1. Overview of the Canadian Financial System and Regulatory Environment 2 nd SEACEN – OSFI – IAG Seminar on Consolidated Supervision Papua New Guinea October 1-5, 2007 Jean Sarazin Director International Advisory Group www.osfi-bsif.gc.ca

2. 2 Discussion Points FI Regulation in Canada OSFI and its Approach to Supervision & Regulation Market Conduct Market Entry Anti-Money Laundering

3. 3 FI Regulation in Canada JURISDICTION Federal - All banks, federally incorporated insurance companies, trust and loan companies, co-operative credit associations and federal pension plans Provincial - Securities (dealers, mutual funds & investment advisers), credit unions, provincially incorporated trust, loan and insurance companies

4. 4 A fully participative & coordinated regulatory partnership: Dept. of Finance - financial sector policy development/legislation Bank of Canada - monetary policy, payments systems, lender of last resort Canada Deposit Insurance Corporation - deposit insurance FI Regulation in Canada

5. 5 A fully participative & coordinated regulatory partnership (cont’d): Financial Consumer Agency of Canada - consumer protection/education Office of the Superintendent of Financial Institutions - solvency, prudential regulation and supervision FI Regulation in Canada

6. 6 A policy framework that is responsive to global environment e.g. exhaustive review/overhaul of financial services sector Task Force on the Future of the Canadian Financial Services Sector How Canada ensures its financial system/regulation is keeping pace FI Regulation in Canada

7. 7 New Policy Framework – 4 main goals empowering and protecting consumers promoting our industry’s global competitiveness fostering greater competition within Canada reducing regulatory burden FI Regulation in Canada How Canada ensures its financial system/regulation is keeping pace

8. 8 Keeping regulatory framework current e.g. 4 updates – last decade Effective legal/legislative framework e.g. legislative “sunset clauses” FI Regulation in Canada How Canada ensures its financial system/regulation is keeping pace

9. 9 OSFI supervisory independence e.g.- funded by Industry - protection from civil liability Legislative/supervisory powers e.g.- control of entry - sanctions FI Regulation in Canada How Canada ensures its financial system/regulation is keeping pace

10. 10 Scorecard IMF Report on the Observance of Standards & Codes (ROSC) “overall, the assessment found a high degree of compliance that had contributed to a stable financial system” June 2000 FI Regulation in Canada How Canada ensures its financial system/regulation is keeping pace

11. 11 Established 1987 - agency of Gov’t of Canada Legislated mandate (OSFI Act) safety & soundness Industry funded Superintendent appointed for 7 years reports to Minister of Finance Integrated supervisor/Prudential regulator Strict adherence to Core Principles Approx. 450 employees/4 locations 3 Sectors: Supervision; Regulation; and Corporate Services OSFI and its Approach to Supervision & Regulation

12. 12 MISSION STATEMENT We are the primary regulator of federal financial institutions and pension plans. Our mission is to safeguard policyholders, depositors and pension plan members from undue loss. We advance and administer a regulatory framework that contributes to public confidence in a competitive financial system. We also provide actuarial services and advice to the Government of Canada. We are committed to providing a professional, high quality and cost-effective service. OSFI and its Approach to Supervision & Regulation

13. 13 Approx. 450 employees/4 locations Julie Dickson Superintendent Ted Price Assistant Superintendent Supervision Sector Gary Walker Acting Assistant Superintendent Corporate Services Sector Jean-Claude Ménard Chief Actuary Office of the Chief Actuary Bob Hanna Assistant Superintendent Regulation Sector OSFI and its Approach to Supervision & Regulation Audit committee

14. Assistant Superintendent Toronto DTI Life Financial Institutions Group DTI Insurance Basel Implementation Regional Offices Montreal & Vancouver Supervision Sector OSFI ’ s Approach Financial Conglomerates Group Actuarial Advisor Practices Supervision Initiatives Supervision Support Capital Markets Credit Risk Operational Risk Monitoring

15. 15 OSFI and its Approach to Supervision & Regulation

16. 16 Entire organisation re-engineered in the face of changing financial services sector/new challenges “almost everyone in OSFI is doing a job that is new or that has been significantly transformed” OSFI and its Approach to Supervision & Regulation How OSFI ensures it’s keeping pace

17. 17 Reorganized Policy/Regulatory function more efficient policy development process unprecedented wave of transactions Developed Legislation & Precedents Group more active role support to Department of Finance OSFI and its Approach to Supervision & Regulation How OSFI ensures it’s keeping pace

18. 18 Created Audit & Consulting Services unit provision of independent objective assessments/information solution – oriented advice Established Research function analysis/research – development of policy impact of policies on industry OSFI and its Approach to Supervision & Regulation How OSFI ensures it’s keeping pace

19. 19 Reorganized our supervisory function reduced overlap/duplication to better focus/align resources analysis and examination distinction eliminated Relationship Manager concept established conglomerate groups expertise needed to deal with largest/most complex FIs OSFI and its Approach to Supervision & Regulation How OSFI ensures it’s keeping pace

20. 20 Established Specialist Positions provide specialist expertise to all areas of OSFI focus on selected activities/issues to ascertain prudential implications specialists in: Accounting Financial Information Actuarial Capital Capital Markets Compliance Credit Risk Financial Services Technology Office of the Chief Actuary OSFI and its Approach to Supervision & Regulation How OSFI ensures it’s keeping pace

21. 21 More emphasis on capital Banks introduced target levels for “well capitalized” Tier 1 = 7% RWA Total Capital = 10% RWA Insurers 150% MCT and MCCSR OSFI and its Approach to Supervision & Regulation How OSFI ensures it’s keeping pace

22. 22 Banks Call for increased provisions identified need for higher general allowances OSFI and its Approach to Supervision & Regulation How OSFI ensures it’s keeping pace

23. 23 OSFI’s Supervisory Approach more reliance based - incl. MOUs more risk focused - new Supervisory Framework - judgement more interventionist - Guides to Intervention adherence to Core Principles consolidated supervision continuous monitoring transparency cross industry reviews OSFI and its Approach to Supervision & Regulation

24. 24 OSFI’s Supervisory Approach (cont’d) On-Site regular examination cycle enhances understanding including corporate culture OSFI and its Approach to Supervision & Regulation

25. 25 OSFI’s Supervisory Approach (cont’d) Off-Site input –regulatory returns/others output –regular monitoring reports/ratios Section Notes risk assessment summary –risk matrix OSFI and its Approach to Supervision & Regulation

26. 26

27. 27 Supervisory Framework released August 1999 new methodology important change in the way OSFI supervises applies to all federally regulated FIs continues to evolve OSFI and its Approach to Supervision & Regulation

28. 28 Supervisory Framework (cont’d) Objective to provide an effective process to assess the safety and soundness of regulated FIs Achieved by evaluating an FI’s risk profile financial condition risk management processes compliance with applicable laws and regulations OSFI and its Approach to Supervision & Regulation

29. 29 Supervisory Framework (cont’d) Key Principles risk focused consolidated supervision focus on significant activities exercise of sound judgment risk assessment determines degree/frequency of supervision –not all areas of an FI will be reviewed each year OSFI and its Approach to Supervision & Regulation

30. 30 OSFI is NOT a market conduct regulator HOWEVER Canada has active interest in enhancing consumer protection in area of financial services New policy framework for financial services sector incl. market conduct provisions identifies areas of responsibility for consumer protection by putting a framework into place to ensure it Financial Consumer Agency Canada Market Conduct

31. 31 Entry criteria is a combination of statutory/government policy Two part application/approval process 1.Minister of Finance issues Letters Patent of Incorporation 2.Superintendent issues an Order to Commence and Carry on Business Market Entry

32. 32 OSFI is responsible for assessing applications and making a recommendation to the Minister minimum expected time frame is 6 months Market Entry

33. 33 Minister shall take into account all matters relevant to the application including: financial resources/continuing financial support soundness/feasibility of business plans business record/experience character/integrity Statutory Entry Criteria Market Entry

34. 34 competence/suitable experience impact of any integration of existing businesses opinion of Superintendent with respect to supervisability and regulation best interests of Canadian financial system Statutory Entry Criteria (cont’d) Market Entry

35. 35 Letters patent may not be issued to: Canada, province, agency or controlled entity government of foreign country, political subdivision, agency or controlled entity (other than a foreign bank, foreign insurer/institution or subsidiary) Restrictions Market Entry

36. 36 Independent agency Established July 5, 2000 Arms’ length from law enforcement agencies Collects, analyzes and discloses information to law enforcement agencies with reasonable grounds Respects individuals privacy and protects information Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) Anti-Money Laundering

37. 37 Mandate includes: enhancing public awareness and understanding of matters related to money laundering responsibility for ensuring compliance with the reporting/record – keeping provisions of Act working with reporting person/entities to help them implement effective compliance regimes FINTRAC Anti-Money Laundering

38. 38 Focus is on risk identification and mitigation in line with OSFI’s supervisory framework FIs should have appropriate policies/procedures to ID/limit risks OSFI does not prescribe specific procedures OSFI Guideline applicable to all FIs Anti-Money Laundering – OSFI ’ s Role

39. 39 FIs must designate senior officer to be responsible for anti-money laundering processes FIs should establish annual self-assessment program which should answer are anti-money laundering policies/procedures in place? are anti-money laundering policies/procedures being adhered to? do anti-money laundering policies/procedures comply with all policies, controls and statutory/regulatory requirements? OSFI Guideline applicable to all FIs Anti-Money Laundering – OSFI ’ s Role

40. 40 Testing by FIs internal audit and external auditors Training for all transactional personnel OSFI may review anti-money laundering policies/procedures OSFI Guideline applicable to all FIs Anti-Money Laundering – OSFI ’ s Role

41. 41 Thank You