On January 20, 2014, the Office of the Superintendent of Financial Institutions of Canada (OSFI) issued a draft advisory concerning changes to the membership of the board and senior management of all federally regulated financial institutions (FRFIs), including banks, trust companies, insurers, loan companies, and cooperative credit and retail associations. The draft advisory is in response to OSFI’s revamped Corporate Governance Guideline indicating that FRFIs should notify OSFI whenever changes to board membership or senior management are contemplated and if circumstances arise that could adversely affect the suitability of existing directors or senior management.
The Corporate Governance Guideline were finalised in January 2013 and are based on emerging international best practices in the regulation of financial institutions. The notification requirements contained in the draft advisory are consistent with the Insurance Core Principles, Standards, Guidance and Assessment Methodology (ICP).
Section 5.4 of the ICP 5 “Suitability of Persons”, states:
The supervisor [i.e. the regulator] requires to be notified by insurers of any changes in Board Members, Senior Management, Key persons in Control Functions and Significant Owners, and of any circumstances that may materially adversely affect the suitability of its Board Members, Senior Management, Key Persons in Control Functions and Significant Owners.”
As indicated by the OSFI, the composition of a FRFI’s Senior Management, as defined in the Corporate Governance Guideline, will vary from institution to institution. Senior Management is composed of the Chief Executive Officer (CEO) and individuals who are directly accountable to the CEO. In addition to the CEO’s direct reports, such as the heads of major business platforms or units, Senior Management may also include the executives responsible for the oversight functions, such as the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Chief Compliance Officer (CCO), Chief Internal Auditor, and Chief Actuary (CA).
The draft advisory titled “Changes to the Membership of the Board and Senior Management” establishes a process to respond to the requirements to notify of changes to the membership of the board and senior management.
The draft advisory requires FRFIs to:
- Pre-notify OSFI in writing as soon as a new nominee to the board of directors is identified.
- Give at least a month’s notice before senior management changes are made in case there are “any specific concerns regarding the appropriateness of the candidate.” However, for Director positions, early notification to OSFI should occur as soon as the preferred nominee for election or appointment is identified.
- Provide the regulator with the proposed senior manager’s specific resumé qualifications, as well as “the rationale for the candidate’s selection.”
- Provide the regulator with the proposed effective date of the appointment
- Provide OSFI, when available, with a draft copy of the internal and/or public announcement regarding the appointment, and the results of the FRFI’s assessment of the candidate in accordance with Guideline E-17 – Background Checks on Directors and Senior Management of FREs.
OSFI said it plans to do background checks on candidates and could provide comment if it finds anomalies. The final decision would be up to the financial institution. However, under certain prescribed circumstances, the Superintendent may order the disqualification or removal of directors or senior officers.
After the new director or executive is appointed, the regulator also may request an introductory meeting so it can remind them of their duties under Canadian banking regulations.
The draft advisory is subject to comment from interested parties before it comes into force. Interested stakeholders have until February 28, 2014, to comment on the draft.
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