Financial services regulators across Canada have issued further special guidance to the entities they regulate, including banks and insurers, to address the COVID-19 crisis. For example, see our previous blog posts on OSFI’s announcement of regulatory flexibility provided to banks and insurers (March 30), the Financial Consumer Agency of Canada’s response to COVID-19 (April 1), and OSFI, the Department of Finance and the Bank of Canada taking measures applicable to financial institutions in Canada (March 20).
Following on this additional guidance, below are some further regulatory updates to be aware of. In addition, we expect that OSFI and other regulators will continue to be in close contact with financial institutions to understand how risk is being managed and what other regulatory tools may be used to assist both financial institutions and their customers.
Further to its statements of March 13, March 27, and March 30, in a statement issued on April 3, the Office of the Superintendent of Financial Institutions (OSFI) noted that it is working to ensure that banks are still able to make loans, that deposits remain available to Canadians, that insurance companies can pay policyholders, and that pension plans can continue to make payments to retirees. Specifically, OSFI has expressed a commitment to policies which are:
- Credible – measures are transparent, preserve the integrity of the regulatory framework and are within international standards
- Consistent – measures can be applied in the same way to all comparable institutions
- Necessary – regulatory adjustments are not made unless other reasonable alternatives could not or should not be used
- Fit-for-Purpose – changes made to adapt to the current extraordinary circumstances should make capital and liquidity measurements more accurate and avoid obscuring the situation, and should be phased out when no longer warranted
On April 9, 2020, OSFI released a letter to banks, which outlines further adjustments to existing capital requirements for banks in Canada in light of COVID-19 and provides the Canadian view on implementation of the principles released recently by the Basel Committee on Banking Supervision (BCBS):
Consistent with changes already made to facilitate provision of credit during the COVID-19 pandemic, banks are permitted to temporarily exclude the following additional exposures from the leverage ratio exposure calculation:
- Central bank reserves; and
- Sovereign-issued securities that qualify under the Liquidity Adequacy Requirements Guideline as “high quality liquid assets”.
Banks using a dealer to access Bank of Canada asset purchase programs and which do not have a settlement account at the Bank of Canada are permitted to exclude the proceeds of the sale of securities into these programs from their leverage ratio exposure calculations.
OSFI has stated that this initiative will remain in place until April 30, 2021 and that capital freed up through this treatment should be used to support lending and financial intermediation activities and, in particular, should not be distributed, for example as dividends or bonus payments.
OSFI has lowered the “floor factor” in its Capital Adequacy Requirements Guideline applicable to institutions using the “Internal Ratings Based” approach to credit risk from 75% to 70%. Lowering this factor means that banks are required to keep lower levels of regulatory capital – which amount will vary based on the risk-weighted assets of the bank – and which further liberates more capital for lending purposes.
In OSFI’s view, the lower level will ensure that the capital floor continues to protect the institution against model risk, while maintaining the risk sensitivity of the framework for those institutions that use the Internal Ratings Based approach.
OSFI expects this lower floor factor to stay in place until Canadian implementation of the Basel III capital floor in Q1 of 2023.
Regulatory Treatment of Capital
As we updated previously, OSFI had introduced transitional arrangements for expected credit loss positioning that are available under the Basel Framework. These arrangements increase banks’ Common Equity Tier 1 capital and shift into this category 70% of certain allowances that would otherwise be designated as Tier 2 capital.
At this time, OSFI is not intending to further adjust this capital treatment. Though the BCBS permits jurisdictions to apply a 100% add-back to Tier 1 capital, in OSFI’s view this level of add-back is not appropriate for lenders in Canada.
The three-year transition will allow banks the ability to phase-in the impact of increased allowances for expected credit losses while also acknowledging that unusual provisions relating to COVID-19 are being taken.
Certain Margin Requirements
OSFI is extending by one year the deadline for implementation of the final two phases of the initial margin requirements for non-centrally cleared derivatives, which are outlined in OSFI Guideline E-22. This is consistent with the decisions taken by BCBS and the International Organization of Securities Commissions.
With this extension, the final implementation phase will take place on September 1, 2022, and covered entities with an “aggregate average notional amount” of non-centrally cleared derivatives greater than C$12 billion will be subject to the requirements.
An intermediate implementation phase will start on September 1, 2021, at which point covered entities with an “aggregate average notional amount” of non-centrally cleared derivatives greater than C$75 billion will be subject to the requirements.
OSFI has published a revised version of Guideline E-22 to reflect this revision.
On April 9, 2020, OSFI released a letter to insurers, which outlines additional actions that OSFI is taking in response to the COVID-19 pandemic.
Loan and Lease Payment Deferrals
OSFI has clarified that, where an insurer grants a payment deferral for a mortgage loan, a lease, or another loan (such as private debt, small business loans or mid-market commercial loans), these loans or leases will continue to be treated as performing loans for purpose of the Life Insurance Capital Adequacy Test (LICAT).
This is consistent with the treatment given to similar loans issued by banks (as we previously updated) and in both cases means that these loan and lease assets will not be moved to the “impaired and restructured” category as a result of these deferrals which ordinarily would require the applicable lender to subject these assets to a higher credit risk factor, with less favourable capital treatment.
Insurers should continue to assess the credit quality of the applicable borrowers and continue to follow sound credit risk management practices.
This capital treatment for loans and leases will remain in place for the duration of the payment deferral, up to a maximum of six months, and insurers may apply this treatment when calculating their capital levels and ratios for all cases related to COVID-19. Notably, OSFI has confirmed that this treatment will apply to loan and lease payment deferrals related to COVID-19 that preceded this OSFI advice.
Insurers should prepare for potential additional reporting requirements relating to payment deferrals on loans and leases.
Premium Payment Deferrals
In addition to deferrals on loan and lease payments noted above, some insurers may elect to grant payment deferrals for insurance premiums. In these situations, OSFI has confirmed that the insurer’s related assets will not be subject to higher credit risk factors under the LICAT, the Minimum Capital Test, or the Mortgage Insurer Capital Adequacy Test. This OSFI position is in relation to installment premiums receivable but not yet due, receivables outstanding less than 60 days, and receivables outstanding 60 days or more, provided in each case that the receipt of payment is in accordance with the deferral terms and conditions.
The capital treatment on this deferral option expressly applies to receivables from agents and brokers to the extent that premiums flow through them. As with loan and lease deferrals, insurers should continue to follow sound risk management practices and assess the ability of the applicable parties to make contractual payments.
Similar to the treatment of loan and lease deferrals, this capital treatment applies for the duration of the premium payment deferral, up to a maximum of six months, and insurers may apply this treatment when calculating their capital levels and ratios for all cases related to COVID-19. Again, as with loan and lease payment deferrals, OSFI has confirmed that this treatment will apply to premium payment deferrals that preceded this OSFI advice.
Insurers should prepare for potential additional reporting requirements relating to payment deferrals on insurance premiums.
LICAT Interest Rate Risk Requirements
On February 26, 2020, OSFI released a letter summarizing its intended public consultation on an update to the LICAT guideline. This consultation was intended to include adjustments to the framework which were targeted at correcting an aspect of the test that resulted in increased volatility in interest rate risk requirements. OSFI has confirmed that this consultation is on hold for the time being.
However, as a part of the methodology of the test causes some “increased and unwarranted volatility” in interest rate risk requirements, and recognizing the unique nature and pressures of the COVID-19 environment, OSFI has changed this aspect of the LICAT to set the interest rate risk requirement for a par block in any given quarter to be equal to the rolling average of the six immediately-preceding quarters.
For Q1 2020, insurers are permitted to determine interest rate risk requirements using either the “rolling average” approach, or the approach in the current LICAT. Beginning for Q2 2020, the rolling average approach will be the mandatory approach, to remain in place until OSFI communicates otherwise.
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) recently provided guidance to reporting entities with respect to their continuing obligations during the pandemic. FINTRAC acknowledged in its guidance that reporting entities may have to reassign internal resources due to COVID-19. This may affect reporting entities’ ability to meet requirements under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. FINTRAC highlighted the following key areas:
- Prioritizing Suspicious Transaction Reports. FINTRAC reporting entities are expected to prioritize the submission of suspicious transaction reports (STRs). If reporting entities have critical information relating to terrorist activity but cannot submit STRs in the normal course, they should email firstname.lastname@example.org. Reporting entities should submit a voluntary self-declaration of non-compliance if they are unable to meet their reporting obligations at this time.
- FINTRAC Enforcement. For the time being, FINTRAC will not be initiating new examinations of reporting entities. FINTRAC’s interactions with reporting entities will be limited to situations related to reporting issues, situations in which reporting entities contact FINTRAC for guidance, and the completion of current examinations.
- Identity Verification. When authenticating documents, reporting entities can, until further notice, consider any government-issued photo ID document that has expired on or after March 1, 2020, to be valid and current pursuant to its issuing authority.
Financial Consumer Agency of Canada
On April 9, the Financial Consumer Agency of Canada (FCAC) issued a further release regarding COVID-19. FCAC’s release largely reiterates what was in previous releases, advising that they will “adjust” regulatory expectations, while ensuring regulated entities will continue to comply with their legislative obligations, voluntary codes of conduct and public commitments. FCAC also said they will work to minimize the impact of regulatory requirements on the entities’ efforts to deliver services to Canadians.
The FCAC will also be monitoring the commitments banks are making to consumers during this time.
Ontario – FSRA
The Ontario Financial Services Regulatory Authority (FSRA) continues to carry out its regulatory duties. FSRA has announced the following initiatives due to the COVID-19 pandemic:
- FSRA is withdrawing F2020-21 invoices already issued to insurance brokers and indefinitely deferring the issuance of the following invoices for F2020-21:
- FSRA is extending the application deadline for Mortgage Brokers Licencing Renewals from March 31, 2020 to May 31, 2020, provided renewal applications have been initiated by March 31, 2020. Current licences will expire on March 31, 2020. FSRA will continue to accept completed 2019 Annual Information Returns past the deadline of March 31, 2020 until June 30, 2020.
- FSRA is extending the deadline for the Health Service Providers filing their 2019 Annual Information Return from March 31, 2020 to June 30, 2020. Health Service Provider licences do not expire as long as they are kept in good standing and will not be affected by late filing in this case.
- FRSA is extending the Insurance Agents Licence Renewals deadline by 60 days.
- FSRA has provided Information Guidanceon how Ontario-incorporated insurance companies may use telephone, digital or other electronic forms for holding virtual annual meetings during the COVID-19 pandemic.
- FSRA has provided pension specific guidance available here.
Québec – AMF
The Autorité des marchés financiers (AMF) has announced a series of measures to minimize the impact of COVID-19 on Québec’s financial system. These include detailed notices with respect to i) financial services cooperatives, trust companies and savings companies ii) deposit institutions authorized under the Deposit Institutions and Deposit Protection Act (Quebec) and iii) Québec-chartered insurers. Key highlights include:
Financial Cooperatives, Trust Companies, and Savings Companies
- The AMF adjusted its capital and liquidity requirements related to credit losses. This includes a temporary increase of the limit for the issuance of secured debt and a temporary decrease of the value at risk factor used in estimating investment risk.
- AMF-regulated financial institutions which would like to use liquidity targets that differ from their internal policies or AMF guidance can make a request for authorisation to the AMF.
- The AMF’s implementation of the remaining measures of the Basel III international capital standard has been delayed until 2023. This is consistent with OSFI’s approach to Basel III.
- Further to OSFI temporarily increasing the covered bond limit applicable to banks to allow greater access to Bank of Canada facilities discussed in our previous blog post OSFI’s announcement of regulatory flexibility provided to banks and insurers (March 30), the AMF temporarily increased to 10 per cent of on-balance sheet assets the total amount of assets that can be pledged for covered bonds.
Quebec Deposit Institutions
- The AMF has granted Quebec deposit institutions an extension until December 15, 2020 to pay deposit insurance premiums that is due on July 15, 2020.
- Quebec financial institutions concerned with reporting of guaranteed deposits as required by July 15, 2020 may approach the AMF for relief on a case by case basis.
- Semi-annual IFRS 17 progress reporting has been suspended indefinitely. (We previously advised that OSFI previously suspended semi-annual IFRS 17 progress reporting, and that in March, the International Accounting Standards Board further deferred the effective date of IFRS 17 by one year, to January 1, 2023.)
- The AMF’s consultation on capital adequacy guidelines in insurance of persons has also been suspended indefinitely. This is similar to the suspended OSFI consultations discussed above.
British Columbia – BCFSA
The British Columbia Financial Services Authority (BCFSA) has published a statement related to the COVID-19 pandemic, and issued guidance to credit unions on loan payment deferrals. The important elements of these publications are:
- BCFSA will permit loans with payment deferrals for credit union members experiencing financial hardship due to the COVID-19 pandemic to continue to be treated as performing loans. For reporting purposes, personal and commercial loans with payment deferrals will not be considered in arrears or past due. However, BCFSA expects all credit unions extending payment deferrals to clearly document the arrangements with their members. This is similar to OSFI’s treatment of loans made by banks and insurers, discussed above.
- Credit unions submitting Financial and Statistical Returns may exclude loans with payment deferral arrangements, due to hardship from COVID-19, from the Loans and Leases in Arrears section. This favourable treatment is appropriate for the duration of the deferral period, up to a maximum of six (6) months.
Source: McCarthy Tetrault