lonny mcpherson senior advisor international advisory group

Office of the Superintendentof Financial Institutions

Bureau du surintendantdes institutions financières

Corporate Governancein Financial Institutions

OCDE/IAIS/ASSAL Conference on Insurance Regulation & Supervision

in Latin America

Punta Cana, Dominican Republic9 May 2003

Corporate Governancein Financial Institutions

OCDE/IAIS/ASSAL Conference on Insurance Regulation & Supervision

in Latin America

Punta Cana, Dominican Republic9 May 2003

Lonny McPhersonSenior Advisor International Advisory Group



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Discussion Points

OSFI- background

The Importance of Corporate Governance in Financial Institutions

OSFI’s risk-based supervisory framework

OSFI’s Corporate Governance Guide

External Oversight Providers



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Canada’s primary regulator of financial institutionsEst. 1987 – agency of Gov’t of Canada

independent – funded by Industry

Legislated mandate (OSFI Act)Integrated supervisor

supervise/regulate all banks (54), and all federally incorporated or registered trust and loan companies (65), insurance companies (306), cooperative credit associations (7) and pension plans (1,189)

Prudential regulator

OSFI – Some Background



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Reliance based Relationship manager conceptRisk focused – judgmentContinuous monitoring

on-site/off-site

InterventionistConsolidated supervisionTransparentAdhere to Core Principles

OSFI’s Supervisory Approach



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Corporate Governance in Financial Institutions

OSFI definition the oversight mechanisms, including the processes, structures and information used for directing and overseeing the management of a company.



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The Importance of Corporate Governance in Financial Institutions

Encompasses the means by which the Board and Senior Management are held accountable for their actions and for the establishment and implementation of oversight functions and processes.



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The Importance of Corporate Governancein Financial Institutions

OSFI regulatory framework has 3 components:

1) supervision by OSFI

2) direct oversight – Board/Senior management

3) independent oversight – external auditor, actuary

Components must work together



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The Importance of Corporate Governancein Financial Insitutions

OSFI’s risk based Supervisory Framework consists of an assessment of:

risk profile

financial condition

risk management processes

compliance with applicable laws/regulations



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The Importance of Corporate Governancein Financial Institutions

Effective corporate governance is essential to the safe and sound functioning of a financial institution

Board & Senior Management are designated as key control functions in OSFI’s Supervisory Framework



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OSFI’s Corporate Governance Guideline

Focuses on issues relevant to financial institutions

Outlines OSFI’s expectations of boards and management

Provides information on factors to assess quality of governance

Not a checklist of criteria



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OSFI’s Corporate Governance Guideline –Key Provisions

Role of the Board in risk management

Role of the Board in internal controls

Role of the Board in independent oversight functions

Governance of subsidiaries

Board independence

How OSFI assesses effectiveness of corporate governance



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Role of the Board in Risk ManagementUnderstand the institution’s risk exposures

Review & approve overall risk philosophy & risk tolerance of the institution

Review & approve policies for accepting, managing & reporting significant risks

Review & approve organizational structure supporting risk management functions of the institution



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Role of the Board in Risk Management

Require from management timely and accurate reporting on: significant risks; procedures & controls for managing risk; overall effectiveness of risk management processes

Assure itself that risk management functions have sufficient independence & are subject to periodic reviews



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Role of the Board in Internal ControlsEnsure management establishes and maintains a sound system of internal controls

Review internal control systems on a high level to ensure functioning as expected, including review of internal & external audit opinions on aderquacy of controls

Require management to take prompt corrective action on deficiencies



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Role of Board -Independent Oversight FunctionsApprove mandates and organizational structures of these functions, promote their capacity to operate effectively & independently, with access to the Board

Recommend appointment of external auditor and heads of internal oversight functions

Ensure the functions have resources & authority to perform duties

Establish committees, such as Audit Committee to oversee these independent oversight functions



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How does OSFI Assess the Effectiveness of Governance?

A variety of factors, the most important of which are findings from monitoring/on-site examinations

Board/Committee minutes

Increasingly involved in discussions with Board and Committees



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Ratings Criteria for BoardsCompositionRole/responsibilitiesNature/operations of Board CommitteesBoard practicesSelf assessment programmes





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OSFI looks for indications that appropriate processes and procedures are in place to help the Board carry out its responsibilities ANDthat these responsibilities, are in fact being carried outCharacteristics + Performance= Effectiveness





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Effective Performanceappropriate organizational structures, policies and controls help promote good corporate governance but do not ensure it.

effective corporate governance is primarily the result of dedicated Directors and Senior Managers performing faithfully the duty of care





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Effective Performance (cont’d)

what makes structures and policies work are knowledgeable and competent individuals, with a clear understanding of their role and strong commitment to, and in, carrying it out.





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Remember “one size does not fit all”OSFI takes into consideration that institutions will adopt different approaches to governance based on size, complexity and nature of their significant activities





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High quality checks/balances in the oversight of FIs are cornerstone of effective governance

this is why OSFI cares about quality of internal control and integrity of external oversight processes such as external audit or actuarial reviews.New peer review process for reports of Appointed Actuaries (Canadian Institute of Actuaries)




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Canadian Public Accountability BoardEstablished to promote high quality, independent auditing of public companies in Canada

Superintendent is member of the Council of Governors

involves a materially enhanced practice inspection function and a significant degree of public oversight

will have specific authorities/responsibilities including ability to levy sanctions and impose discipline.




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Accounting Standards Oversight Councilfocuses inter-alia, on the implications of Enron for accounting and auditing standardsrecently endorsed accounting standard setters proceeding to require expensing of stock options.Superintendent is a member




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In the current environment, it is important that regulators and policy makers look to the lessons of Enron and other corporate failures, to enhance sound corporate governance practices, and also to ensure we can continue to rely on the work of those who provide independent oversight functions to corporations whose stakeholders rely on them

Conclusion

Corporate Governance in Financial Institutions



Thank you

www.osfi-bsif.gc.ca

lonny mcpherson senior advisor international advisory group

Documents

risk management functions

risk management role

risk managementunderstand

risk managementrequire

osfis supervisory framework

management timely

oversight mechanisms

insurance companies