On May 14, the Office of the Superintendent of Financial Institutions (OSFI) released the final version of an Advisory outlining the required process for advising OSFI of proposed changes to the directors and senior officers of Canadian federal financial institutions. The notification process is intended to ensure that OSFI can convey any comments or concerns to the institution's board before such an appointment or nomination is implemented. The Advisory also outlines OSFI's process for post-appointment/election introductory meetings that it may request with new directors and senior officers of large, complex institutions.
OSFI released an initial draft of the Advisory in January, and the draft was open for comment until February 28, 2014. We reviewed that initial draft in our January 2014 Financial Services Update. OSFI received detailed and critical feedback on the draft Advisory from the relevant industry associations and a number of institutions, and eventually accepted some, but not all, of the comments received. The materials released with the Advisory include an Annex summarizing the key comments received and OSFI's response. This Financial Services Update reviews the key changes to the revised Advisory from the initial draft and considers the key consequences for institutions of certain of those changes.
Key changes from the draft Advisory
OSFI clarified that its intention is not to "vet" or otherwise impose regulatory pre-approval of institutions' hiring decisions. Rather, the Advisory is merely intended to formalize the current practice in which institutions typically provide OSFI with early notification before making senior appointments or nominations. This allows OSFI to convey concerns or comments to the institution's board before the appointment or nomination is implemented. While OSFI noted that some jurisdictions have opted for a much more formal regulatory vetting process for senior appointees, OSFI is satisfied that its approach strikes the right balance in the Canadian context. Specifically, OSFI noted that it is focused on a "potential candidate's record and suitability in respect of risk awareness and sensitivity to the financial institution's safety and soundness".
The 30-day advance notification required for senior management appointments proposed in the draft has been amended to be merely as early as possible once the preferred candidate has been identified, consistent with the approach for proposed directors. OSFI believes that this period will permit effective regulatory oversight of new senior appointees while respecting institutions' need for independence and flexibility in conducting their day-to-day affairs. Institutions are expected to discuss expectations for early notification with their OSFI Relationship Manager (RM).
The proviso in the draft Advisory that institutions could notify OSFI on a shorter timeline under "exceptional" circumstances has been relocated and emphasized in the text of the Advisory, but OSFI stresses that it expects that institutions would not routinely invoke this exemption, as the regular occurrence of such exceptional circumstances could indicate systemic issues at the institution. In addition, OSFI adopted a suggestion that the RM be notified when claiming exceptional circumstances and that the rationale for relying on that exemption be provided to the RM.
The timeframe within which OSFI may hold a post-appointment meeting with a new director or senior officer has been changed from certain fixed deadlines in the draft Advisory to "as early as possible" following the appointment or election. In addition, the indication in the draft Advisory that such interviews would be conducted by certain specified OSFI senior staff or "a delegate" has been amended to refer instead to their "appropriate alternates", in response to industry feedback that the OSFI interviewer ought to be of a sufficiently peer level to the new director or senior officer.
In the related summary of comments, OSFI indicated that several commenters had noted that, under OSFI Guideline E-17 (Background Checks on Directors and Senior Management of FREs), a parent financial institution's board may elect not to apply that Guideline to responsible persons at a subsidiary level within the group if the management of the subsidiary is directed by responsible persons of the parent entity in the group's control chain. However, OSFI did not believe that such financial institution subsidiaries should be exempted from the Advisory because OSFI's interest in receiving early notification (particularly having regard to a candidate's sensitivity to risk and a financial institution's safety and soundness) is broader than the background checking addressed in that Guideline.
OSFI also noted in the same summary that it was not inclined to accept suggestions that Canadian subsidiaries of foreign groups should be exempted from the application of the Advisory in light of the unique governance relationships Canadian subsidiaries might have with their foreign parents. Rather, OSFI noted that it holds Canadian-incorporated financial institution subsidiaries of foreign parents to the same standards as other domestically-incorporated financial institution subsidiaries.
While the Advisory will impose new requirements on financial institutions, the fundamental approach under the Advisory is still much less intrusive than the approach in certain other major jurisdictions such as the United Kingdom, where the regulator more actively interviews proposed candidates to determine whether they are "fit and proper" for the proposed position and will reject candidates determined not to qualify.
The change from a fixed 30-day advance notice requirement to a more ambiguous "as soon as possible" standard may in fact be more problematic for institutions than the arbitrary 30-day requirement, as institutions will not automatically know when they are free to implement a proposed appointment-rather they will need to deal with their RM in each instance in order to be comfortable that no concerns will be forthcoming from OSFI and that the appointment can thus proceed as planned.