On February 28, 2023, the Office of the Superintendent of Financial Institutions (OSFI) released a draft of its proposed Culture and Behaviour Risk Guideline. The aim of this Guideline is to ensure that Federally Regulated Financial Institutions (FRFIs) are actively considering the implications of culture within their organizations, and how culture impacts behaviour and decision making.
In a letter that it sent to FRFIs and federally regulated pension plans in March 2022, OSFI had signalled its intent to focus more specifically on the impact that culture has on those organizations. This follows a trend that has been developing globally, as financial institution regulators in several other countries have started to focus more intently on organization culture and the impact that it has on risk and decision making within financial institutions.
The draft Guideline states that OSFI expects FRFIs to:
- Define a desired culture and continuously develop and improve the culture to support their purpose, strategy, effective management of risks, and resilience; and
- Continuously evaluate and respond to behaviour risks that can affect the FRFI’s overall safety and soundness.
Culture is defined in the draft Guideline as “the commonly held values, mindsets, beliefs and assumptions that guide both what is important and how people should behave in an organization.”
The draft Guideline is described as principles-based and outcomes-focused in recognition that every FRFI’s culture is unique. OSFI states that it expects FRFIs to design, govern and manage culture and behaviour in accordance with the FRFI’s size, nature, scope, complexity of operations, strategy, and risk profile.
The draft Guideline identifies three expected outcomes and related principles for FRFIs to attain and adopt in their sound management of culture and behaviour risks. The three expected outcomes are:
Outcome 1: Culture and behaviour are designed and governed through clear accountabilities and oversight.
Outcome 2: Desired culture and expected behaviours are proactively promoted and reinforced.
Outcome 3: Risks emerging from behavioural patterns are identified and proactively managed.
The principles discussed in the draft Guideline emphasize the importance of ensuring that FRFIs define their desired culture to align with the purpose and strategy of the FRFI and create proper incentives to promote desired outcomes and behaviours. They also emphasize the importance of identifying, monitoring, and managing risks which arise from behavioural patterns that do not align with the desired culture and expected behaviours.
OSFI has invited interested stakeholders to submit comments on the draft Guideline until May 31, 2023, and has indicated that the final Guideline will be issued by the end of 2023. More information regarding the draft Guideline can be found by clicking here.
