Canada: Canadian Financial Institutions Regulator Releases Final Guideline Applicable To Foreign Banks And Insurers In Canada With Compliance Required By January 2022

On June 28, 2021, the Office of the Superintendent of Financial Institutions ("OSFI"), Canada's federal regulator of financial institutions, released its final version of Guideline E-4, Foreign Entities Operating in Canada on a Branch Basis ("Guideline E-4").  This Guideline replaces previous OSFI guidelines E-4A Role of the Chief Agent and Record Keeping Requirements  (applicable to foreign insurers) and E-4B Role of the Principal Officer and Record Keeping Requirements  (applicable to foreign banks). Guideline E-4 is based upon the draft guideline OSFI issued in October 2020 (the "Draft Guideline"), but with some notable changes that we discuss below.

Guideline E-4 foreign entities operating in Canada and sets out the duties of foreign entities and their management who oversee day-to-day business of their branch in Canada. Through Guideline E-4, OSFI

places greater emphasis on OSFI's expectations of foreign entities operating in Canada and less emphasis on the individual role of the chief agent of a foreign insurer or principal officer of a foreign

bank. In conjunction with issuing Guideline E-4, OSFI is reissuing other guidance that had specific requirements for chief agents and principal officers with the references to such specific requirements removed.

While Guideline E-4 took effect immediately, OSFI has implemented a six-month transition period.

Accordingly, OSFI expects full compliance by all foreign entities operating in Canada on a branch basis by January 2022.

Guideline E-4 addresses three areas: Branch Management, Administration of the Business in Canada, and Supervision of Branches.

Branch Management

As specified in Guideline E-4, the "Branch Management" of a foreign entity operating in Canada is those individuals who have the authority and responsibility of overseeing the business in Canada for, or on behalf of, the foreign entity. Branch Management may include the chief agent of a branch of a foreign insurer or the principal officer of a foreign bank (who is the foreign entity's legal agent in Canada for the receipt of notices from the Superintendent of Financial Institutions and Minister of Finance and other legal documents), and senior officers of the foreign entity, whether located within Canada or outside of Canada. , as the foreign entity determines. While OSFI leaves it up to foreign entities to determine the composition of their Branch Management, OSFI expects that the composition of Branch Management to be "commensurate with the overall size and complexity of the foreign entity's federally regulated business" conducted by the branch in Canada, foreign entities to determine the composition of their Branch Management.

OSFI expects Branch Management to be responsible for the effective adaptation, implementation and

oversight of the following:

• Business objectives, strategies and plans;
• Risk management policies and procedures, and related risk management controls, including

appropriate goals, benchmarks, parameters and limits to risk related to its business in Canada that the foreign entity will accept;

• Policies and procedures to manage the branch's assets and liabilities; and
• Independent assessments of the adequacy and effectiveness of the required controls by internal audit or risk management, or qualified third parties. OSFI expects Branch Management to be "cognizant" of evaluations performed by the foreign entity's  home office relevant to the business in Canada, and any implications of these evaluations.

In its commentary, OSFI noted that, while Branch Management as a collective is expected to have

sufficient knowledge of applicable Canadian laws, regulations, guidelines, and other supervisory/regulatory matters applicable to the branch in order to oversee the branch's business, there is no specific expectation for individual members of branch management. Guideline E-4 specifies that Branch Management should receive reports that are sufficiently comprehensive and frequent to satisfy OSFI's expects that Branch Management be knowledgeable about Canadian legal and regulatory requirements.

Administration of the Business in Canada

Guideline E-4 sets out specific expectations for the administration of business in two areas: Arrangements with the Foreign Entity's Home Office, and Record Keeping.  

Arrangements with the Home Office

Where the foreign entity's home office performs "material functions" on behalf of the branch, OSFI expects Branch Management to document these arrangements and to incorporate in such documentation the "contract for services" elements in s. 7.2.1 of its Guideline B-10, Outsourcing of Business Activities, Functions and Processes ("Guideline B-10"), although we note that this guideline remains under review.

Notably, Guideline E-4 – unlike the Draft Guideline – does not require that this documentation take the

form of a service level agreement. This approach recognizes that the branch and the home office are the same legal entity and cannot contract with each other.

In addition, OSFI has specified that arrangements that involve a flow of funds between the branch and

the home office should be clearly documented, and details of these arrangements should be provided to OSFI. Where there are proposed fund transfers, or a series of proposed funds transfers, from the branch to the home office that deviate materially from the documented processes provided to OSFI, Branch Management should provide OSFI with 10 days' advance notice of such transfer(s) or proposed transfer(s). While the Draft Guideline required 30 days' advance of such transfers, based on comments OSFI received, it shortened the advance notice period in the final Guideline. Note that, while advance notice of the transfers that materially deviate from the documentation provided is required, OSFI pre-approval is not required.

Record Keeping

The Bank Act  and the Insurance Companies Act  include requirements with respect to records

that branches must prepare and maintain regarding their business in Canada (the "Canadian Records").

OSFI expects the Canadian Records to be "updated and accurate as at the end of each business day,"

and that the Canadian Records will be sufficiently detailed to enable:

• OSFI to conduct an examination and inquiry into the branch's business;
• OSFI to manage the branch's assets, prior to the appointment of a liquidator, should the Superintendent take control of the branch's assets in Canada; and
• The liquidator to conduct an effective liquidation of the branch's assets in Canada.

Guideline E-4 specifies that, where any of the Canadian Records change less frequently than daily, then they may be updated on the books of the branch in Canada on the frequency with which they change without a breach of Guideline E-4.

OSFI expects electronic Canadian Records to be capable of being reproduced in intelligible written form within a reasonable period of time, and that electronic Canadian Records will be accessible and intelligible without incurring additional costs and using readily available commercial applications. Guideline E-4 notes that for certain types of information, such as reinsurance arrangements or files on more complex activities, reproduced electronic Canadian Records may not be sufficient for OSFI's review and Guideline E-4 contains a requirement – not included in the Draft Guideline – that the executed copy may need to be made available, upon OSFI's request.

The Bank Act  and the Insurance Companies Act  include requirements – some of which come into force in July 2021, following ratification of the Canada-United States-Mexico trade agreement – that the Canadian Records be maintained at the principal office (in respect of a foreign bank) or chief agency (in

respect of a foreign insurance company) in Canada or, in the case of a foreign bank, at another place in Canada. If the Canadian Records are in electronic form, then Guideline E-4 specifies that complete copies of these documents must be kept on a computer server physically located at the places in Canada set out in the applicable legislation.

However, where a branch in Canada of a foreign bank or a foreign insurer is exempt from the statutory requirement to keep copies of the Canadian Records at these locations in Canada, then Guideline E-4 requires that the branch provide OSFI with "immediate, direct, complete and ongoing access" to the Canadian Records stored outside Canada.

Supervision of Branches

Guideline E-4 notes a foreign entity's home country regulator is its primary regulator. OSFI supervises the business in Canada of foreign banks and foreign insurers, including compliance with the Bank Act  or Insurance Companies Act, as applicable, and applicable OSFI guidance. OSFI takes various steps, including discussions with Branch Management, in order to assess the adequacy of the management and oversight of the Canadian business.

Through Branch Management, the foreign bank or foreign insurer is accountable to OSFI for its regulated business in Canada, including its compliance with federal legislative and regulatory requirements. Accordingly, OSFI expects Branch Management "to be knowledgeable of the results of OSFI's supervisory work and to develop and oversee an appropriate response to any supervisory expectations."

In Guideline E-4, OSFI notes the importance of ongoing open communication between Branch Management and OSFI, in order to "promote the mutual trust and confidence essential for OSFI's approach to supervision to be effective." OSFI therefore expects to be "promptly notified" of changes and substantive issues that affect the management and operations of the branch, which we note is consistent with the so-called "no surprises" approach to regulatory supervision.

Similarly, Guideline E-4 includes OSFI's expressed expectation that Branch Management respond to communications and requests for information from OSFI "in a timely and thorough manner."

With respect to proposed changes to members of Branch Management, Guideline E-4 notes OSFI's

expectation that the foreign entity will notify OSFI "as early as possible in the process" of potential changes to members of Branch Management, and circumstances that may adversely affect the suitability of such members, with information regarding the qualifications of Branch Management to be provided to OSFI. We note that, while advance notification of these potential changes is required, OSFI approval is not required.

OSFI expects foreign entities operating in Canada on a branch basis to comply with the applicable legislative requirements of the Bank  Act or Insurance Companies Act and OSFI guidance. If, in OSFI's view, such requirements and expectations are not being met, then OSFI may apply additional supervisory and regulatory measures to the foreign entity in respect of the branch.

Other Comments

As noted above, Guideline B-10 continues to apply to branches in Canada of foreign banks and foreign

insurers, even though it is under review. When an updated version of Guideline B-10 is issued, changes to Guideline E-4 may be required.

Although OSFI received some feedback that the Draft Guideline  expectations regarding location of records may not reflect advances in technology and may not provide sufficient flexibility, Guideline E-4 reflects OSFI's legal interpretation of the legislative requirements. If such legislative requirements change, for example through the regular review process of the Bank Act  and the Insurance Companies Act  that was recently extended to 2025, then Guideline E-4 may be updated to reflect any such change.

In the consultation process after release of the Draft Guideline, certain commentators requested more specificity, for example with respect to governance, controls, and what constitutes "materiality". OSFI noted that this lack of specificity is consistent with the "principles-based" (rather than "rules-based") approach that OSFI takes to regulation.

Takeaways

OSFI has indicated that they will host information sessions in the coming months to provide clarity and guidance to Guideline E-4.

Clients looking to discuss Guideline E-4 and their compliance regimes or assistance in adapting their policies and procedures to comply with Guideline E-4, are invited to reach out to Nancy Carroll and Hartley Lefton.

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