On June 28 2021, the Office of the Superintendent of Financial Institutions Canada (OSFI) issued the final version of Guideline E-4: Foreign Entities Operating in Canada on a Branch Basis (“Guideline E-4”). Guideline E-4 applies to both foreign banks and foreign insurance branches and replaces Guideline E-4A: Role of the Chief Agent and Record Keeping Requirements (which applied only to insurers) and Guideline E4-B: Role of the Principal Officer and Record Keeping Requirements (which applied only to banks) (collectively, the “Existing Guidelines”). OSFI expects all foreign branches operating in Canada to be compliant with Guideline E-4 by January of 2022.
Guideline E-4 compares to the Existing Guidelines as follows:
- General Direction:
- Guideline E-4 envisions OSFI’s expectations with respect to foreign entities operating in Canada on a branch basis. It provides for greater emphasis on the expectations of foreign entities operating in Canada by outlining their responsibilities in the management of the Canadian business.
- Branch Management:
- Guideline E-4 presents “Branch Management”, which includes a team of individuals who have the authority and responsibility of overseeing the business in Canada. This may include the Chief Agent of a foreign insurance branch or the principal officer of a foreign bank branch and senior officers of the foreign entity located in or outside Canada.
- The composition of the Branch Management team is expected to be proportionate with the overall size and complexity of the foreign branch’s federally regulated business in Canada.
- Branch Management will be responsible for the effective adaptation, implementation and oversight of the foreign entity, which includes the expectation that Branch Management have sufficient knowledge of all applicable Canadian legislation, regulations, guidelines and any other supervisory or regulatory matters related to the foreign entity’s federally regulated business in Canada. Accordingly, Guideline E-4 looks to the foreign entity’s Branch Management for accountability and management contrary to the Existing Guidelines which looked only to the Chief Agent or Principal Officer for accountability.
- If there are any changes to Branch Management, new reporting measures are in place which do not apply to the Chief Agent or Principal Officer under the Existing Guidelines. Particularly, the foreign entity is obligated to notify OSFI of any potential changes to the Brach Management team and any circumstances that may negatively impact the Branch Management team.
- Arrangements with the Foreign Entity’s Home Office:
- Branch Management must document any arrangements involving material actions by the foreign entity’s home office on behalf of the branch. Guideline B-10: Outsourcing of Business Activities, Functions and Processes continues to apply to Guideline E-4 when determining the material functions of a branch’s home office when acting on behalf of the foreign entity.
- If the foreign entity’s home office and its branch engage in the flow of funds then OSFI must be provided with details regarding the arrangement. Moreover, OSFI must be provided advanced notice of 10 business days by Branch Management before any funds are transferred to the foreign entity’s home office if the transfer of funds materially deviates from the documented process. The notice period of 10 business days is shorter than the Draft Guideline initially proposed of 30 days’ notice.
- Record Keeping:
- Guideline E-4 aligns with new amendments to the location of records requirements provided in the Insurance Companies Act (“ICA”) and the Bank Act (“BA”), which will be effective in July of 2021. For branches under the BA, copies of records must be stored at the principal office in Canada or at another place in Canada found suitable by the principal officer. For branches under the ICA, copies of records must be stored at the chief agency in Canada.
- Electronic records must be kept on a computer server physically located at the places stipulated in the BA and the ICA. Although electronic records must be available to be reproduced in written form within a reasonable period of time, certain information, such as reinsurance arrangements, an executed copy may be required to be available at OSFI’s request. However, certain bank branches and insurance branches are exempted from the requirements to keep copies of the records in Canada and must instead provide OSFI with immediate, direct, complete and ongoing access to the records that are stored outside Canada.
- The Guideline does not include any significant updates to the electronic storage of Records, nor does it clarify data processing and retention of records as it relates to cloud computing.
- Records must be updated and accurate as at the end of each business day, unless they are records that change less frequently than daily. The records must be sufficiently detailed to allow OSFI to conduct an examination and inquiry into the business of the branch, manage the branch’s assets prior to the appointment of a liquidator (if the Superintendent takes control of the branch’s assets in Canada, and to allow the liquidator to conduct an effective liquidation of the branch’s assets in Canada.
- Supervision of Branches:
- Although the designation of branch responsibilities in the Existing Guidelines has not been built-in to Guideline E-4, OSFI expects the foreign entity, through its designated Branch Management, to be accountable to OSFI for its federally regulated business in Canada. As such, Branch Management should be knowledgeable of the results of OSFI’s supervisory role and manage the appropriate response to any supervisory expectations.
OSFI continues to expect that all foreign entities operating in Canada as a branch remain in compliance with the legislative requirements of the BA and ICA, and all applicable supervisory and regulatory expectations set out by OSFI and its guidance. If OSFI is not satisfied that the expectations set out in Guideline E-4 are being met, OSFI may apply additional supervisory and regulatory actions to the foreign entity’s branch in Canada.
