OSFI releases draft Guideline E-4 for public consultation

On October 27, the Office of the Superintendent of Financial Institutions (OSFI) released for comment by December 18, 2020, a draft Guideline E-4 Foreign Entities Operating in Canada on a Branch Basis which will replace 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.

What you need to know

• The draft Guideline E-4 consolidates Guidelines E-4A and E-4B into one guideline that applies to both foreign bank branches (FBB) under the Bank Act (BA) and foreign insurance company branches (FCB) under the Insurance Companies Act (ICA), and sets out OSFI’s expectations with respect to the responsibilities of these foreign entities operating in Canada on a branch basis (branches) and their management in overseeing the day-to-day operation of their businesses in Canada.
  • OSFI expects to issue the final Guideline E-4 in spring 2021.
• OSFI has replaced references to Chief Agents and Principal Officers from Guidelines E-4A and E-4B with references to “Branch Management”, and has, accordingly, expanded the responsibilities of Chief Agents and Principal Officers to Branch Management.
• OSFI now requires Branch Management to have a comprehensive, in-depth understanding of the foreign entity’s federally regulated business in Canada carried on through the branch, along with a thorough understanding of the applicable Canadian laws and regulatory landscape related to the branch.
• The draft Guideline E-4 reflects new amendments to the location of records requirements contained in the BA and the ICA, as a result of the Canada-United States-Mexico trade agreement and Bill C-4 which will come into force in July 2021.

Expectations of Branch Management

In the draft Guideline E-4, OSFI has removed the references to and focus on Chief Agents, with respect to an FCB, and Principal Officers, with respect to an FBB, and replaced them with the holistic concept of “Branch Management” (which may include Chief Agents and Principal Officers (as applicable), as well as senior officers of a foreign entity located in or outside Canada). OSFI expects the composition of Branch Management to be commensurate with the overall size and complexity of the foreign entity’s federally regulated business in Canada¹.

The draft Guideline E-4 extends certain enumerated responsibilities from the Chief Agent and Principal Officer to Branch Management. For example, OSFI has removed the requirement that the Chief Agent of a branch under the ICA, or his or her formally appointed delegate, sign all material contracts related to the administrative operation of the branch, along with all reinsurance agreements, group contracts and agents’ agreements. For branches under the BA, the Principal Officer or a person with signing authority at the home office could previously sign such material administrative contracts, so long as a list of persons with such signing authority was provided to OSFI on request. Similarly, a branch’s bank or trust accounts will no longer be accessible only with the signature of the Chief Agent or Principal Officer, or his or her formally appointed designate(s). By removing these requirements, and more broadly requiring that Branch Management be responsible for the oversight of the branch (including with respect to its business objectives, risk management, assets and liabilities and conducting independent assessments of the effectiveness of such matters), OSFI is bringing the responsibilities of Branch Management in line with that of the senior management of a Canadian insurance company or bank.

Branch Management is now required to have a comprehensive, in-depth understanding of the foreign entity’s federally regulated business in Canada carried on through the branch. OSFI also notably expects Branch Management to have a thorough understanding of the applicable Canadian laws and regulatory landscape related to the branch, which may need to be clarified to provide that Branch Management ensure that the branch has policies and procedures in place to monitor and comply with applicable laws. In contrast, Guidelines E-4A and E-4B require only that Chief Agents and Principal Officers, as applicable, have a “good” understanding of the foreign entity along with applicable laws.

Arrangements with the foreign entity’s home office

In situations where the foreign entity’s home office performs material functions on behalf of the branch, either directly or through its own outsourcing arrangements, OSFI maintains its expectation, as outlined in Guidelines E-4A and E-4B with respect to Chief Agents and Principal Officers, that Branch Management documents such arrangements with the foreign entity’s home office in written service level agreements. Additionally, the draft Guideline E-4 adds that arrangements involving the flow of funds between the branch and its home office should be clearly documented and that the details of such arrangements should be provided to OSFI. Further, Branch Management should provide 30-days’ notice of any proposed fund transfer that materially deviates from the documented process to OSFI.

Record-keeping requirements

In the draft Guideline E-4, OSFI describes its expectations with respect to the “sufficiently detailed” records to be maintained by branches, including adding a requirement that these records should enable a liquidator to conduct an effective liquidation of the branch’s assets in Canada, if necessary. OSFI notes that the ICA and the BA contain requirements with respect to certain records that branches must prepare and maintain regarding their business in Canada, and, accordingly, OSFI has removed the detailed Appendices to Guidelines E-4A and E-4B, which previously set out a thorough description of the types of records to be maintained by FCBs and FBBs.

The draft Guideline E-4 also reflects new amendments to the location of records requirements contained in the ICA and the BA, as a result of the Canada-United States-Mexico trade agreement and Bill C-4 which will come into force in July 2021. As noted in our previous bulletin, these amendments will exempt certain branches under the BA and ICA (such as those with head offices domiciled in the United States and Mexico) from the requirement to keep copies of records at the principal office or the chief agency in Canada, as applicable. Such branches must provide OSFI with immediate, direct, complete and ongoing access to records stored outside Canada.

Supervision of branches

Unlike in Guidelines E-4A and E-4B, in the draft Guideline E-4, OSFI provides some colour to its approach to the supervision of a foreign entity in Canada, noting that it is not the foreign entity’s primary regulator. OSFI stresses the importance of open communication with Branch Management to promote mutual trust and confidence. For example, Branch Management should promptly notify OSFI of substantive issues and changes affecting the management and operations of the branch, including potential changes to members of Branch Management, and any circumstances that may adversely affect their suitability. In addition, if, in OSFI’s view, legislative requirements and supervisory and regulatory expectations are not being satisfied by the foreign entity, OSFI may apply additional supervisory and regulatory measures to the foreign entity in respect of its branch.

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¹ OSFI will make similar amendments to the Corporate Governance Guideline, which will be simultaneously released with the final Guideline E-4.