On October 27, 2020, the Office of the Superintendent of Financial Institutions released its long-awaited Draft Guideline E-4, "Foreign Entities Operating in Canada on a Branch Basis", the finalized version of which will replace the outdated Guidelines E-4A (insurance) and E-4B (banking). The new Guideline had been expected in March 2020 but has been delayed due to the COVID-19 pandemic. The comment period on the Draft Guideline concludes on December 18, 2020, with final guidance expected in the spring of 2021.

The Draft Guideline, which brings the branch rules for insurance and banking under a single instrument, is divided into four sections:

  • Purpose and scope
  • Branch management
  • Administration of the business in Canada
  • Supervision of branches

Background

The Draft Guideline has been under development for many years, including through OSFI consultations with the branch community. However, work on it had been paused to allow for completion of revisions and updating in 2017-2018 to OSFI's Corporate Governance Guideline, which applies to federally incorporated insurers and banks (but not foreign branches). The updates and amendments to the Corporate Governance Guideline could then inform the development of the Draft Guideline. 

It has been widely expected that the Draft Guideline would heighten governance expectations of branches and their home offices, in part to address a perception in some quarters that branches had it much easier from a governance standpoint than federally incorporated insurers and banks.

Branches, particularly insurance branches, vary greatly in size and sophistication, from large operating entities to very small branches often in run-off or virtually dormant and without local full-time employees.

Purpose and Scope

The purpose of the Draft Guideline is to "communicate OSFI's expectations with respect to foreign entities operating in Canada on a branch basis." Because a branch is the extension of a foreign entity in Canada, rather than a distinct legal entity, OSFI's role is to supervise the foreign entity's business in Canada, including compliance with Insurance Companies Act ("ICA") and Bank Act ("BA") requirements, as well as with OSFI's own guidance. OSFI is not the solvency regulator of the foreign entity as a whole.

The Draft Guideline is very concise (just over 3 pages) and, helpfully, principles-based.

Branch Management

As expected, the Draft Guideline defines the persons who hold regulatory responsibility for a foreign branch more broadly than the existing guidelines, which focus such responsibility on one person (the Chief Agent for an insurance branch or the Principal Officer for a bank branch), with allowance for delegation by that person to the entity's home office or elsewhere. In contrast, the Draft Guideline places such duties on "Branch Management", defined as "individuals who have the authority and responsibility of overseeing the business in Canada for, or on behalf of, the foreign entity". These individuals may include the Chief Agent or Principal Officer as well as senior officers of the foreign entity, regardless of where they are located. OSFI expects the composition of Branch Management to be commensurate with the overall size and complexity of the branch.

Under the Draft Guideline, Branch Management's responsibilities include implementation and oversight of:

  • Business objectives, strategies and plans specific to the Canadian business;
  • Risk management policies tailored to the size, complexity and risk profile of the branch operations;
  • Controls to manage the risks pertaining to the Canadian business;
  • Policies and procedures to manage the assets and liabilities recorded on the branch's books and related accounts; and
  • Independent assessments of the adequacy and effectiveness of the controls, policies and procedures described above. (Internal assessment may be obtained from qualified third parties or internal individuals or groups within the branch or home office.)

Branch Management's oversight should be based on "sufficiently comprehensive and frequent reports" as well as on a thorough understanding of the legal and regulatory frameworks that apply to the Canadian branch.

Administration of the Business in Canada

Arrangements with the home office

As under the current guidelines, OSFI expects that any material functions performed by the foreign entity's home office (directly or via outsourced services) should be documented by Branch Management in the form of written service level agreements, which would also comply with the expectations and best practices contained in OSFI's outsourcing guideline B-10. As previously, in case of arrangements between the branch and its home office, these would presumably be documented in written policies or statements, rather than an "agreement" per se, as the branch is part of the same legal entity as the home office, and thus technically cannot contract with itself.

In particular, the Draft Guideline newly expects that arrangements involving the flow of funds between the branch and the home office should be clearly documented and submitted to OSFI. Further, OSFI should be provided with 30 days' advance notice of any proposed transfer of funds that would materially deviate from the documented process.

Record-keeping

OSFI expects that the business records of the branch will be updated and accurate at the end of each business day, with a degree of detail sufficient to allow:

  • OSFI to conduct an examination and inquiry into the branch's business;
  • OSFI to manage the branch's assets, pending appointment of a liquidator, if the Superintendent were to assume control of the branch's Canadian assets; and
  • A liquidator to conduct an effective liquidation of the branch's Canadian assets.

Unlike the current guidelines, the Draft Guideline does not prescriptively stipulate a long list of types of records expected to be maintained by the branch, or signed by the Chief Agent/Principal Officer or his/her formally appointed designate, such as, in the case of insurance branches, reinsurance agreements, group contracts and agents' agreements.

Electronic records

As currently, under the Draft Guideline, OSFI would accept electronic records that are "accessible and intelligible without incurring additional costs and using readily accessible commercial applications" in most cases. As currently, for certain types of information, such as reinsurance arrangements or files on more complex activities, electronic records may not be sufficient and OSFI may request that original hard copies be kept at the branch.  

As currently, copies of electronic records must be maintained on a computer server located at the chief agency of the foreign company in Canada (under the ICA) or at the principal office or other place in Canada designated by the Principal Officer (under the BA). Under the new Canada-U.S.-Mexico Agreement ("CUSMA"), branches of entities incorporated under U.S or Mexican law will be exempt from the BA and ICA requirements to maintain records in Canada provided that OSFI has "immediate, direct, complete and ongoing access" to records that are maintained outside Canada. These provisions will take effect no later than July 1, 2021, the first anniversary of the CUSMA.

Supervision of Branches

While primarily regulated by the regulators of their home jurisdictions, foreign entities are accountable to OSFI and must ensure that their federally regulated business activities in Canada comply with the BA or ICA (as appropriate) as well as with OSFI guidance and other applicable federal requirements.

Supervisory assessments

OSFI expects Branch Management to:

  • Develop and oversee an appropriate response to OSFI's supervisory expectations;
  • Respond in a thorough and timely manner to OSFI's communications and requests;
  • Stay informed about the results of OSFI's supervisory work; and
  • Notify OSFI promptly about any substantive issues or developments that impact the management or operations of the Canadian branch.

Branch Management membership and qualifications

The foreign entity is expected to provide OSFI with information about the qualifications of Branch Management. On an ongoing basis, the foreign entity is also expected to notify OSFI in a timely manner of:

  • Changes or potential changes to Branch Management membership; and
  • Any circumstances that may adversely affect the suitability of any member of Branch Management.

Responding to non-compliance

OSFI's expectation is that all foreign entities operating as branches in Canada will remain in compliance with the BA or ICA, as appropriate, and with the Draft Guideline (once implemented) and other applicable OSFI guidelines.

Where OSFI is of the view that requirements and expectations are not being met, it may apply "additional supervisory and regulatory measures" to the foreign entity, with respect to its Canadian branch, according to the Draft Regulation.

Going Forward

As noted in the OSFI Letter announcing the Draft Guideline, the comment period extends until December 18, 2020, with the finalized Guideline E-4 expected to follow in the spring of 2021. Details about the commenting process are provided in the Letter. As OSFI did in connection with the finalization of the Corporate Governance Guideline, OSFI intends to make consequential changes to its risk management and capital guidelines to remove references to Chief Agents and Principal Officers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.