OSFI Releases Guide for Continuing a Local Cooperative Credit Society as a Federal Credit Union

On August 9, 2016, the Office of the Superintendent of Financial Institutions (OSFI) released its Guide for Continuing a Local Cooperative Credit Society as a Federal Credit Union (the FCU Guide, available on OSFI's website here). The FCU Guide sets out two phases of the process to continue as a Federal Credit Union (FCU) under the Bank Act (Canada), including the information that  is generally expected to be submitted in support of an application. While OSFI will generally evaluate a proposed continuance against the criteria set forth in the FCU Guide, the FCU Guide should not be viewed as an exhaustive set of criteria and information requirements.¹

General Overview

There are two approvals related to an application to continue a local cooperative credit society as an FCU: (i) the issuance of Letters Patent by the Minister of Finance; and (ii) the making of an Order to Commence and Carry on Business by the Superintendent of Financial Institutions.

Application Process

The two-stage process to continue a local cooperative credit society as an FCU is comprised of Phase 1 – Pre-Application, and Phase 2 – Letters Patent and Order. The two stages are intended to provide applicants with guidance and feedback initially and throughout the application process.

Phase 1 – Pre-Application

Before submitting a formal application, a prospective applicant must contact OSFI to set up an initial in-person meeting with the Legislation and Approvals Division to discuss the proposed application and provide OSFI with an opportunity to give preliminary feedback regarding any potential regulatory, prudential or public policy issues and to clarify its processes and expectations regarding the application. In connection with the meeting, the prospective applicant will be expected to provide written submissions to OSFI outlining, among other things, the reason(s) for which it intends to apply to continue as an FCU, an overview of the proposed business strategy and target market of the FCU, a description of the proposed management team and a description of the prospective applicant’s ownership structure, including details regarding the distribution of membership shares and shares, any proposed changes to the structure and sources of capital for initial and ongoing financial support.

If, after the initial discussion with OSFI, the prospective applicant wishes to proceed with an application, the applicant will be asked to provide certain additional information for OSFI to identify any fundamental issues that should be considered by the prospective applicant before or at the time of its Phase 2 application (including significant prudential or policy concerns that may prevent OSFI from making a positive recommendation to the Minister of Finance for the issuance of Letters Patent). Examples of the additional information requirements include (i) information about the prospective applicant and its financial strength (for example, details in respect of the applicant’s ownership, an organizational chart, a summary of the applicant's financial services and other key activities and financial statements),² (ii) a five-year business plan, and (iii) details regarding the applicant’s current and proposed (as applicable) credit products, investment strategy, information technology environment and contingency plan in the event it is unable to execute its business plan.

A second in-person meeting with the prospective applicant, known as the "Challenge Session," will be scheduled once OSFI has had an opportunity to consider the information submitted above. Prior to the Challenge Session, OSFI will provide the prospective applicant with an agenda and specific list of issues to be addressed at the Challenge Session. The purpose of the Challenge Session is for the prospective applicant to demonstrate an understanding of the material risks associated with its business plan and the methods by which it intends to mitigate those risks. Following the business plan discussion, OSFI will provide the prospective applicant with a letter setting out OSFI’s views and expectations regarding any material risks or concerns with the proposed business plan and additional information requirements (in addition to those already set out in the FCU Guide).

In addition to the requirements noted above, a prospective applicant is expected to comply with the Disclosure on Continuance Regulations (Federal Credit Unions), which specify that, at least four weeks before its members vote on a special resolution authorizing an application to continue as an FCU, the prospective applicant must send a notice to every member:

(i) informing them of the day on which provincial deposit insurance coverage for the prospective applicant's depositors would end;

(ii) describing the Canada Deposit Insurance Corporation (CDIC) coverage that would apply during the transitional period to the deposits of the prospective applicant after its continuance as an FCU; and

(iii) describing the CDIC coverage that would apply after the transitional period to the deposits of the prospective applicant after its continuance as an FCU and how its differs from the pre-continuance provincial coverage.

The foregoing notice must be approved by OSFI in consultation with the CDIC and made available on the prospective applicant’s website and at its branches.³

Prior to Phase 2, the applicant’s members will be asked to vote to authorize the applicant to file an application for Letters Patent.

Phase 2 – Letters Patent and Order

Before submitting a formal application, the prospective applicant must give its notice of intention to apply for Letters Patent by publishing a notice in the Canada Gazette and a newspaper in general circulation at or near the place where the head office of the FCU is to be situated once a week for four consecutive weeks. A draft copy of such notice should be provided to OSFI for their review and sign-off prior to its publication.

Following the publication of the notice, a formal application may be submitted, along with the $32,000 filing fee. OSFI will review the application and contact the applicant through one or more written communications, discussions and/or meetings to discuss its completeness, status and outstanding issues, including requests for additional information. As part of the formal application, OSFI will expect the prospective applicant to update any of the information that was provided in Phase 1 to the extent it has changed, and will also expect information relating to:

(i) management of the FCU, including the projected staff complement, details regarding hiring criteria, information on each proposed senior officer including a completed OSFI Security Form, and the name of the proposed external audit firm;

(ii) risk management, including a risk appetite framework, a detailed description of the risks to which the FCU would be exposed and how such risks are monitored and managed, and copies of the FCU’s proposed risk related policies;

(iii) the board of directors and committees, including OSFI Security Forms for each proposed director, a copy of the proposed conflict of interest policy and an analysis that the applicant’s proposed corporate governance policies and practices comply with OSFI’s Corporate Governance Guideline;

(iv) internal audit, including a description of the proposed audit mandate and a copy of the proposed internal audit plan for the first year of operations as an FCU;

(v) regulatory compliance management, including a detailed description of the internal controls, policies and procedures that the applicant would follow as an FCU to ensure compliance with the Bank Act, OSFI guidance, and applicable anti-money laundering and anti-terrorist financing legislation;

(vi) information technology, including a risk assessment of the information technology operations and copies of its proposed cyber risk management policies and practices; and

(vii) other requirements, including a copy of the proposed by-laws, the proposed name of the FCU with an analysis in support of the applicant's conclusion that the proposed name is available and not prohibited by the Bank Act, a confirmation that the applicant has the required amount of capital and a signed letter of commitment by the applicant to provide OSFI with adequate notice of any proposed material changes to its business plan as an FCU.

On-Site Reviews and Pre-Commencement Letters

Prior to OSFI making a recommendation to the Minister of Finance in respect of the issuance of Letters Patent, an on-site review will be arranged. Because credit unions have an existing business, the on-site should be expected to include a thorough review of that business (especially regarding a credit review). The purpose of the on-site review is to determine whether the applicant is sufficiently prepared to commence business operations as an FCU. OSFI will provide the applicant with a pre-commencement letter prior to a scheduled on-site review, which will request additional information that the applicant is expected to provide prior to the review. Following the on-site review, OSFI will provide the applicant with a letter setting out any outstanding concerns and OSFI’s expectations regarding their solution.

Letters Patent and Order

Before making a recommendation to the Minister in respect of the issuance of Letters Patent, OSFI must be satisfied that the applicant has the necessary systems, management structure, control processes and regulatory compliance management systems in place. All policies and procedures should be finalized and approved prior to the making of the recommendation.

The applicant will continue as an FCU on the date provided in the Letters Patent. The Superintendent may set out in the Order to Commence and Carry on Business conditions or limitations on the FCU’s business to address supervisory and regulatory concerns. The FCU will also be assigned its authorized leverage ratio. The FCU will be required to publish notice of the making of the Order to Commence and Carry on Business in a newspaper in general circulation in the city where the FCU’s head office is located and OSFI is required to publish a notice of the issuance of the Letters Patent and the making of the Order in the Canada Gazette.

Transitional Relief

To the extent certain activities of an FCU in respect of which Letters Patent were issued will not comply with the Bank Act, the Minister may (on the recommendation of the Superintendent), grant a temporary permission in respect of these activities. The applicant should request such an order in its application to continue as an FCU and is expected to provide a rationale for the requested order (including details regarding the activity for which relief is requested and a plan to come into compliance). Examples of permissions which may be granted are set forth in the Administrative Guidance to the FCU Guide.⁴

If you are interested in more information, please contact the authors to discuss further (as well as provide a detailed checklist for each Phase of the continuance).

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¹ Note that a local cooperative credit society may also apply for continuance in order to immediately amalgamate with 1) one or more local cooperative credit societies also applying for continuance or 2) with an existing FCU (and such applications for continuance and amalgamation will be considered together).

² As part of Phase I, OSFI will also require a review of the applicant’s capital and a determination as to what will be considered CET1 capital, Additional Tier 1 capital or Tier 2 capital (or not qualify at all). We would also note that OSFI is expected to release amendments to the CAR guideline for credit unions in the fall.

³ In addition, the notice must be published in the Canada Gazette and a newspaper in general circulation in the province in which the prospective applicant transacts business, once a week for four consecutive weeks, before its members vote on the special resolution.

⁴ We would also note that, due to amendments to s. 6 of the Pension Benefits Standards Act, 1985 emanating from the 2016 Budget Implementation Bill, there is a possibility that an applicant may continue to be able to follow provincial pension rules following continuance as an FCU. We would be happy to discuss further upon request.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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