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:‎

Branch Management

  • 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. ‎

Record keeping

  • 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.