POR number: 014-14
PWGSC Contract number: 59017-140078-001-CY
Call-up date: 2014.07.09
Delivery Date: September 1, 2015
Prepared for: Office of the Superintendent of Financial Institutions (OSFI)
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For more information on this report, please e-mail:
information@osfi-bsif.gc.ca
Prepared by:
The Strategic Counsel
21 St. Clair Avenue East
Toronto, Ontario, Canada
Tel: (416) 975-4465 Fax: (416) 975-1883
Email: info@thestrategiccounsel.com
Website: www.thestrategiccounsel.com
The primary objective of the research was to explore Board Director impressions of OSFI in the discharge of a number of key elements of its mandate as a prudential regulator.
Findings are based on a total of 30 telephone and in-person interviews completed among Board Directors of Canada's largest deposit-taking institutions, life insurance and property and casualty insurance companies. Of these interviews, 27 were conducted in English and 3 were conducted in French. Interviews were undertaken from March to June 2015. The average interview length was 60 minutes.
A more detailed description of the methodology is provided in the report.
This consultation employed a qualitative methodology. While the findings provide an indication of participants' views about the issues explored, they cannot be generalized to the full population of Board Directors of the largest companies and institutions regulated by OSFI. The findings from this research are intended to provide themes and direction.
Much of the feedback received about OSFI throughout this consultation was positive. Positive evaluations were based on perceptions that OSFI has a depth of knowledge about the companies and institutions it regulates, an understanding of issues in the marketplace, and that its interactions with regulated entities are professional and non-adversarial. Board Directors observed that these characteristics are fundamental to fostering open dialogue between OSFI and the companies and institutions that it regulates.
In addition, Board Directors suggested that OSFI is providing value in its dealings with regulated entities. Value was often described as the sharing of best practices gained from OSFI's interactions with the companies and institutions it regulates and through its participation in the Financial Stability Board and other regulatory forums.
Overall, commentary about OSFI's supervisory effectiveness was also positive. Participants generally felt that OSFI focuses on the appropriate issues, those which are also seen as important by boards and management. Further, Board Directors suggested that OSFI appears to be fostering open dialogue in the supervisory process.
Many Board Directors reported that they believe OSFI has been proactive in responding to emerging issues. However, OSFI's perceived early adoption of international regulatory initiatives was often referenced as an example of how proactivity can serve to disadvantage Canada's financial services sector.
Board Directors identified risk governance as an area in which OSFI has improved significantly. OSFI's focus on this area was viewed as appropriate and a natural response to the financial crisis. Further, it is perceived to have strengthened the independence of risk management functions, internal risk reporting and documentation, and underwriting performance.
OSFI was generally deemed to have been effective in conveying to boards the responsibilities and reporting lines required to comply with the Corporate Governance Guideline. However, some concerns were raised regarding the perception that, when applying the Guideline, OSFI does not always scale its assessments based on the nature, scope, complexity and risk profile of each institution or company.
Further, there was a perception among some that the guideline is driving boards into areas of responsibility that are beyond their mandate, areas that have traditionally been understood to be the responsibility of management. Board Directors expressed the view that the role of boards should not be extended in this manner.
OSFI Corporate Governance representatives were considered knowledgeable in the area of corporate governance guidance. While perceived to be professional and collaborative in their interactions with Board Directors, many felt that knowledge of corporate governance among OSFI representatives tends towards the theoretical rather than based on practical board experience.
An overarching theme of this consultation is that communications and interactions between OSFI and board members have improved significantly over the past three to four years. A number of factors were perceived to be driving this improvement, including: the format and scope of discussion at annual board meetings and more regularized meetings including mid-year and off-cycle meetings, both of which were believed to afford Board Directors a better understanding of OSFI's concerns.
The cost of this research was $43,245.67 (HST included).
The Strategic Counsel certifies that the deliverables fully comply with the Government of Canada political neutrality requirements outlined in the Communications Policy of the Government of Canada and Procedures for Planning and Contracting Public Opinion Research. Specifically, the deliverables do not contain any reference to electoral voting intentions, political party preferences, standings with the electorate, or ratings of the performance of a political party or its leader.
OSFI has commissioned consultations with senior members of the financial services community to obtain their assessment of OSFI's effectiveness as a supervisor and regulator since 1998.
In 2014, OSFI commissioned The Strategic Counsel as an independent research firm to undertake a new consultation among Board Directors of the largest financial institutions that OSFI regulates in the deposit-taking, life insurance and property and casualty insurance sectors.
The consultation comprised a series of 30 confidential interviews among these Board Directors.
The primary objective of the research was to obtain impressions concerning the discharge of key elements of OSFI's mandate as a federal regulator of Canada's financial services institutions.
More detailed objectives were to explore impressions of:
OSFI provided The Strategic Counsel with a list of names and contact information for 80 Board Directors from 15 financial institutions and insurance companies.
The Strategic Counsel recommended a sampling plan to OSFI. The plan sought to ensure representation of Board Chairs, Chairs of Audit, Risk, Governance and Human Resources Committees across deposit-taking institutions, life insurance and property and casualty insurance companies.
The Strategic Counsel then randomly selected two Directors for interviews from each institution or company.
The Board Directors Consultation (BDC) followed the methodological approach employed in prior consultations undertaken on behalf of OSFI: qualitative, semi-structured, one-on-one interviews. This qualitative approach provides a depth of insight that is unachievable through other research methods, in particular, through strictly quantitative surveys. One-on-one interviews allow deep probing into underlying assessments of OSFI's effectiveness.
The Strategic Counsel sent selected potential interviewees a package containing an invitation letter from the Superintendent of OSFI, as well as a copy of the interview guide to allow potential interviewees to think about the issues to be discussed during the interviews.
Following distribution of the package, Strategic Counsel senior consultants contacted their respective interviewees to confirm their willingness to participate in the consultation and to set a date and time for an interview, as appropriate.
The findings in this report are based on a total of 30 telephone and in-person interviews.
The average interview length was 60 minutes.
Interviews were undertaken from March 11 to June 3, 2015.
| Participant Characteristics | NUMBER OF PARTICIPANTS INTERVIEWED |
|---|---|
| Board Chairs | 5 |
| Audit Committee Chairs | 8 |
| Risk Committee Chairs | 6 |
| Corporate Governance Committee Chairs | 5 |
| HR Committee Chairs | 6 |
| TOTAL | 30 |
The research conducted was qualitative in nature. As such, the results provide an indication of participants' views on the issues explored but cannot be generalized to the full population of Board Directors representing Canada's largest deposit-taking institutions, life insurance and property and casualty insurance companies regulated by OSFI. Rather, the findings from this research provide themes and direction. The findings cannot be used to estimate the numeric proportion or number of individuals in the population who hold a particular opinion because they are not statistically projectable.
Q. Overall, how would you evaluate OSFI's effectiveness as the principal prudential regulator and supervisor of Canada's financial services industry?
Evaluations of OSFI were generally positive overall and, among some, strongly positive. These evaluations are driven by perceptions that:
These factors are seen as facilitating trust between OSFI and those it regulates.
The consultation disclosed a further positive characteristic of OSFI, one that has not been apparent in previous sector consultations: the perception, held by some, that OSFI brings value to regulated entities. The value is associated with the sharing of best practices gained from OSFI's interactions with the companies and institutions it regulates and its participation in the Financial Stability Board and other regulatory forums.
In responding to this question, participants often provided an historical perspective of OSFI. Many participants framed their responses based on what were perceived to be different eras in OSFI's progression as a regulator.
Pre-crisis - Prior to 2008: Characterized as the period during which OSFI established a regulatory foundation that contributed to the strength and stability of Canada's financial institutions during the financial crisis.
Crisis Period - Beginning with the Lehman Brothers' collapse and continuing for four or five years thereafter: Some perceived that during the crisis, and for a number of years thereafter, OSFI became increasingly prescriptive, interactions between OSFI and institutions/companies became more formal and OSFI positioned Canada as a leader in the adoption of international regulatory initiatives.
Some believed that the crisis gave rise to considerable tensions between OSFI and some of its regulated entities. At the same time, there was also perceived to be a positive evolution in the interaction between OSFI and regulated entities.
Many observed improved interaction on a number of fronts. First, they believed that the collaborative nature of interaction improved. Further, some believed that there was greater dialogue between OSFI and institutions/companies and a more consultative approach to the development of guidance.
Post-Crisis Period - 2013 onwards: This period was often characterized as one in which OSFI cemented its culture of collaboration through enhanced interaction with boards (e.g. annual and off-cycle meetings) and an increasingly more effective consultation process.
Most Board Directors expressed the expectation that moving forward OSFI will temper its leadership in adopting international regulatory initiatives. This expectation is driven, in part, by a perception that the current Superintendent is not of the view that Canada must lead in the adoption of global initiatives.
Q. Overall, how would you evaluate OSFI's effectiveness in supervising your institution/company?
Overall, commentary about OSFI's supervisory effectiveness was positive. Participants generally felt that OSFI focuses on the appropriate issues, those which are also seen as important by boards and management. Further, most Board Directors suggested that OSFI appears to be fostering open dialogue in the supervisory process.
In discussion about OSFI's supervisory effectiveness, the importance of the Lead Supervisor (LS)1 role was raised by some. The experience and depth of knowledge of the LS was identified as a key factor in fostering an effective working relationship with the supervisory team. The LS was described as having influence on OSFI decision-making because of their strong knowledge about the financial institution or company to which they are assigned. The LS was also seen as being an important facilitator by bringing in appropriate resources, as necessary, to address issues of concern raised by board members or management. Finally, the LS was viewed as providing insight to Board Directors about issues facing the sector and raising issues of concern about the specific institution or company activities.
A number of Board Directors indicated that they have greatly benefited from informal and candid discussions with their LS. Overall, the LS was perceived as playing a pivotal role in building and maintaining a strong and effective relationship with the Board Directors of regulated institutions and companies.
Beyond the commentary regarding the LS, a few Board Directors specifically noted that they believe there is an appropriate level of expertise within the different groups in Supervision.
A few Board Directors of insurance companies were of the opinion that, in the supervisory process, OSFI sometimes has a tendency to view insurance issues through a banking lens.
Q. How would you assess OSFI with respect to how proactive it is in dealing with emerging issues pertaining to the deposit-taking sector/insurance sector?
Many Board Directors reported that they believe OSFI has been proactive in responding to emerging issues. The main examples provided were cyber risk, risk due to oil and gas investments, and credit risk related to mortgages.
Some Board Directors observed that they don't expect, nor do they necessarily wish, OSFI to be proactive in dealing with emerging issues, but rather to have an "ear to the ground" and be responsive to emerging issues. OSFI's perceived early adoption of international regulatory initiatives was often referenced as an example of how proactivity can serve to disadvantage Canada's financial services sector. Some participants felt that during the 'Crisis Era' OSFI appeared to want to lead other jurisdictions in this area.
Q. Thinking about the Corporate Governance Guideline finalized January 2013, how effective has OSFI been in communicating to the financial services industry its expectations of board members and senior management?
Participants generally felt that OSFI was effective in apprising boards of their responsibilities and of the reporting lines that would need to be followed in order to comply with the guidance.
Many indicated that they believe the guideline was clearly written. Further, some spoke positively about members of the Corporate Governance Division and their efforts in responding to requests for clarification about the guidance.
Some participants, however, went on to express concerns or frustrations about the content of the guideline. The principal concerns were that:
It was suggested by some Board Directors that the guideline is moving the role of boards into areas that board members believe are the responsibility of management. While not a consistent theme, a few participants expressed the belief that this has led to friction between management and boards.
Q: Since 2010 there has been an increased focus on assessing corporate governance practices at federally regulated financial institutions. How would you assess OSFI on the extent to which it focuses on the appropriate areas of corporate and risk governance of your institution/company?
Most Board Directors felt that OSFI's risk governance focus has been appropriate and is a natural response to the financial crisis. Some suggested that this is an area in which OSFI has improved significantly.
Directors offered some examples of areas in which they believe OSFI's focus has been warranted and worthwhile. Often mentioned was the introduction of the three lines of defense model. The checks and balances contained in the model were seen to have strengthened governance structures.
Other examples provided include the risk appetite and risk culture initiatives. These were identified as positive developments. In particular, the risk appetite framework was regularly referenced by Board Directors as an important consideration in their ongoing decision-making.
A few participants identified the disaster recovery plan scenario testing as a beneficial exercise.
Overall, the focus by OSFI on corporate and risk governance was perceived to have strengthened the independence of risk management functions, internal risk reporting and documentation, and underwriting performance.
Q: What do you consider to be the key skills necessary for OSFI to interact effectively with the Board and Senior Management? Are there any deficiencies in OSFI's skill set?
Directors identified a number of key skills which they believed are required in order to facilitate productive exchanges between OSFI and boards:
Board Directors were of the view that OSFI representatives already possess most of these skills. There were several areas, however, in which some Board Directors suggested that OSFI's representatives might improve.
Board Experience
OSFI Corporate Governance representatives were described by some as knowledgeable in the area of corporate governance guidance. Further, many described representatives as professional and collaborative in their interaction with Board Directors. However, many Board Directors felt that OSFI representatives' knowledge of corporate governance tends towards the theoretical. They were seen as lacking board experience, a characteristic believed critical to evaluating the nature and effectiveness of a board's interaction with management.
Some Board Directors expressed concern that this lack of practical experience leads to more of a "check box" approach to regulation, assessing board director effectiveness based on a checklist. Some of the conversations between OSFI and board members were perceived to be focused on ensuring that elements of the guidance are being met, but that this is not necessarily reflective of how a board interacts with management in practice.
Depth of Knowledge in Technology Risk
As previously noted, a number of participants believed that OSFI has been proactive through its focus on and understanding of cyber risk. However, there was also a sense that this is a risk area in which OSFI must gain greater expertise.
Among the deposit-taking institutions, there was another issue of particular concern: emerging payment technologies. Some Directors from the banking sector suggested that OSFI needs to improve its knowledge in this area, in particular concerning the potential disruption and risks associated with unregulated entities such as Google.
Q: How, if at all, have your communications and/or interaction with OSFI changed over the past few years? If your communications and/or interaction with OSFI has changed over the past few years, what impact, if any, has it had on your institution's/company's overall approach to risk management and/or corporate governance?
An overarching theme of this consultation is that communications and interactions between OSFI and board members have improved significantly over the past three to four years. Several factors contribute to this perception.
A number of Board Directors noted that they find the annual board meetings where the full board and OSFI interact (including the in camera session) to be highly constructive. They allow board members to obtain greater insight into OSFI's thinking, both with respect to current concerns or issues as well as where OSFI believes its focus will lie moving forward.
Some committee chairs reported that they also find other more regularized meetings to be beneficial. Those who commented on mid-year and off-cycle meetings have found that these meetings allow Board Directors to obtain a better understanding of OSFI's concerns. Further, some reported that these meetings have allowed OSFI greater insight into the challenges that the individual institutions and companies face and consequently that these challenges are taken into account in OSFI's supervisory process. These more regular meetings were viewed as contributing to the trust between regulated entities and OSFI.
Q: How would you evaluate the clarity of OSFI's written correspondence outlining any issues of concern with your institution/company?
Perceptions of OSFI's written correspondence tended to be strongly positive. Written correspondence was perceived by most to be clear and concise. Further, some noted that OSFI letters include constructive observations and recommendations.
Some observed, however, that OSFI should always be cognizant of the tone used in its supervisory correspondence. Some believe the information and/or directives in OSFI's letters can sometimes be delivered in a harsher tone than OSFI uses in discussions or meetings.
Although evaluations of OSFI's supervision process were mostly positive, some Board Directors raised a concern that OSFI does not prioritize areas for remediation when issuing supervisory letters and cross-sector reviews. Directors noted that OSFI's approach can lead to unwarranted stress on a company's or financial institution's processes and resources because of the perception that it is necessary to respond to each OSFI directive immediately.
Q: Thinking about your dealings with OSFI, what, if anything, do you believe needs to be improved?
Participants were provided with an opportunity to identify areas in which OSFI might improve. The following themes emerged:
Since 1998, the Office of the Superintendent of Financial Institutions (OSFI) has commissioned consultations with senior members of the financial community to obtain their assessment of its effectiveness as a supervisor and regulator. OSFI is committed to monitoring how well it is achieving its strategic objectives, both to be accountable to stakeholders and to help improve effectiveness.
In order to broaden the base of assessments obtained through these consultations, OSFI has commissioned The Strategic Counsel to undertake a consultation among Board Chairs of Canada's federally regulated deposit-taking institutions and insurance companies.
The Strategic Counsel, as an independent third party, will hold your comments in strict confidence. OSFI will not know who was interviewed or what individual participants have said about it.
The Strategic Counsel will provide OSFI with a report aggregating the findings from this consultation.
Participants were recruited from a list of potential interviewees provided by OSFI. The list provided by OSFI included a total of nine deposit-taking institutions, three life insurance companies, and three property and casualty insurance companies.
The following process was used in administering the interviews:
Potential interviewees were sent a package from The Strategic Counsel (TSC) containing an invitation letter from OSFI, a cover letter from TSC inviting them to participate in the study and an advance copy of the interview guide for review prior to the interview.
Invitation packages were followed up with a telephone call confirming the proposed interviewees' willingness to participate in the research process. Among those willing to participate, a date/time for an interview was scheduled.
Interviews were primarily undertaken via telephone. However, in-person interviews were conducted if requested by the participant.
[1] The OSFI "Relationship Manager" title has recently been changed to "Lead Supervisor". This report will use the latter title.