Actuarial Notes

Corporate Governance

By Office of the Superintendent of Financial Institutions · 2018

Study guide: Exam 6C

OSFI's Corporate Governance guideline communicates its expectations for the corporate governance of federally regulated financial institutions (FRFIs). It applies to all FRFIs other than the branch operations of foreign banks and foreign insurance companies, and its expectations are principles-based, recognizing that governance practices may depend on an institution's size, ownership structure, complexity, strategy and risk profile. It covers the Board of Directors, risk governance, the Audit Committee and OSFI's supervision, with annexes on the special nature of financial institutions and the Risk Appetite Framework. It is dated September 2018.

On the syllabus

  • Exam 6C — objectives C4 and C5; Section V and Annex B only.

I Purpose and Scope of the Guideline

  • Corporate Governance for Financial Institutions
    • Corporate Governance is a set of relationships between a company's management, its Board, its shareholders and other stakeholders, and the structure through which its objectives are set and performance is monitored.

II The Board of Directors

  • The Role of the Board
  • The Board and Senior Management
  • The Board and the Oversight Functions
  • Boards of Subsidiaries or with FRFI Subsidiaries
  • Board Effectiveness
  • The Board is responsible for the FRFI's business plan, strategy, and risk appetite and culture, and oversees Senior Management, who implement its decisions; an effective Board is independent, and the role of the Board Chair should be separate from the CEO.

III Risk Governance

  • General
  • Risk Appetite Framework
  • Oversight of Risk
  • The FRFI should have a Risk Appetite Framework that guides its risk-taking activities, a Board Risk Committee to oversee risk management, and a senior officer (CRO or equivalent) responsible for the risk management function.

IV The Role of the Audit Committee

  • The Audit Committee's statutory duties include reviewing the annual statements, approving internal control procedures, and meeting with the Chief Internal Auditor and/or the Appointed Actuary on internal controls and the adequacy of practices for determining financial reserves.

V Supervision of FRFIs

  • The Role of Corporate Governance in OSFI's Supervisory Process
    • The Board and Senior Management are designated key Oversight Functions in OSFI's Supervisory Framework; their effective oversight lets OSFI use the FRFI's own processes and functions, reducing the supervisory resources it needs.
    • Where a FRFI is experiencing problems or needs significant corrective action, OSFI requires significant Board involvement in the solutions and their implementation.
  • OSFI's Supervisory Assessment
    • Key among OSFI's assessment criteria is the quality of oversight and control provided by the Board and Senior Management, who are ultimately accountable for the FRFI's safety and soundness; OSFI expects to be promptly notified of substantive issues.
    • The Board should be informed of the results of supervisory work and consider regulatory findings in evaluating Senior Management and the oversight functions; OSFI assesses governance through discussions with the Board, its committees and Senior Management and review of Board material.
  • Changes to the Board or Senior Management
    • FRFIs should notify OSFI as early as possible of potential changes to the Board and Senior Management, and of circumstances that may affect their suitability, and make the selection process and candidates' qualifications transparent to OSFI.

Annex A The Special Nature of Financial Institutions

Annex B Risk Appetite Framework

  • The Risk Appetite Framework contains a risk appetite statement, risk limits, and the roles and responsibilities of those overseeing its implementation; it is an integral part of the FRFI's enterprise-wide risk management framework.
  • Risk Appetite Statement
    • Reflects the aggregate level and type of risk the FRFI is willing to accept to achieve its business objectives; it is linked to strategic, capital and financial plans and compensation programs, uses qualitative and quantitative measures, is forward-looking, considers normal and stressed scenarios, and aims to be within the FRFI's risk capacity (i.e., regulatory constraints).
  • Risk Limits
    • The allocation of the risk appetite statement to risk categories, business units or platforms, lines of business or products (e.g., concentration limits) and more granular levels; often quantitative, and specific, measurable, frequency-based and reportable.
  • Implementation of the Risk Appetite Framework
    • Once approved by the Board, it is implemented by Senior Management throughout the organization; the CRO ensures aggregate limits are consistent with the risk appetite statement and reports against it, and Internal Audit assesses compliance.
    • The Board and Senior Management receive regular reports comparing actual results with the framework's measures; where breaches are identified, action plans should exist and be communicated to the Board.

Related readings

  • OSFI AA — Guideline E-15, to which Section IV refers for the role of the Appointed Actuary

Sources