OSFI Releases Revisions to its Draft Corporate Governance Guideline: The Ongoing Evolution of Governance Practices
Corporate governance has become an increased area of focus for regulators in the financial services industry both internationally and domestically since the financial crisis. In 2010, the Office of the Superintendent of Financial Institutions (OSFI) joined these efforts by establishing a Corporate Governance Unit to review the corporate governance practices of certain large Canadian banks and insurance companies. On August 7, 2012, OSFI released draft revisions to its Guideline on Corporate Governance (the Draft Corporate Governance Guideline), which update the original version of the guideline, reflect developments in international standards and introduce some new requirements. The amendments generally build on the principles articulated in the former guideline, and are a codification of industry best practices and OSFI’s existing expectations. Primary themes of the Draft Corporate Governance Guideline include increased focus on risk governance, effective board oversight, minimum director competency requirements in the areas of financial industry and risk management expertise, board independence (including the mandated separation of the roles of chairman and CEO and certain direct reporting lines to the board), and the commission of third party reviews to provide the board with an objective evaluation of the federally regulated financial institution’s (the FRFI’s) systems and procedures.
One significant development is the introduction of the concept of a board-approved risk appetite framework (RAF). OSFI notes that the unique nature, systemic importance and inherent risks associated with financial institutions and their business and activities, make risk governance a distinct and crucial element of corporate governance for FRFIs. The RAF is intended to be an enterprise-wide benchmark designed to guide the amount and type of risk that the FRFI is prepared to accept in pursuit of its strategic and business objectives. It should reflect the FRFI’s business model and overall philosophy, should be forward-looking and should take into account all types of risks (including reputational risks) relevant to the FRFI.
The comment period closed on September 14, 2012, and it is currently anticipated that the Draft Corporate Governance Guideline will be implemented without any major changes by the end of the year.
Proposed Amendments to the Credit and Debit Card Code of Conduct – The Ongoing Evolution of the Regulation of Mobile Payments
On September 18th, 2012, the Federal Government announced the proposed expansion of the Code of Conduct for the Credit and Debit Card Industry in Canada (the Code) to apply to credit and debit network participants that provide point-of-sale payment services through mobile devices. The government undertook to amend the Code, which does not currently expressly address mobile payments transactions, following the release of the final report of the Task Force for the Payments System Review (released in March 2012).
The proposed Addendum was issued for a 60-day comment period. It seeks to clarify that the rules relating to payment cards will apply at the payment app level, and provides specific guidance in relation to four key elements of the Code, including clarification that merchants who accept credit and debit card payments through a mobile device from a particular network will not be obligated to accept all products in that payment network’s mobile wallet, that the equal branding rules apply to co-branded payment apps, and separate credit and debit applications may reside on the same mobile device provided they are represented as separate mobile payment apps.
Like the Draft Corporate Governance Guideline, the proposed Addendum is the evolution of existing framework and is not a marked departure from the current regime. We will need to wait, however, to see how the industry responds and whether the proposed extension of the Code provides industry participants with enough flexibility in this ever evolving sector.
Revised OSFI Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures
The final version of the revised Guideline B-20 Residential Mortgage Underwriting Practices and Procedures (the RMUP Guideline) was published by OSFI on June 21, 2012. The RMUP Guideline, together with the tightening of the rules for government-backed insured mortgages announced by the Minister of Finance on the same day (including reducing the maximum amortization period to 25 years and lowering the maximum amount that Canadians can borrow when refinancing from 85% to 80%), form part of the Canadian Government’s attempts to strengthen the Canadian housing finance system.
The RMUP Guideline builds on the theme of risk governance contained in OSFI’s Draft Corporate Governance Guideline, and sets outs the following 5 principles for managing risk specific to residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada:
Principle #1: FRFIs that are engaged in mortgage underwriting and/or purchasing should have a comprehensive, Board-approved Residential Mortgage Underwriting Policy that is linked to the FRFI’s RAF, and the Board should ensure that it is being complied with.
Principle #2: FRFIs should perform reasonable due diligence on the borrower to assess the borrower’s identity, background and demonstrated willingness to service its debt obligations on a timely basis.
Principle #3: FRFIs should adequately assess the borrower’s capacity to service debt on a timely basis including taking steps to verify the borrower’s income and the establishment of appropriate debt serviceability metrics.
Principle #4: FRFIs should have sound collateral management and appraisal processes for the underlying mortgage properties. Non-amortizing Home Equity Lines of Credit (HELOCs) must be limited to a maximum authorized loan to value (LTV) ratio of less than or equal to 65%.
Principle #5: FRFIs should have effective credit and counterparty risk management practices and procedures that support residential mortgage and underwriting and asset portfolio management, including, as appropriate, mortgage insurance. Where a FRFI purchases mortgages that have been originated by a third party, the FRFI should ensure that the underwriting practices of the third party are consistent with its own practices, its RMUP and the RMUP Guideline, and not rely solely on the attestation (i.e., a representation and warranty) from the third party.
All FRFIs are expected to fully comply with the RMUP Guideline by the end of fiscal year 2012/2013, and where possible, comply with the principles and expectations set out in the RMUP Guideline as of the date of its release.