On June 28, 2021, the Office of the Superintendent of Financial Institutions Canada (“OSFI”), the independent federal institution that regulates the Canadian banking system, released Guideline E-4: Foreign Entities Operating in Canada on a Branch Basis (“Guideline E-4”). Guideline E-4 is intended to support the statutory and regulatory requirements established in the Bank Act (“BA”) and Insurance Companies Act (“ICA”). It highlights OSFI’s expectations with respect to foreign entities operating in Canada through branches, including foreign banks operating in Canada on a branch basis and foreign entities that insure Canadian risks.
Guideline E-4 replaces the existing guidelines E-4A Role of the Chief Agent and Record Keeping Requirements and E-4B Role of the Principal Officer and Record Keeping Requirements.
Although Guideline E-4 does not fundamentally change the operation of a foreign entity, it has practical applications in its day-to-day functions. As discussed below, Guideline E-4 provides for the following:
- OSFI expects that individuals, who are authorized and responsible for overseeing a foreign entity’s business in Canada (“Branch Management”), are knowledgeable of all applicable Canadian legislation, regulation, and guidelines related to the foreign entity’s federally regulated business in Canada. However, OSFI does not require any one individual to have all such knowledge.
- OSFI expects that composition of the Branch Management is reflective of the overall size and complexity of the foreign entity’s business in Canada. This allows foreign entities to establish an effective Branch Management composition that is well suited for their unique needs and business practices.
- Branch Management should be satisfied that their business plan and policies appropriately comply with the relevant Canadian regulatory requirement. Hence, OSFI expects that Branch Management will oversee and implement:
- the foreign entity’s business objectives, strategies and plans;
- risk management policies and procedures, and related risk management control;
- policies and procedures to manage the assets and liabilities recorded on the branch’s books and related accounts;
- and independent assessment of the adequacy and effectiveness of the risk management controls.
- OSFI notes that risk management policies and procedures should include measurable benchmarks and limits as to the amount of Canadian business risk the foreign entity is willing to accept. Furthermore, OSFI has clarified that the independent assessment of risk management can be conducted by the foreign entity’s internal audit personnel at their Canadian branch or home office, as well as qualified third parties.
- OSFI expects to be informed as soon as possible of any potential changes to the members of a foreign entity’s Branch Management.
- OSFI expects that all records required pursuant to the BA and ICA, must be updated and accurate at the end of each business day. Branch Management should maintain the records in such a way that enables:
- OSFI to conduct an examination and inquiry into the branch’s business;
- OSFI to manage the branch’s assets; and
- to appoint a liquidator to conduct an effective liquidation of the branch’s assets in Canada.
- OSFI expects authorized foreign banks to keep copies of their records at their principal office in Canada and expects foreign entitles governed by the ICA to keep their records at their chief agency in Canada. Records stored in an electronic format must be kept on servers that are physically located in Canada. Under the Canada–United States–Mexico Agreement Implementation Act (“CUSMAIA”), which went into force in July 2021, some foreign entity branches will be exempt from the requirements to maintain records in Canada.
- Where a foreign entity is exempt from the requirement to keep records in Canada, its branch must provide OSFI with “immediate, direct, complete and ongoing access to the records” that are stored outside of Canada. If OSFI believes that it has insufficient access, it may direct the foreign entity to maintain copies of records in Canada. CUSMAIA, which introduced these exemptions, provides that OSFI may make regulations that determine “what constitutes immediate, direct, complete and ongoing access.” Hence, OSFI is likely to provide such regulations before Guideline E-4 goes into force.
- OSFI expects that electronic records are capable of being reproduced in an intelligible written form within a reasonable period of time. In other words, Branch Management must ensure that their electronic records are easily accessible and can be shared without creating additional costs on the requesting party.
- Guideline E-4 does not give significant guidance on the storage and maintenance of electronic records. In an effort to further modernize its guidelines, OSFI is expected to introduce additional guidelines on how foreign entities should manage cyber security and cloud computing in the near future.
Arrangements with the foreign entity’s home office
- OSFI expects Branch Management to document any arrangements where the foreign entity’s home office performs material functions on behalf of their Canadian branch. Guideline E-4 does not define “material functions.” The lack of a concrete definition provides the Branch Management with some discretion to determine what is material in the context of their business. However, Branch Management should still consult with OSFI’s Guideline B-10: Outsourcing of Business Activities, Functions and Processes for further insight on materiality.
The foregoing is a summary of Guideline E-4. Foreign banks and entities operating branches in Canada have until January 2022 to comply with the guideline.