemoremature,wehaverespondedwithagreateremphasisonmonitoringimprovementstoFRFIs’AML/ATFcontrols.

Viaitswebsite,OSFIcontinueditsroleasleadcommunicatorinhelpingtoensurethattheCanadianfinancialsectorispromptlynotifiedofsanctionsimposedbytheUnitedNationsSecurityCouncil(UNSC)andtheGovernmentofCanadaonterroristsandterroristorganizations,aswellasUNSCsanctionsagainstIranandNorthKorea.

INTERNATIONAL ACTIVITIESInternationalorganizationsplayakeyroleinthedevelopmentofregulatoryframeworksforbanksandinsurersandOSFIisanactiveparticipantinanumberofthesegroups,includingtheFinancialStabilityBoard,BaselCommitteeonBankingSupervision,andInternationalAssociationofInsuranceSupervisors.

Financial Stability Board

TheFinancialStabilityBoard(FSB)wasestablishedinApril2009tocoordinate,attheinternationallevel,theworkofnationalfinancialauthoritiesandinternationalstandardsettingbodies.Itdevelopsandpromotestheimplementationofeffectiveregulatory,supervisoryandotherfinancialsectorpolicies.

CanadianrepresentationontheFSBissharedbytheDepartmentofFinance,theBankofCanadaandOSFI.During2014-2015,OSFIcontinueditsinvolvementwiththeFSBthroughmembershipontheFSBPlenary,SteeringCommittee,andStandingCommitteeonSupervisoryandRegulatoryCooperation.

SomeoftheworkinwhichOSFIanditsCanadianpartnersparticipatedduring2014-2015included:

• furtherdevelopingtheinternationalstandardtoenhancethetotalloss-absorbingcapacityofglobalsystemicallyimportantbanks(G-SIBs)inresolution,withtheaimtofinalizethestandardbytheG20SummitinNovember2015;

• actionstostrengthentheresilienceofmarket-basedfinance,includingfurtherdevelopingstandardsaroundsecuritiesfinancingtransactions;and

• worktofinalizeimplementationoftheG20financialsectorreforms,includingintheareasofresolutionregimesandover-the-counterderivatives.

Basel Committee on Banking Supervision

OSFIisanactivememberoftheBaselCommitteeonBankingSupervision(BCBS),whichprovidesaforumfor internationalrulemakingandcooperationonbankingsupervisorymatters.

TheBCBSprovidesregularupdatesontheprogressofmembercountriesinimplementingBaselstandards.OSFIhasactivelysupportedtheinternationalworkdonetodeterminewhetherinternationallyactivebanksarecalculatingtherisk-weightedassetsportionofminimumcapitalratiostandardsinaconsistentmanner.

In2014-2015,OSFIparticipatedinquantitativeimpactstudiesandmultipleworkstreamsreportingtotheBCBS.Theseresultedinafirstroundofproposalstofurtherreduceexcessivevariabilityinthecalculationofminimumcapitalrequirements,including:capitalfloors,revisedStandardizedApproachestooperationalandcreditrisk,andafundamentalreviewofmodelingstandardsfortradingbookrisks.

OSFIconfirmedtheprudenceofitsminimumcapitalrequirementsduring2014-2015byparticipatingintheRegulatoryConsistencyAssessmentProgramme(RCAP),whichassignedanoverall“Compliant”ratingforCanada(incontrastto“LargelyCompliant”and“MateriallyNon-Compliant”ratingsforsomeofitspeersreviewedduringthesameperiod)foritsimplementationofBaselIIIcapitalrequirementsinCanada.Inaddition,OSFI’sDeputySuperintendentledtheRCAPassessmentoftheEuropeanUnion(EU)inthisregard.TheRCAPreportontheEUwaspublishedinDecember2014.OSFIalsocontinueditsleadershiprole


inbenchmarkingstudiestogaugeconsistencyacrossjurisdictionsforthetreatmentofrisk-weightedassetsinthedeterminationofcapitalratiosofglobalbanks.Thisworkisbeingconductedwiththegoalofachievingmoreconsistentimplementationofinternationalrisk-basedcapitalstandards.

International Accounting and Auditing Standards

SinceallFRFIsinCanadaarerequiredtofollowInternationalFinancialReportingStandards(IFRS)andInternationalStandardsonAuditing(ISA),OSFIinterpretsandassessesinternationalrulesthatmayapplytoCanadianfinancialinstitutions.OSFIworkswith theInternationalAccountingStandardsBoard(IASB)andInternationalAuditingandAssuranceStandardsBoard(IAASB)throughactiveparticipationandleadershipintheAccountingExpertsGroupoftheBCBSandtheAccountingandAuditingWorkingGroupoftheInternationalAssociationofInsuranceSupervisors(IAIS).In2014-2015,OSFIworkedthroughtheBCBSandIAIStoprovideitspositionson:

• IAASBProposedStrategyfor2015-2019andProposedWorkProgramfor2015-2016

• IAASBExposureDraft:ProposedISA720(Revised)TheAuditor’sResponsibilitiesRelatingtoOtherInformation

• IAASBExposureDraft:ProposedChangestotheInternationalStandardsofAuditing(ISAs)-AddressingDisclosuresintheAuditofFinancialStatements

• IASBExposureDraft:DisclosureInitiative-ProposedamendmentstoIAS1

• IASBDiscussionPaper:AccountingforDynamicRiskManagement:APortfolioRevaluationApproachtoMacroHedging

Inaddition,OSFIactivelyparticipatedintheBCBSinitiativetoreviseBCBSguidanceonSoundCreditRiskAssessmentandValuationforLoanstoaddressthenewIASBaccountingstandardIFRS9dealingwithexpectedcreditlosses(ECL).TheconsultationpaperGuidance on accounting for expected credit losseswaspublishedforcomment.ItsetsoutsupervisoryrequirementsonsoundcreditriskpracticesassociatedwiththeimplementationandongoingapplicationofECLaccountingframeworksinarobust,highqualityandconsistentmanner.This

guidanceisexpectedtobefinalizedin2016inorderforinternationallyactivebankstoapplytheguidanceforimplementationofIFRS9in2018.

Activeparticipationinthedevelopmentofthesestandardspromotesasetofhigh-qualityglobalstandardsandenhancesourunderstandingofkeyIFRSsandISAsthatimpactFRFIs.Significantchangestoaccountingstandardsrequireearlyinvolvementandcloseconsultationandcommunicationwithstandardsetters,otherregulators,andbothinternationalanddomesticfirms.OSFIcollaboratescloselywithallstakeholdersaskeyaccountingandauditingstandardsaredeveloped.Forexample,during2014-2015,OSFIworkedcloselywiththeActuarialStandardsBoardandtheInternationalActuarialAssociationonsettingstandards,particularlyinrelationtoIFRS4InsuranceContracts.

Hind AbdoSenior SupervisorMontreal Regional OfficeSupervision Sector

Georges GhannamManagerMontreal Regional OfficeSupervision Sector


International Association of Insurance Supervisors

OSFIparticipatesintheworkoftheInternationalAssociationofInsuranceSupervisors(IAIS),whichrepresentstheinsuranceregulatorsandsupervisorsofapproximately140countries.IAISobjectivesaretocontributetotheimprovedsupervisionoftheinsuranceindustryfortheprotectionofpolicyholdersworldwide,topromotethedevelopmentofwell-regulatedinsurancemarketsandtocontributetoglobalfinancialstability.

OSFIisamemberoftheIAISExecutive,Technical,FinancialStability,andAuditandRiskcommittees,SupervisoryForum,andseveralworkinggroups.InOctober2013,theIAISannouncedplanstodeveloparisk-basedglobalInsuranceCapitalStandard(ICS).Throughvariouscommittees,OSFIisengagedinthedevelopmentoftheICS,whichistargetedforcompletionby2016,withfullimplementationtobeginin2019.Tothateffect,theIAISissuedtheRisk-based Global Insurance Capital StandardpublicconsultationdocumentinDecember2014.Intheinterim,theIAIScompletedabasiccapitalrequirementinOctober2014forimplementationbyglobalsystemicallyimportantinsurers

(G-SIIs)in2017.ThroughitscontinuedinvolvementintheHigherLossAbsorbencyDraftingGroupandtheFieldTestingTaskForce,OSFIisplayingakeyroleinthedevelopmentoftheseveryimportantprojects.

AsamemberoftheIAISFinancialStabilityCommittee,OSFIisparticipatingintherefinementofthemethodologytoassesswhich,ifany,reinsurancecompaniesmaybeglobalsystemicallyimportantinsuranceinstitutionsandwhatkindofsupervisorymeasureswouldapplytothoseidentifiedassuch.This IAISinitiativewillextendthrough2015.

ThroughmembershipontheAccountingandAuditingWorkingGroup,OSFIcontinuestomonitorkeydevelopmentsandcontributetointernationalpolicyworkonissuesofmainconcerntoOSFI,suchastheIASB’skeyinsuranceprojectIFRS4InsuranceContracts.

Approvals and PrecedentsTheBank Act, Trust and Loan Companies Act,Insurance Companies Act,andCooperative Credit Associations Actrequirefederallyregulatedfinancialinstitutions(FRFIs)toseekregulatoryapprovalfromthe

Mary Camello Manager Operational Risk DivisionSupervision Sector

Laura Nicholl Senior SupervisorBMO Team Supervision Sector


SuperintendentofFinancialInstitutionsortheMinisterofFinance(afterreceivingtherecommendationoftheSuperintendent)priortoengagingincertaintransactionsorbusinessundertakings.

RegulatoryapprovalsarealsorequiredbypersonswishingtoincorporateaFRFI,andbyforeignbanksorforeigninsurancecompanieswishingtoestablishapresenceortomakecertaininvestmentsinCanada.OSFIadministersaregulatoryapprovalprocessthatisprudentiallyeffective,responsiveandtransparent.OSFI’sApprovalsdivisionisresponsibleformakingrecommendationstotheSuperintendentandtotheMinisterregardingthosemattersrequiringregulatory approval.

In2014-2015,OSFIprocessed223applicationsofwhich200wereapproved.Individualapplicationsoftencontainmultipleapprovalrequests.The200approvedapplicationsinvolvedatotalof371approvals,286ofwhichweregrantedbytheSuperintendentand85bytheMinister.Thisrepresentsanincreaserelativetolastyear,when199 applicationswereprocessed.Mostapplicationsfor2014-2015relatedtopropertyandcasualty(P&C)insurers(47%)andbanks(41%).(See figure 1)

In2014-2015,OSFIprocessed223applicationsofwhich200wereapprovedand23werewithdrawn.

Themostcommonapplicationsreceivedfromdeposit-takinginstitutionsrelatedtopurchasesorredemptionsofsharesordebentures,substantialinvestments,andtransfersofassetsinexcessof10%.Applicationsreceivedfrominsurancecompaniesrelatedmainlytoreinsurancewithrelatedunregisteredreinsurers,amendingorderstocommenceandcarryonbusinessorinsuringinCanadaofrisks,andpurchasesorredemptionsofsharesordebentures.

During2014-2015,letterspatentweregrantedincorporatingEsuranceInsuranceCompanyofCanadaasaCanadianP&Cinsurer.Inaddition,ordersauthorizingtheestablishmentofaforeigninsurancebranchinCanadawereissuedtoArchReinsuranceCompany,XLSpecialtyInsuranceCompany,TechnologyInsuranceCompany,andHannoverRe(Ireland)Limited.

Uponrequest,OSFIalsoprovidesadvancecapitalconfirmationsontheeligibilityofproposedcapitalinstruments.Atotalof43suchopinionsandvalidationswereprovidedin2014-2015,comparedtoseventhepreviousyear.

OSFIhasperformancestandardsestablishingtimeframesforprocessingapplicationsforregulatoryapprovalandforotherservices,allofwhichweresurpassedduring2014-2015.MoreinformationonserviceperformancestandardscanbefoundonOSFI’swebsite.

Guidance and Education

InkeepingwiththeobjectiveofenhancingthetransparencyofOSFI’slegislativeapprovalprocessandpromotingabetterunderstandingofourinterpretationofthefederalfinancialinstitutionstatutes,OSFIdevelopsandpublisheslegislativeguidanceincludingadvisories,rulings,andtransactioninstructions.In2014-2015,OSFImaderevisionstothefollowingguidancedocuments:

• GuideforIncorporatingBanksandFederallyRegulatedTrustandLoanCompanies

• AdvisoryontheLegislativeFrameworkforForeign Banks

• AdvisoriesonSubstantialInvestments

• TransactionInstructionsonRelatedPartyAsset TransactionsasPartofaRestructuring

• TransactionInstructionsonRelatedPartyAsset TransactionswithaFinancialInstitution

FIGURE 1ApprovedApplicationsbyIndustry2014-2015

100

80

60

40

20

0 Bank T&L/Coop* Life P&C

Num

ber

*TrustandLoan/CooperativeAssociations

In 2014-2015, OSFI processed 223 applications of which 200 were approved and 23 were withdrawn.


Federally Regulated Private Pension Plans

inthelatterpartof2013,resumedtheirdeclinetohistoriclowsin2014andinto2015.However,theimpactofthisdeteriorationinsolvencypositionsonrequiredsolvencyfundingpaymentsisexpectedtobemoderatedformostfederallyregulateddefinedbenefitpensionplans,asfederalsolvencyfundingrequirementsarebasedonapensionplan’saveragesolvencypositionoverthepastthreeyears.Forfederallyregulateddefinedbenefitpensionplansasawhole,thethree-yearaveragesolvencyratiofortheperiodendingDecember2014isslightlyhigherthan itwasfortheperiodendingDecember2013.

Thesustainedlowinterestrateenvironment,ongoingmarketvolatilityandimprovementsinlongevityareleadingplansponsorsandadministratorstoconsidernewwaystomanagepensionfundingrisks.Atthesametime,newpensionplandesignsarebeingexplored,asevidencedbytheGovernmentofCanada’sconsultationpaperissuedinApril2014onTargetBenefitPlans,aswellassimilarlegislation beingadoptedorproposedinotherCanadianjurisdictions.

In2014,OSFIregisteredthefirstfederalPooledRegisteredPensionPlans(PRPPs)forPRPPadministratorswhohadreceivedfederallicensesin2013-2014.ThegrowthofthisnewtypeofplanwilldependtoalargedegreeontheimplementationofprovinciallegislationthatwillsupporttheoperationofPRPPsacrossdifferentCanadianjurisdictions.A numberofprovincialgovernmentsareexpectedto implementPRPPlegislationin2015-2016.

OSFIsupervisesfederallyregulatedprivatepensionplansandintervenesinatimelymannertoprotectmembersandbeneficiariesofsuchpensionplansfrom

loss,whilerecognizingthatplanadministratorsareultimatelyresponsibleandthatfundingdifficultiescan resultinalossofbenefits.

Approximately6%ofprivatepensionplansinCanadaarefederallyregulated(StatisticsCanadadataasatJanuary2013).AsatMarch31,2015,1,226privatepensionplanswereregisteredunderthePension Benefits Standards Act, 1985,coveringover1,076,000activemembersandotherbeneficiariesinfederallyregulatedareasofemployment,suchasbanking,inter-provincialtransportationandtelecommunications.BetweenApril1,2014andMarch31,2015,federallyregulatedprivatepensionplanassetsincreasedbyslightlymorethan10%,toa valueofapproximately$189billion(see figure 2).

Private Pension Environment

Followingayearthatbroughtasignificantoverallimprovementinthehealthoffederallyregulatedprivatepensionplans,2014markedthereturntoamorechallengingeconomicenvironment.Thoughequitymarketsfor2014asawholeweregenerallystrong,theoverallsolvencypositionofdefinedbenefitpensionplansdeteriorated.Thiswasdueprimarilytofurtherdeclinesinlong-terminterestrateswhich,afterhavingrisensomewhat


2012 2013 2014 20152

Total Plans 1,354 1,234 1,234 1,226

DefinedBenefit 358 347 335 323

Combination 94 100 111 112

DefinedContribution 902 787 788 791

Total Active Membership 646,000 639,000 639,000 631,000

DefinedBenefit 378,000 358,000 353,000 342,000

Combination 144,000 154,000 162,000 161,000

DefinedContribution 124,000 127,000 124,000 128,000

Total Other Beneficiaries3 - 420,000 430,000 445,000

DefinedBenefit - 265,000 268,000 272,000

Combination - 142,000 147,000 156,000

DefinedContribution - 13,000 15,000 17,000

Total Assets $142 billion $155 billion $171 billion $189 billion

DefinedBenefit $102 billion $104 billion $112 billion $123 billion

Combination $35 billion $46 billion $54 billion $60 billion

DefinedContribution $5 billion $5 billion $5 billion $6 billion

1AsatMarch31st 2DoesnotincludethefivePRPPsregisteredin20143Dataisavailableonlyasof2013

FIGURE 2FederallyRegulatedPrivatePensionPlansbyType(last4years)1

Risk Assessment, Supervision and Intervention

In2014-2015,OSFIencouragedplanadministratorstoconsiderreviewingtheirstrategiestomanagerisksintheirpensionplans,particularlygiventheimprovedfinancialpositionattheendof2013.OSFIalsocontinuedtoemphasizetheimportanceofstresstestingtoadministratorsoffederallyregulatedprivatepensionplans.Ingeneral,OSFIhasobservedthatplanadministratorsandemployersarepayingcloserattentiontotheirpensionplans’underlyingrisks,andto howtheseriskscanbemanaged.

InOctober2014,OSFIpostedupdatedversionsoftheRiskAssessmentFrameworkforFederallyRegulated

PrivatePensionPlansandtheaccompanyingGuidanceNotes.Thesedocuments,whichsupportOSFI’ssupervisorymethodologyforpensionplans,weredevelopedasaresourcetooltoassistinmakingconsistentriskassessments.

OSFI’sRiskAssessmentSystemforPensions(RASP)analysesinformationfrompensionplanfilingsandothersourcesandgenerateskeyriskindicatorsforeachfederallyregulatedprivatepensionplanregisteredwithOSFI,therebyenablingearlyidentificationofissues.In2014-2015,OSFIfinalizedanin-depthreviewofthekeyriskindicatorsitbuiltintoRASPin2012andhassinceidentifiedanumberofchangesthatwillbeimplementedduring2015-2016.OSFIalsore-evaluateditsprocesstosupport

As at March 31, 2015, there were 1,226 private pension plans registered under the Pension Benefits Standards Act, 1985, covering over 1,076,000 active members and other beneficiaries. (The drop from 1,354 plans in 2012 to 1,234 plans in 2013 was largely due to a Supreme Court of Canada decision that affected the jurisdiction of 110 First Nations pension plans.


theassessmentsofapensionplan’soverallriskprofileandwillbeimplementingchangesin2015-2016.

During2014-2015,OSFIrevieweditssupervisoryprocesseswithrespecttoplanswithdefinedcontributionprovisionsandconcludedthatmorecomprehensiveinformationisneededtoidentifyanygaps.Adetailedstudyisplannedfor2015-2016.

Solvency Testing

OSFIestimatessolvencyratios(ratioofassetsoverliabilitiesonaplanterminationbasis)onanannualbasisforthedefinedbenefitpensionplansitregulates.ThistestprovidesOSFIwithimportantinformationthatenablesearlierinterventioninhigher-riskpensionplans.AtDecember31,2014,theestimatedsolvencyratio(ESR)forallplanswas0.94,downfrom0.98atyear-end2013(see figure 3).ESRscalculatedbyOSFIatyear-end2014showedthatapproximately79%ofalldefinedbenefitpensionplanssupervisedbyOSFIwereunderfunded(upfrom61%in2013),meaningtheirestimatedliabilitiesexceededassets,onaplanterminationbasis.

Examinations

Aspartofitsrisk-basedsupervisoryapproach,OSFI conductsexaminationsofselectedfederallyregulatedprivatepensionplans.Theexaminationsmaybelimitedtoadeskreviewofadditional

informationthatwouldnotbepartofthenormalregulatoryfilings.Examinationsmayalsobeconductedontheplanadministrator’spremises(on-siteexaminations)duringwhich,inadditiontothemorethoroughreviewoftheplanadministrator’sprocesses,OSFIinterviewsthoseinvolvedintheadministrationofthepensionplan.The objectiveofan examinationistogatheradditionalinformationandbetterassesstheplan’squalityofriskmanagement.During2014-2015,OSFIperformed11examinationsandfindingscontinuedtofocusongovernance,assetmanagementandcommunicationto members.

Watch List

Pensionplansfacinghigherrisk–duetotheirfinancialcondition,planmanagementorotherreasons–are placedonawatchlistandactivelymonitored.ThenumberofwatchlistplansatMarch31,2015decreasedto60from92atMarch31,2014.Ofthe60plans,42weredefinedbenefitplansand18weredefinedcontributionplans.During2014-2015,48planswereremovedfromthewatchlistwhile16newplanswereadded.

Intervention

OSFIstrivestoprotectmembers’benefitsthroughcooperationwithplanadministratorsandemployersbeforeexercisingitspowerstoenforcelegislativerequirements.In2014-2015,OSFIinterventionswithrespecttohigh-riskpensionplansincludedissuingtwo directionsofcompliancerequiringtheemployerstoremitoutstandingcontributions.

Rules and Guidance

Pension Benefits Standards Regulations, 1985

AmendmentstothePension Benefits Standards Regulations, 1985(theRegulations)werepublishedbythefederalgovernmentforcommentinSeptember2014,andfinalizedinMarch2015.Anumberofamendments,suchasthoserequiringthatadditionalinformationbeprovidedtoplanmembersinannualstatements,willcomeintoeffectatalaterdatetoallowplanadministratorstimetomakethenecessarychanges.ThroughitswebsiteandregularInfoPensionsnewsletter,OSFIprovidedup-to-dateguidanceonthestatusofchangestofederalpensionlegislationandwill issuerevisedguidancein 2015-2016.

FIGURE 3DefinedBenefitPlans’EstimatedSolvencyRatio(ESR)Distribution(past9years)

1.15

1.05

0.95

0.85

0.75

The ESR decreased from 0.98 to 0.94 since year-end 2013.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Pension Industry Outreach

InApril2014,OSFIhostedawebconferenceor“webinar”thatincludedtopicsonsupervisoryfindingsandexpectations,actuarialconcerns,andexpectationswithrespecttoregulatoryapprovals.ThewebinarformatenablesOSFItoreachagreaternumberofstakeholdersacrossthecountryinamannerthatiscosteffectivebothforOSFIandthoseattending.

InNovember2014,OSFIconductedasurveyofplanadministratorsandprofessionaladvisorsoffederallyregulatedprivatepensionplans,throughanindependentresearchfirm,toobtaintheirassessmentofOSFI’seffectivenessasasupervisorandregulatorofprivatepensionplans.Theseconsultationsareapartofourongoingcommitmenttoberesponsivetostakeholderinputandtoseeksuggestionsforimprovement.AllsurveyresultsarepublishedonOSFI’swebsite.

Guidance

Inkeepingwiththeobjectivesofpromotingprudentpracticesandatransparentregulatoryframework,OSFIregularlyprovidesguidancetoplanadministratorson legislativerequirementsandOSFI’sexpectations.

Reflectingthegrowinginterestinstrategiestomanagetherisksfacingdefinedbenefitpensionplans,OSFIissuedapolicyadvisorytitledLongevityInsuranceandLongevitySwapsinJune2014,followingconsultationwithpensionstakeholdersin2013.Theadvisoryprovidesguidancetoadministratorsoffederallyregulateddefinedbenefitpensionplanswhoareconsideringthistypeofcontractasameansofhedging longevityrisk.

In2014,OSFIissuedrevisedinstructionsonhowtocompleteForm 1 – Attestation Regarding Withdrawal Based on Financial Hardshipforapplicantswhowishtounlockfundsheldinafederallyregulatedlocked-in

Stephen Reid Senior SupervisorPrivate Pension Plans DivisionRegulation Sector

Adam Kearney Actuarial OfficerPublic PensionsOffice of the Chief Actuary


FIGURE 4AssetBreakdown*ofPensionPlansRegulatedbyOSFI

($ millions) 2013 2014

Cash $1,266 0.7% $986 0.5%

Debt Securities

ShortTermNotes,OtherTermDeposits 5,676 3.3% 4,619 2.4%

GovernmentBonds 36,681 21.4% 47,548 25.2%

CorporateBonds 12,606 7.4% 13,714 7.3%

MutualFunds-Bonds,CashEquivalent&Mortgage 11,883 6.9% 15,046 7.9%

MortgageLoans 780 0.5% 864 0.5%

GeneralFundofanInsurer 195 0.1% 194 0.1%

Total Debt Securities 67,821 39.6% 81,985 43.4%

Equity

SharesinInvestment,RealEstateorResourceCorporation 4,275 2.5% 4,163 2.2%

CommonandPreferredShares 52,710 30.8% 54,174 28.7%

StockMutualFunds 19,825 11.5% 20,469 10.8%

RealEstateMutualFunds 1,504 0.9% 1,958 1.1%

RealEstate 2,922 1.7% 2,697 1.4%

Total Equity 81,236 47.4% 83,461 44.2%

Diversified and Other Investments

BalancedMutualFunds 5,938 3.5% 5,152 2.7%

SegregatedFunds 2,825 1.7% 3,311 1.8%

HedgeFunds 4,879 2.9% 5,986 3.2%

PrivateEquity 1,272 0.7% 1,887 1.0%

Infrastructure 2,059 1.2% 2,552 1.3%

MiscellaneousInvestments 6,528 3.8% 9,287 4.9%

Total Diversified and Other Investments 23,501 13.8% 28,175 14.9%

Other Accounts Receivables (net of liabilities) (2,575) -1.5% (5,682) -3.0%

TOTAL NET ASSETS 171,249 100.00% 188,925 100.0%

*Representsassetdistributionasreportedinthefinancialstatementsofpensionplansduringrespectiveyears.

Approximately 44% of federally regulated private pension plan assets are invested in equities, 43% in debt instruments and 13% in other assets. Equities produced strong returns in 2014, compensating for the negative results on debt instruments. Investment returns for federally regulated private pension plans were 13% in 2014 compared to 12% in 2013.


savingsplanduetofinancialhardship.Theinstructionswererevisedinresponsetoquestionsreceivedonthepreviousversion.

InFebruary2015,OSFIconductedatargeted,onlineconsultationwithasmallnumberofpensionindustryprofessionalswhoregularlyrequestinterpretationsrelatingtotheRegulations.TheoverallresultsoftheconsultationwerepositiveandhavehelpedOSFItoidentifyareasforimprovement,includingformalizingservicedeliverystandardsforrespondingtoenquiries.

InfoPensions

OSFIpublisheditsbi-annualnewsletterInfoPensions inMayandNovember2014.Thenewsletterincludesannouncementsandremindersonissuesrelevanttoadministratorsoffederallyregulatedprivatepensionplans,pensionadvisors,andotherstakeholders.ItalsoincludesdescriptionsofhowOSFIappliesselectedprovisionsofthepensionlegislationandOSFIguidance.OSFIregularlyconsultswithitsstakeholderstoensurethatwearecommunicatingeffectivelyandcontinuestolookforwaystoensurethatInfoPensions ishighlyreadable,accessibleand relevant.

Approvals

FederallyregulatedprivatepensionplansarerequiredtoseekapprovalfromtheSuperintendentforseveraltypesoftransactions,includingplanregistrationsandterminations,assettransfersbetweenregistereddefinedbenefitpensionplans,refundsofsurplus,andreductionsofaccruedbenefits.During2014-2015,thenumberofpensiontransactionssubmittedtotheSuperintendentforapprovalreturnedtohistoricalnorms,followingayearwhenrequestsforapprovalwereunusuallyhigh.OSFIprocessed63applicationsforapprovalandreceived56newrequestsin2014-2015,comparedto104processedapplicationsand89newrequestsin2013-2014.ThirtynewplanswereregisteredbyOSFIin2014-2015(14definedbenefitplansand16definedcontributionplans),while18planterminationreportswereapproved(7definedbenefitplansand11definedcontributionplans).

Inadditiontotheapprovalsnotedabove,OSFIisresponsibleforlicensingadministratorsandregisteringplansunderthePooled Registered Pension Plans Act.In2014-2015,OSFIregisteredfivePRPPs,oneforeachfederalPRPPadministratorlicensedbyOSFIin2013-2014.NonewPRPPadministratorswerelicensedbyOSFIin2014-2015.


Office of the Chief Actuary

TheOfficeoftheChiefActuary(OCA)contributestoafinanciallysoundandsustainableCanadianpublicretirementincome systemthroughtheprovisionofexpert

actuarialvaluationandadvicetotheGovernmentofCanadaandtoprovincialgovernmentsthatareCanada PensionPlan(CPP)stakeholders.

TheOCAprovidesstatutoryactuarialvaluationandadvisoryservicesfortheCPP,OldAgeSecurityprogram,theCanadaStudentLoansProgram,EmploymentInsuranceprogram,andpensionandbenefitsplanscoveringthefederalPublicService,theCanadianForces,theRoyalCanadianMountedPolice(RCMP),federallyappointedjudges,andMembersofParliament.

TheOCAwasestablishedwithinOSFIasanindependentunit.TheChiefActuaryreportstotheSuperintendent;however,theaccountabilityframeworkoftheOCAmakesitclearthattheChiefActuaryissolelyresponsibleforcontentandactuarialopinionsinreportspreparedbytheOCA.

Tabling of the 12th Actuarial Report on the Old Age Security Program

TheOCAisrequiredbylawtoproduceanactuarialreportontheOldAgeSecurity(OAS)programeverythreeyearsorwheneveranamendmentismadethataffectsthecostofbenefits.Thetriennial12thActuarialReportontheOASProgramasat31December2012wastabledonAugust20,2014.Thisactuarialreportprovidesinformationonfutureexpendituresuntil2060.ThereportfacilitatesabetterunderstandingofthestatusoftheOASprogramandthefactorsthatinfluenceitscosts,therebycontributingtoaninformedpublicdiscussionofissuesrelatedtoit.

TheOASprogram,financedthroughGovernmentofCanadageneraltaxrevenues,isoneofthecornerstones

ofCanada’sretirementincomesystem.BenefitsincludethebasicOASpension,theGuaranteedIncomeSupplement(GIS)andtheAllowance.ThebasicpensionisamonthlybenefitavailabletomostCanadianswhomeetageandresidencerequirements.TheageofeligibilityforOASbenefitsiscurrently65butisscheduledtoincreasegraduallyto67byJanuary2029.TheGISandtheAllowancearemonthlybenefitspaidtoresidentsofCanadawhoreceiveabasic,fullorpartialOASpensionandhavelittleornootherincome.

In2014,about5.5millionCanadiansreceivedOASbenefits,withatotalvalueofapproximately$44billionor2.2%ofCanada’sGrossDomesticProduct(GDP).Thereport’skeyfindingsshowthat,overthelongterm,theratiooftotalOASexpenditurestoGDPisprojectedtoreachahighof2.8%by2033andthendecreaseslowlytoalevelof2.4%by2050.

External Peer Review of the 26th CPP Actuarial Report

TheOCAiscontinuallyworkingtostrengthenitstechnicalexpertise,aswellasinternalandexternalcommunications.ExternalpeerreviewsofCPPactuarialreportsandtheirensuingrecommendationshavehelpedtheOCAachievetheseobjectivesandensurethattheOCAcontinuestoprovideavaluableservicewithtangiblebenefitstoCanadians.

Jean-Claude MénardChief Actuary


TheOCAreleased,inMay2014,thefindingsofanexternalpeerpanelcommissionedtoreviewthe26thActuarialReportontheCanadaPensionPlan.Keyfindingswerereportedinthe2013-2014OSFIAnnualReportandthecompletereviewisavailableintheOfficeoftheChiefActuarysectionoftheOSFIwebsite.

Thepeerreviewresultedineightrecommendationsdealingwithvariousaspectsofthereportincludingdata,methodology,communicationofresults,andotheractuarialissues.TheOCAhaseithertakenorplanstotakeactionontheserecommendations.Inparticular,theOCAwillcontinuetobroadenitssourcesofinformationbeforesettingassumptions.TheworkperformedbytheChiefActuaryasChairmanoftheInternationalSocialSecurityAssociation(ISSA)CommissiononStatistical,ActuarialandFinancialStudies,aswellastheOCAinter-disciplinaryseminarplannedforSeptember2015,areaimedatgatheringopinionsfromnationalandinternationalexperts.TheOCAwillalsocontinuetoobtainexpertadvicefromvariousfieldssuchasdemographics,economics,statisticsandinvestments.

Tofurtherincreasethetransparencyandindependenceofthepeerreviewprocess,anexternalpartywasresponsiblefortheoversightofthereview.TheUnitedKingdom’sGovernmentActuary’sDepartment(GAD)selectedthepeerreviewpanelmembersandreleasedanopinioninMay2014ontheworkperformedbytheexternalpanel.TheGADopinionnotedthattheworkcarriedoutforthereviewandthereviewreportadequatelyaddressestheissuessetoutinthetermsofreferenceandthatthethreereviewerswereabletoreachagreementonalloftheopinionsandrecommendationssetoutinthereviewreport.(TheGADopinionisalsoavailableontheOSFIwebsite.)

Public Sector Insurance and Pension Plans

In2014-2015,theOCAcompletedfouractuarialreportswithrespecttopublicsectorinsuranceandpensionplans,whichweresubmittedtothePresidentoftheTreasuryBoardfortablingbeforeParliament.TheActuarialReportonthePensionPlanfortheMembersofParliamentasatMarch31,2013andtheActuarialReportontheRegularForceDeathBenefitAccountasatMarch31,2013weretabledonOctober31,2014,andtheActuarialReportsonthePensionPlansfortheCanadianForces–RegularForceandReserveForceasatMarch31,2013werebothtabledonNovember21,2014.Thesereportsprovideactuarialinformationtodecisionmakers,Parliamentariansandthepublic,

therebyincreasingtransparencyandconfidenceinCanada’sretirementincomesystem.

Actuarial Report on the Employment Insurance Premium Rate

In2014-2015,theOCApresentedtotheCanadaEmploymentInsuranceCommissionthe2015ActuarialReportontheEmploymentInsurancePremiumRatethatwastabledbeforeParliamentonSeptember24,2014.Thisreportprovidestheforecastbreak-evenpremiumratefortheupcomingyearandadetailedanalysisinsupportofthisforecast.

Special Events, Presentations and Special Studies

Increasinglongevityaffectsthesustainabilityofpensionplans.Theimpactofthistrend,coupledwithhighuncertaintywithrespecttotheevolutionoffuturemortalityrates,makesthedevelopmentofappropriatemortalityassumptionsofparamountimportance.AsstatedbyChiefActuaryJean-ClaudeMénardduringhisappearanceattheHouseofCommonsStandingCommitteeonPublicAccountsinMay2014,theexpectedfuturemortalityimprovementsareembeddedinactuarialvaluationsofthepensionplanspreparedbytheOCA.Ifthefutureimprovementsinmortalitywerenottakenintoaccount,thetotalactuarialliabilityofthethreelargestpublicsectorpensionplans(publicservice,CanadianForcesandRCMP)asat31March2013wouldbereducedby$7.7billionor3.4%.

In2014-2015,theOCApublishedtwomortalitystudiesthataddressmortalityassumptions.ActuarialstudyNo.12Mortality Projections for Social Security Programs in CanadaexploredtrendsinCanadianpopulationmortalityanddiscussedmortalityassumptionsdevelopedforthelatestCPPandOASActuarialReports.Thefindingsofthisstudywerepresentedtovariousnationalandinternationalaudiences,includingbyChiefActuaryJean-ClaudeMénardattheSocietyofActuaries’AnnualMeeting.ActuarialstudyNo.14Pension Plan for the Public Service of Canada Mortality StudywasproducedinresponsetothedevelopmentbytheCanadianInstituteofActuariesofmortalitytablesbasedontheexperienceofCanadianpensioners.TheOCAstudyfoundthatlifeexpectanciesoffederalpublicservantsaresimilartothoseofmembersofprivatesectorpensionplans.

Foracompletelistofstudies,meetings,presentationsandspeeches,seetheOfficeoftheChiefActuarysectionofOSFI’swebsite.


Corporate Services

Communicating Effectively

During2014-2015,OSFIcommunicateditsplansandactivitiestoawiderangeofstakeholdersviaitswebsiteandothermeans.Asinpreviousyears,OSFIreceived

manyrequeststoaddressexternalconferencesandevents.TheSuperintendentandseniorOSFIofficialsdeliveredpresentationsacrossCanadaandinternationally.TheSuperintendentappearedbeforetheSenateStandingCommitteeonBanking,TradeandCommerce,andtheChiefActuaryappearedbeforetheHouseofCommonsStandingCommitteeon PublicAccounts.

CoincidingwithJeremyRudin’sfirstpublicaddressasSuperintendent,inSeptember2014,OSFIbeganusingTwittertobroadcastcontenttoalargeraudience.OSFItweetsfromtwoaccounts:@OSFICanada(English)and@BSIFCanada(French).

OSFI’sexternalnewsletter,The Pillar,waspublishedfourtimesin2014-2015.Itupdatesstakeholdersonthelatestguidelines,notices,publicstatements,andotherpertinentinformation.

Throughout2014-2015,OSFIcommunicatedwithinterestedCanadians,includingmembersofthegeneralpublic,industry,regulators,legislatorsandthe newsmedia,asfollows:

• Served1,744,643visitorstoOSFI’swebsite

• Respondedto9,861publicenquiries,185enquiriesfromMembersofParliamentand175enquiriesfromrepresentativesofthenewsmedia

• Deliveredover63presentationstoindustryandregulatoryforums,including12keyspeechesthatwerepostedtoOSFI’swebsite

• Processed43accesstoinformationrequestsand24 consultationswithinpermittedstatutorytimelines,aspertheAccess to Information Act.

Renewing Technology and Systems

2014-15markedthesuccessfulcompletionofafive-yearInformationTechnologyRenewalprogram.Bytheendofthefiscalyear,thelastthreeprojectsconcludedasplannedandthenewsystemsareprovidingOSFIwithupdatedbusinessdatamanagementcapability.OSFInowusesthefederalgovernment’ssharedSAPplatformforitsfinancialandcontractingprocesses;amodernHRManagementSystemenablesself-servetransactions;andaCorrespondenceandEnquiryManagementsystemmanagesinquiriesreceivedfromParliament,federallyregulatedfinancialinstitutions,pensionplanmembers,mediaandthegeneralpublic.Systemupgradesdeliveredovertheprecedingfouryearsinclude:on-linefilingforregulatorydata;businessintelligenceanalyticstools;anewwebsite;ariskassessmentsystemforthePensionPlansDivision;andmodernizednetworkingandtechnologytools.


Theoverallresultissignificantlyfewerapplicationsandrationalizeddata,andastrongemergingfocusonenterpriseinformationmanagementacrosstheOffice.

Managing Human Resources

Toachieveitsstrategicoutcomes,OSFI’spriorityisto haveahigh-performingandeffectiveworkforce.

In2014-2015,ongoingrisksposedbythecurrentenvironment,bothattheleveloftheeconomyandwithinthefinancialsector,aswellasinternalfactors,continuedtohaveanimpactonhowwedoourwork.Tomitigatetheserisks,anumberofprioritieswere

identifiedthroughtheHumanResources(HR)planningprocessandthefollowingactionsweretakentoaddressgaps:

• SupportedthereorganizationoftheSupervisionSector,whichledtothecreationofnewsectorsforDeposit-takingInstitutions,InsuranceInstitutionsandtheSupervisionSupportGroup,withstaffingexpectedtobecompletedearlyin2015-2016

• Providedsupportandoversighttocontaincostsandgrowthintheorganization,andhelpedmanagersidentifyandreallocateresourcestoaddressorganizationalpriorities

Elishka Pinto Human Resources AdvisorHuman Resources and AdministrationCorporate Services Sector

Chris Cooper Administrative OfficerAdministrationCorporate Services Sector


Sabina FaustManager, Procurement and ContractingProcurement, Contracting and Asset ManagementCorporate Services Sector

James KealeyManager, Financial Policy and ProjectsFinanceCorporate Services Sector

• ContinuedtoupdateHRpoliciesandguidelinestoprovideappropriateguidancetomanagersandemployeesandtosupporttheirconsistentapplicationacrosstheorganization

• Focusedonemployeeengagementbyensuringthat managersworkedwithemployeestoimplementactionplanstoaddressissuesraisedinthe bi-annualemployeesurveydonein2013-2014

• Providedlearninganddevelopmentopportunitiesforstaffacrosstheorganizationbasedonindividuallearningplansinsupportofbusinessplans

• Continuedtosupportmanagersinhandlingcomplexperformance,disabilityandsickleavecasesonatimelybasis


Financial Review and Highlights

OSFIrecoversitscostsfromseveralrevenuesources.OSFIisfundedmainlythroughasset-based,premium-basedormembership-basedassessmentsonthe

financialinstitutionsandprivatepensionplansthatitregulatesandsupervises,andauser-payprogramforlegislativeapprovalsandotherselectedservices.

TheamountchargedtoindividualinstitutionsforOSFI’smainactivitiesofriskassessmentandintervention(supervision),approvalsandprecedents,andregulationandguidanceisdeterminedinseveralways,accordingtoformulassetoutinregulations.Ingeneral,thesystemisdesignedtoallocatecostsbasedontheapproximateamountoftimespentsupervisingandregulatingeachindustry.Costsarethenassessedtoindividualinstitutionswithinanindustrybasedontheapplicableformula,withaminimumassessmentforsmallerinstitutions.

Stagedinstitutionsareassessedasurchargeontheirbaseassessment,approximatingtheextrasupervisionresourcesrequired.Asaresult,well-managed,lower-riskinstitutionsbearasmallershareofOSFI’scosts.

OSFIalsoreceivesrevenuesforcost-recoveredservices.TheseincluderevenuesfromprovincesforwhichOSFIprovidessupervisionoftheirinstitutionsoncontract,federalCrowncorporationssuchastheCanadaMortgageandHousingCorporation(CMHC)whichOSFIsupervisesundertheNational Housing Act,andrevenuesfromotherfederalorganizationstowhichOSFIprovidesadministrativeservices.

OSFIcollectsAdministrativeMonetaryPenaltiesfromfinancialinstitutionswhentheycontraveneaprovisionofafinancialinstitutionsActandarechargedinaccordancewiththeAdministrative Monetary Penalties (OSFI) Regulations.ThesepenaltiesarecollectedandremittedtotheConsolidatedRevenueFund.Byregulation,OSFIcannotusethesefundstoreducetheamountthatitassessestheindustryinrespectofitsoperatingcosts.

TheOfficeoftheChiefActuary(OCA)isfundedbyfeeschargedforactuarialvaluationandadvisoryservicesrelatingtotheCanadaPensionPlan,theOldAgeSecurityprogram,theCanadaStudentLoansProgramandvariouspublicsectorpensionandinsuranceplans,andbyaparliamentaryappropriation.

Overall,OSFIfullyrecoveredallitscostsforthefiscalyear2014-2015.

OSFI’stotalcostswere$144.9million,a$2.9million,or2.1%,increasefromthepreviousyear.Humanresourcescosts,OSFI’slargestexpense,roseby$0.3million,or0.3%.Theincreaseinbasicsalarieswasoffsetbylessusageofcontractedpersonnelservicescombinedwithadecreaseintheprescribedemployeebenefitplancontributionrate.Informationmanagement/technologycostsincreasedby$2.0 million,or14.1%,largelydrivenbyamortizationexpenserelatedtonewsystemimplementationsduringtheyearandinthelatterhalfoftheprecedingone.Facilitiescostsincreasedby$1.1M,or11.6%,asaresultofadditionalleasedspacetoaccommodatethe


growthinstaffcomplementofrecentyears.Allothercostsdecreasedby$0.5Masaresultofeffortstocontaindiscretionaryspending.

OSFI’saveragenumberoffull-timeequivalentemployeesin2014-2015was687,a3.2%increasefromthepreviousyearasaresultofthefullyearimpactofemployeesaddedduring2013-2014.Intheyearunderreview,OSFIsetalimitonheadcountandendedtheyearwithanactualheadcountof704,a1.0%increasefromitsheadcountof697asatMarch31,2014.

Federally Regulated Financial Institutions

Revenues

Totalrevenuesfromfederallyregulatedfinancialinstitutionswere$130.8million,anincreaseof$3.8million,or3.0%,fromthepreviousyear.Baseassessmentsonfinancialinstitutions,whicharerecordedatanamountnecessarytobalancerevenueandexpensesafterallothersourcesofrevenuearetakenintoaccount,increasedby$3.3million,or2.8%,fromthepreviousyear.

Revenuesfromcostrecoveredservicesincreasedby $0.4million,or8.4%,fromthepreviousyearasaresultofservicesprovidedtotwoadditionalfederalCrowncorporations.

Costs

Totalcostswere$130.8million,anincreaseof$3.8 million,or3.0%,fromthepreviousyear.Theincreaseis primarilyduetotwofactors:facilitiescostsincreasedby$1.1Mandinformationmanagement/technologycostsincreasedof$2.1million,forthereasonsmentionedabove.

Base Assessments by Industry

BaseassessmentsaredifferentiatedtoreflecttheshareofOSFI’scostsallocatedtoeachindustrygroup(baseassessmentsarethecostsallocatedtoanindustry,lessuserfeesandchargesandcost-recoveredservicesrevenues).Thechartbelowcomparesthecumulativegrowthofbaseassessmentsbyindustrygroupoverthe pastfiveyears,using2009-2010asthebaseyear.

Theincreaseinbaseassessmentsonthedeposit-takinginstitutions(DTI)industryduring2010-2011and2011-2012wasdrivenbygrowthinourcomplementof

specializedskillsinresearch,creditriskandcapitaltoenhanceOSFI’sabilitytoguideandsupervisefederallyregulatedfinancialinstitutionsinmanagingrisks.Whilebaseassessmentsstabilizedin2012-2013,theyincreasedin2013-2014asaresultofworkrelatedtodomesticsystemicallyimportantbanks(D-SIBs).Therateofgrowthinbaseassessmentseasedin2014-2015,inlinewiththatofOSFI’stotalexpenses.

Theincreaseinassessmentsonthepropertyandcasualty(P&C)insuranceindustryin2010-2011through2013-2014reflectsOSFI’scontinuedeffortstoenhanceitsspecializationintheP&Cindustry,supportmoresophisticatedrisk-sensitivecapitalrulesandfulfillinternationalcommitments.During2014-2015,OSFIfinalizedandissueditsrevisedMinimumCapitalTest(MCT)andcontinueddevelopmentworkonaframeworkfortheuseofcompany-specificmodelstodeterminecapitalrequirementsforP&Cinsurancecompaniesandnewcapitalrulesformortgageinsurers.

Theincreaseinassessmentsonthelifeinsuranceindustryin2010-2011through2013-2014reflectstheadditionofstaffwithspecificexpertiseinlifeinsurance,OSFI’seffortsindevelopinganewframeworkforthestandardizedMinimumContinuingCapitalandSurplusRequirements(MCCSR)approach,anditscontinuingfocusonreviewingandrevisingtheframeworkusedtodeterminethecapitalrequirementsforsegregatedfundguaranteeproducts.In2014-2015,OSFIcontinueditseffortsontheMCCSRguidelineandcontinuedtoworkonthedevelopmentofanewLifeInsuranceSolvencyFrameworkStandardApproachthatisscheduledforimplementationin2018.

Base Assessments by Industry CumulativeGrowthRatesfromFiscalYear2010

80%

60%

40%

20%

0%2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

Fiscal Year

DTI Industry P&C Industry Life Industry


Inadditiontotheseindustry-specificcostdrivers,othergenericfactorscausedincreasesinbaseassessmentsonallindustries:OSFI’sdevelopmentandimplementationofanInformationManagement/InformationTechnology(IM/IT)strategyandrenewalprogramfrom2010-2011to2014-2015contributedtooverallgrowthinexpendituresandassessments;and,slightdecreasesduring2010-2011and2011-2012inthenumberofstagedinstitutionsacrossallindustries,andhenceinsurchargeassessments.Thisinturnhadtheeffectofincreasingbaseassessments.In2012-2013,therewasafurtherdecreaseinthenumberofstagedinstitutions;however,surchargeassessmentsincreasedslightlyasaresultofchangestothemixofstagedinstitutions.Inboth2013-2014and2014-2015,surchargeassessmentsdecreasedslightlywhich,inturn,slightlyincreasedbaseassessments.

Federally Regulated Private Pension Plans

Assessments

OSFI’scostsforregulatingandsupervisingprivatepensionplansarerecoveredfromanannualassessmentchargedtoplans,basedonthenumberofplanbeneficiaries.PlansareassessedafeeuponapplyingforregistrationunderthePension Benefits Standards Act, 1985(PBSA)andannuallyontheduedateoftheirannualinformationreturn.

TheassessmentrateisestablishedbasedonOSFI’sestimateofcurrentyearcoststosupervisetheseplans,adjustedforanyexcessorshortfallofassessmentsintheprecedingyears.Theestimateisthendividedbytheanticipatedassessablemembershiptoarriveata

basefeerate.Therateestablishedfor2014-2015was$10.00perassessablebeneficiary,unchangedfromthepreviousyear.Totalfeesassessedduringthefiscalyearwere$6.7million,downfrom$6.8millionin2013-2014.

Theexcessorshortfallofassessmentsinanyparticularyearisamortizedoverfiveyearsinaccordancewiththeassessmentformulasetoutinregulations.Priorto2009-2010,rateshadbeensetto recoveranaccumulatedshortfallandtheannualcostsofadministeringthePBSA.Asmallsurpluspositionwasre-establishedin2008-2009andwasbuoyedbylowerthanplannedexpensesineachofthetwosubsequentyears.Since2012-2013,rateshavebeensettodrawthesurplusdown.TherateestablishedandpublishedintheCanadaGazettefor2015-2016issetat$10.00perassessablebeneficiary,unchangedfrom2014-2015.

Costs

ThecostofadministeringthePBSAfor2014-2015was$6.7million,adecreaseof$0.4million,or6.2%,fromthepreviousyearduetolowerhumanresourcescostsasaresultofvacancieswithinthedivision.

Actuarial Valuation and Advisory Services

TheOCAisfundedbyfeeschargedforactuarialvaluationandadvisoryservicesandbyanannualparliamentaryappropriation.Totalcostswere$7.3 million,adecreaseof$0.3millionor4.2%fromthepreviousyearduetosomevacancysavingsandthecompletionofatriennialreviewoftheCanadaPension Planin2013-2014.

FY 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

FeesAssessed 8,578 7,866 7,949 6,477 6,842 6,725

Costs 6,529 6,555 6,701 6,905 7,196 6,666

BasicFeeRate*perassessablemember 24.00 22.00 22.00 10.00 10.00 10.00

*Theminimumandmaximumannualassessmentperplanisderivedbymultiplyingtheannualassessmentby50and20,000respectively.With anannualassessmentof$10.00permember,theminimumannualassessmentis$500andthemaximumis$200,000.

Fees Assessed and Costs for Fiscal Years 2009-2010 to 2014-2015($000,exceptBasicFeeRate)


Changes in Accounting Standards

Transition to Public Sector Accounting Standards (PSAS)

InDecember2014,thePublicSectorAccountingBoard(PSAB)issuedamendmentstoPublicSectorAccountingStandards(PSAS).Theseamendmentsintroducedtheconceptofanewpublicsectorentity–referredtoasagovernmentcomponent–andprovidedguidanceonthebasisofaccountingtobeusedbysuchentities.OSFIisconsideredagovernmentcomponentandisrequiredtoadoptPSASeffectivethe 2017-2018fiscalyear.

OSFIhaschosentoapproachtheconversioninfivephases:(1)DiagnosticAssessment;(2)DesignandPlanning;(3)Assessment,DesignandDevelopment;(4)Implementation;and,(5)PostImplementationReview.OSFIbeganthediagnosticassessmentphase during2014-2015.

Thedesignandplanningphasewillbegininsummer2015.Thiswillincludeatransitionplanandatimetableforassessingtheimpactofthechangeinaccountingstandardsonsystems,internalcontrolsoverfinancialreportingandbusinessactivities.

OSFIcontinuestomonitorstandardsdevelopmentasissuedbyPSAB.Suchdevelopmentscouldaffectthetiming,natureordisclosureoftheadoption ofPSAS.

ThetransitiontoPSASisasignificantundertaking.Asthedesignandplanningphasehasnotyetbegun,OSFIisunabletoquantifytheimpactofPSASonitsfinancialstatements.ThefollowingtableoutlinestheelementsofOSFI’sconversiontoPSASandpresentsanassessmentofprogresstowardsachievingtheseobjectives.Astheprojectprogressesorfurtherchangesinregulationconditionsoccur,changestothe transitionplanmayberequired.

OSFI PSAS Conversion Approach: Assessment as at March 31, 2015

Project Phase Milestone Status

Diagnostic Assessment

• Identify differences in External advisor’s report To be completed in June 2015 IFRS/PSAS accounting presented to OSFI’s Executive policies andandAuditCommittees

Design and Planning

• Launch project, establish Project governance and policy To be completed in 2015-2016 project governance choices are in place • Develop training and communications plan

Assessment, Design and Development

• Identify solutions to PSAS Solutions approved by OSFI’s To be completed in 2015-2016 and evaluate Executive and Audit • Develop final solutions to PSAS Committees

Implementation

•RolloutPSASsolutions Financialsystemsand Tobecompletedin2016-2017•Testandremediate processesareabletocapture andreportPSASinformation

Post Implementation Review

• Debrief management and Ongoing process post To be started in 2017-2018 assess implementation implementation • Ongoing PSAS update and related changes management


Appendix

Disclosure of Information

UndertheOSFIAct,theSuperintendentisrequiredtoreporttoParliamenteachyearonthedisclosureofinformationbyfinancialinstitutionsandtheprogressmadein

enhancingthedisclosureofinformationinthefinancialservicesindustry.

OSFIpromoteseffectivedisclosureby:publishingselectedfinancialinformationonOSFI’sexternalwebsite(andthroughBeyond20/20Inc.forfederallyregulatedinsurancecompaniesonly–seeOSFI’swebsiteunderFinancialInstitutions/FinancialData);providingguidancetofederallyregulatedfinancialinstitutions(FRFIs)ontheirdisclosures;and,participatingininternationalsupervisorygroupswith similarobjectives.

Public Disclosures Associated with Building a More Stable Future

PublicdisclosuresofriskmanagementpracticesandriskexposuresmadebyFRFIshavebecomeasignificantfocustoachievingtransparency,financialstabilityandrestoringmarketconfidencesincetheglobalfinancialcrisis.Overthepastfewyears,publicationsreleasedbyinternationalorganizations,suchastheFinancialStabilityBoard(FSB),theEuropeanBankingAuthority,andtheBaselCommitteeonBankingSupervision(BCBS)havestressedtheneedforenhancedriskdisclosures.OSFIbelievesthatstrongdisclosuresandmarketdisciplinearekeyelementsforeffectivecorporategovernanceandsoundriskmanagementpracticeswithinaninstitution.

During2014-2015,OSFIfocusedonissuingguidanceforseveraldisclosureprojectswhichincluded:

• April2014–revisionstoPublicDisclosureRequirementsrelatedtoBaselIIIPillar3compositionofcapital,toaccommodateCreditValuationAdjustment(CVA)phase-in

• July2014–issuanceofthefinalGuidelineD-11:PublicDisclosureRequirementsforDomesticSystemicallyImportantBanksonLiquidityCoverage Ratio

• September2014–issuanceofthefinalGuidelineD-12:PublicDisclosureRequirementsrelatedtoBaselIIILeverageRatio

OSFIhasalsoparticipatedasamemberoftheWorkingGrouponDisclosuressubgroupoftheBCBSonrecentPillar3disclosuresinitiativesandwillbeworkingonthedomesticimplementationoftheBCBSRevisedPillar3DisclosureRequirementsstandardissuedinJanuary2015.

Financial Stability Board Guidance

InOctober2012,theEnhancedDisclosureTaskForce(EDTF),establishedbytheFSB,issued32recommendationstoimproveriskdisclosures.Sincethen,OSFIhasworkedcloselywithCanada’ssixmajorbanks(designatedasdomesticsystemicallyimportantbanks)toimplementthe32EDTFrecommendationsandperformedquarterlyreviewsofthesixmajor


banks’publicdisclosurestomonitortheprogressofimplementation.Thesixmajorbanks,ashighlightedby theEDTFinits2014progressreport,madesubstantialimprovementstoriskdisclosuresandachievedvirtuallyfullcompliancewiththe32EDTFrecommendationsby 2014.

OSFIexpectsthesixmajorbankstoadoptfuturedisclosurerecommendationsinthebankingarenathatareendorsedbyinternationalstandardsettersandtheFSB,aswellasevolvingdomesticandinternationalbankriskdisclosurebestpractices.

OSFIiscommittedtocontinuingtoimprovepublicdisclosuresinordertopromotesafetyandsoundnessinthewayinstitutionsconductbusiness,andcontributetopublicconfidenceintheCanadianfinancialsystem.OSFIwillcontinuetosupportdisclosureinitiativesthroughitsmembershipininternationalassociationsandthroughreviewingour domesticdisclosurerequirementsandpractices.

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