Proceedings of the Standing Senate Committee on
National Finance
Issue 4 - Evidence - January 29, 2014
OTTAWA, Wednesday, January 29, 2014
The Standing Senate Committee on National Finance met this day, at 6:45 p.m., to consider the expenditures set out in the Main Estimates for the fiscal year ending March 31, 2014.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this evening we are continuing our consideration of the 2013-2014 Main Estimates for the fiscal year ending March 31, 2014.
[English]
This evening, we're very pleased to welcome officials from the Office of the Superintendent of Financial Institutions. I'm pleased to welcome Marie-France Caron, who is the Acting Chief Financial Officer and Managing Director of Finance and Corporate Planning; and also Philipe Sarrazin, who is the Managing Director, Legislation and Policy Initiatives. It will be interesting to get into the policy initiatives with you, Mr. Sarrazin. I understand that you have a brief opening statement, Mr. Sarrazin.
[Translation]
Philipe-A. Sarrazin, Managing Director, Legislation and Policy Initiatives, Office of the Superintendent of Financial Institutions: Mr. Chair, thank you for inviting me to appear before the committee. As the chair mentioned, my name is Philippe Sarrazin, and I am the Managing Director of Legislation and Policy Initiatives at the Office of the Superintendent of Financial Institutions. Joining me is my colleague Marie-France Caron, Acting Chief Financial Officer and Managing Director, Finance and Corporate Planning.
[English]
As the 2013-14 Main Estimates show, OSFI's total budget was $140.3 million. Nearly all of our costs are recovered through asset-based, premium-based or membership-based assessments on the financial services industry and a user-pay program for selected services. A small portion of OSFI's revenue, around $909,000, is received through an appropriation from the Government of Canada for actuarial valuation and advisory services provided by the Chief Actuary relating to various public sector pension and benefit plans.
[Translation]
OSFI is one element of Canada's federal regulatory framework for financial institutions. We are the primary prudential regulator and supervisor of deposit-taking institutions, insurance companies and federal pension plans. We monitor and examine these for solvency, liquidity and safety and soundness. We advance and administer a regulatory framework that promotes the adoption by institutions of policies and procedures designed to control and manage risk.
Our work involves ensuring that financial institutions are in sound financial condition and, in the case of pension plans, that they are meeting minimum plan funding requirements. We also monitor institutions and plans to see that they are complying with their respective governing laws and supervisory requirements. When necessary, we advise institutions and plans of material deficiencies and take — or require management, boards or plan administrators to take — any necessary corrective measures expeditiously.
We also protect depositors and policy holders by monitoring and evaluating system-wide events or sectoral issues that could negatively impact financial institutions.
[English]
OSFI's legislation and supervisory guidance recognize the need for institutions to compete effectively and take reasonable risks.
Our legislation is clear that management and boards of directors are ultimately responsible for the management of their institutions and that plan administrators are responsible for the management of their pension plans.
[Translation]
Ms. Caron will now be able to respond to questions on OSFI's 2013-2014 Main Estimates, and I will be happy to answer your questions relating to OSFI's mandate.
The Chair: Mr. Sarrazin, you said that this year's Main Estimates show an amount of $140.3 million in the budget, but I cannot find that in the document. Can you help me find the $140 million?
Marie-France Caron, Acting Chief Financial Officer, Managing Director of Finance, Finance and Corporate Planning, Office of the Superintendent of Financial Institutions: That amount is on page 49 of the main estimates. Under the heading ``Office of the Superintendent of Financial Institutions'', an amount of $133.7 million is listed for operational expenditures.
The Chair: On page 49?
Ms. Caron: Yes, page 49 of part 2.
The Chair: Maybe that is in the French version.
Ms. Caron: Possibly.
The Chair: Do you have the French version? We could check the amount. Unfortunately, I cannot find it.
Ms. Caron: An amount of $133.7 million is listed under operational expenditures and $6.5 million is listed under capital expenditures. The two add up to $140.3 million.
[English]
Senator Buth: This doesn't include anything about the $140 million. I don't see $133.7 million in the English, either. Do you see the $133.7 million?
[Translation]
Ms. Caron: I also have page 4 of part 2 — I think this is the English version — under the heading Office of the Superintendent of Financial Institutions.
[English]
The Chair: It's a rough start when we can't find our place in the documents here.
Senator Callbeck: It's page II-267 in the English.
The Chair: We've got that, but we can't find the numbers she's giving us. But that's a good start. Thank you.
Ms. Caron: What you're seeing is the net expense.
[Translation]
What you are seeing are the net expenditures. Since the Office of the Superintendent of Financial Institutions is a cost-recovery organization, what you are seeing — I have the detailed table in another part of the main estimates — is the $909,369. That is the amount funded through parliamentary appropriations. So that accounts for less than 1 per cent of our expenditures.
Since our budget is netted out, the difference between revenue and expenditures is zero. So the only difference you are seeing is the $909,000, which is the amount appropriated by Parliament. Therefore, the total expenditures amount to $140.3 million, which is funded through cost recovery, with the exception of the parliamentary appropriation you are seeing.
The Chair: Including the $909,000?
Ms. Caron: Yes.
[English]
The Chair: Okay. So the total expenditure for the year is predicted to be $140.3 million. Almost a million of that you get from the government, and all the rest you get from —
Ms. Caron: Cost recovery from the financial institutions and the pension plans that we regulate, so through the industry.
The Chair: These Main Estimates are not your fault, I understand, but you confirm with us that the full amount that you spend of $140.3 million is not here in these Main Estimates?
[Translation]
Ms. Caron: I have the detailed breakdown by what is called standard object.
[English]
The Chair: I'm looking at the Main Estimates. Are you going to send us somewhere else?
Ms. Caron: This is from the Main Estimates, but it's probably the Part III that I'm looking at, and this book is Parts I and II.
The Chair: Okay. We're going to have to change the way we prepare ourselves to talk to you by looking at another part, Part III. You indicated in your remarks, ``as you can see from the Main Estimates,'' but, as you can now see, we couldn't see that in the Main Estimates. Are you with me?
Ms. Caron: Yes.
The Chair: Good. I just wanted to lay the basis for the amount of money that is being spent by your operation, whether you obtain it from a government appropriation or you obtain it through charging for your services. It's $140 million.
Ms. Caron: Yes, so less than 1 per cent is funded by an appropriation.
The Chair: Yes, but the authority to obtain the funds from the banks you supervise is also given to you by Parliament?
Ms. Caron: It's given through the OSFI Act.
The Chair: Yes.
Ms. Caron: And we also have our re-spendable authority through the OSFI Act as well.
The Chair: Thank you.
[Translation]
Senator Hervieux-Payette: This is great, as I will be able to speak in French. It would be nice to know how many institutions you supervise and what their nature is. Are we talking about banks, insurance companies? What are those institutions and how many of them are there?
Mr. Sarrazin: I do not have the exact number. Our mandate is to supervise and regulate. As for the kinds of institutions we oversee, they include tax companies, banks, foreign banks, trust and loan companies, domestic insurance companies and foreign insurance companies. We also regulate and supervise pension plans.
Senator Hervieux-Payette: Are you involved in federal insurance?
Mr. Sarrazin: Yes. The same goes for insurance companies, which are also federal. An organization called Greenshield is also under our supervision.
Senator Hervieux-Payette: If there were any federal co-operatives, would they fall within your purview?
Mr. Sarrazin: Yes. The system is in place.
Senator Hervieux-Payette: It is important to know whom you supervise. To round it off, you have at least 125 institutions?
Mr. Sarrazin: Exactly.
Senator Hervieux-Payette: You were explaining your actuarial services, and I thought that was a bit strange. What is the purpose of actuarial services? You say that you provide services, so you have revenue. But you need actuaries when it comes to your regular operations?
Mr. Sarrazin: As for the matter of actuaries, Marie-France will correct me if I am wrong, but I believe that has to do with the Office of the Chief Actuary.
The chief actuary reports directly to Parliament and provides his or her services to the Government of Canada. We are not talking about services to institutions or services to the Office of the Superintendent of Financial Institutions, but rather to the government.
Senator Hervieux-Payette: So our own actuaries are carrying out studies on the pension plans of various government organizations.
Mr. Sarrazin: Yes.
Senator Hervieux-Payette: Do they come under your authority or is that because you manage this?
Ms. Caron: As for the organization, the Office of the Chief Actuary is not directly related to our mandate, but it does report to the organization, so it is tied to the superintendent.
Senator Hervieux-Payette: Have the recent government budget cuts affected your staff?
Ms. Caron: We are not immediately affected by budget cuts because they are directly related to parliamentary appropriations. Since parliamentary appropriations account for less than 1 per cent of our funding — with the rest coming from cost recovery — we are not directly affected by budget cuts.
Senator Hervieux-Payette: How much staff do you have?
Ms. Caron: Close to 640 or 650 employees.
Senator Hervieux-Payette: Where are they located?
Ms. Caron: They are spread out through four Canadian provinces. The two main offices are located in Ottawa and Toronto, and we have two small regional offices — one in Montreal and one in Vancouver.
Senator Hervieux-Payette: Whom does the corporation report to? Directly to the Minister of Finance?
Mr. Sarrazin: The superintendent reports to the Minister of Finance.
Senator Hervieux-Payette: Do you have any ties to the Bank of Canada?
Mr. Sarrazin: Both the Bank of Canada and the Office of the Superintendent of Financial Institutions participate in interagency committees that create a connection between us. However, if you were asking whether we report to the Bank of Canada, the answer is no.
Senator Hervieux-Payette: The Bank of Canada has done a lot of work recently, especially with the former governor of the Bank of Canada. Regarding the new agreements — including the Basel Accord — are you in charge of monitoring the application of those agreements and checking whether banks' financial statements include the assets they should include, in compliance with the new rules?
Mr. Sarrazin: Yes. Currently, the Office of the Superintendent of Financial Institutions, through the Capital Division, ensures that our institutions in Canada are applying, respecting or even exceeding international rules.
Senator Hervieux-Payette: How do we rank compared with other G20 or G8 countries?
Mr. Sarrazin: I know that our banks are well-capitalized, but I could not tell you more because that is unfortunately not my purview.
Senator Hervieux-Payette: For a committee like ours, that aspect is among the most important ones when it comes to the financial stability of our Canadian system. Our neighbours and European countries have had a meltdown, and I am regularly reading that not all the partners are yet up to date with the Basel accords. I would like you to send us information on how we rank compared with other countries — at least in the G8, if not the G20.
They are clearly competing. In any competitive situation, we have to ensure that we are neither too far ahead nor too far behind. At the end of the day, those funds have to be withheld by the bank. That is basically what dictates that bank's investments. The money cannot be invested in the United States. That was a recent trend.
Mr. Sarrazin: It will be my pleasure to try to answer you. However, I would like to clarify the question. Do you want to know whether Canadian rules are adequate and in line with international developments, or are you asking how our banks are doing?
Senator Hervieux-Payette: Both. A process was begun, and there is a timeline to be followed. Countries have a certain number of months or years to achieve the final objective. When it comes to the agreements that have been signed — and I do not know what they are off the top of my head — I would like to know how much progress Canada and our banks have made. I think that all of our banks will comply, but this is an ongoing process, and not a closed process. That is why I would like to know this. There are certain benchmarks they are supposed to achieve at some point. Currently, my main concern has to do with your mandate.
Mr. Sarrazin: Your point is noted. Thank you.
[English]
Senator L. Smith: Mr. Sarrazin, I'm just reading through the brief overview that you gave. You said, ``OSFI's legislation and supervisory guidance recognize the need for institutions to compete effectively and take reasonable risks.''
Could you give me an example of a working relationship you have with one of these financial institutions, just so we understand what type of interaction exists, how you influence the operation and what rules they have to follow?
You also said, the other point, ``Our legislation is clear that management and boards of directors are ultimately responsible for the management of their institutions and that plan administrators are responsible for the management of their pension plans.''
Can you give me an overview of the type of interaction you have? Tell me what are your two or three major objectives or challenges that you face with some of your clients or customers.
Mr. Sarrazin: You need to understand that OSFI is a relatively small organization — I think we've mentioned 640 employees — overseeing, regulating and supervising several institutions. The way OSFI has chosen to carry out its mandate is through what we call a reliance-based, principles-based and risk-based approach — loaded terms, and I will explain them.
``Principles-based'' means that we believe, in general, in setting not so much fixed, one-size-fits-all types of rules but principles that institutions have to abide by. Our corporate governance guideline would be a good example. It is available on our website; you can have a look at this piece of guidance. It is at the core of carrying out our mandate.
Our supervisory team, mainly in Toronto, as Marie-France alluded to earlier, is carrying out the supervisory function, not the regulatory function. When they interact with institutions, one of their most important tasks is to determine the risk profile of institutions. The analysis starts with what kind of governance we can see within the institution in question.
Our supervisory framework allows us to set or to analyze controls in place — governance, culture and so on — within an institution to first establish its risk profile, based, as I said, on governance and on its significant activities. That means which segments of the industry they fall in — are they more of a deposit taker or more of a credit card institution, for instance? Those have different types of risk. We establish a risk profile.
Based on that, that gets into the labelling that I was talking about earlier — a risk-based approach. Through ongoing monitoring, we identify the relevant risks at institutions, and we choose to spend time based on those risks. Much like an auditor does not audit every transaction in an institution, OSFI will not be looking at every transaction that an institution takes part in. We focus on areas of risk. These areas of risk can be informed either through trends in the market or through the particular risk profile of the institution.
For a principles-based approach in the regulation sector, we set principles rather than hard and fast rules. With risk-based, we don't look at everything; we look at the particular risk profile of each institution.
``Reliance-based'' means that we will help ourselves in the assessment of each institution from the work of auditors and actuaries who have to prepare documents, vis-à-vis these institutions. So that informs us, in exchange, and helps us set our minds as to where the risks are in each institution.
I've been talking so long and so fast that I'm forgetting what the question is.
Senator L. Smith: What is your major challenge when you go through this process with your clients? Can you give us an example, without giving names?
Mr. Sarrazin: The challenges are experienced mostly by supervisors. I'm not a supervisor. My functions are within the regulation sector. Thinking on my feet, challenges would be making sure we have the right information about an institution; filing requirements are very important, and our ability to monitor. Our IT systems are very important. We have been investing in renewing our IT systems, because this is key for us to keep an eye on every institution on the market.
Senator L. Smith: So your institutions would have to comply with the regulations that are set for them?
Mr. Sarrazin: Yes.
Senator L. Smith: For non-compliance, are you the people who would take actions against these folks to make sure they do comply; and whatever penalties they would have to come up with, you monitor that?
Mr. Sarrazin: They need to comply with their governing statute, with the regulations, with our guidelines and advisories.
We are, as I said earlier, reliance-based, in the sense that we do not have a strong presence or culture of compliance. We rely on the institutions' own controls to determine whether or not they have complied. There are duties within each institution to have controls in place that ensure that every piece of legislation or rule out there that they are under the obligation to follow has been followed. It's up to each institution to determine whether they have or have not violated certain rules. There are mechanisms in place where they are expected to inform OSFI immediately. That helps to ensure we become aware of any possible situation fairly quickly.
We do some evaluations as well on compliance. I'm not saying we're silent on this. But given that we are risk-based, the focus on each institution will be dependent on where the risk is, and the risk is not always compliance within institutions.
Senator L. Smith: Excuse my ignorance. Who evaluates OFSI's performance?
Mr. Sarrazin: We report to Parliament through a departmental performance report, a DPR.
Senator L. Smith: Is it Finance people who would do that? If you report to someone, usually someone has the responsibility to evaluate your performance at OSFI. Who does that, and where does the trail end? Is it with Parliament or Finance or what?
Ms. Caron: We report to Parliament through the Minister of Finance. Ultimately, yes.
The Chair: Are you audited by the Auditor General?
Ms. Caron: We were, until the year before last. We were audited by the Office of the Auditor General. Through their Budget 2012 cuts, they decided to let go of a few of the organizations they were auditing. So we issued a contract. We went out to tender, and we now have a private firm that is responsible for auditing our financial statements on a yearly basis.
The Chair: That's very interesting. You're giving us an idea.
Senator Hervieux-Payette: Where I was, we were visited by these people. There are some ratios, Senator Smith, that you have to comply with when you are in a specific field. If you don't, then you have to enter into a dialogue with these people and find a way to re-establish the appropriate ratio so that the risk will not be there forever and ever, so that you will not continue to go down but will make sure you have enough to cover the risk within your own company.
They are the ones that are entering into a dialogue with the institution if, at a certain point, they don't meet the criteria or regulation. In terms of the rules and regulations with which they have to comply, you have the regulations of the government, but there are also the guidelines. If you put that together, it's a book that would be this high, so it's quite extensive.
The Chair: Just so that Senator Hervieux-Payette doesn't have to be listed as one of our witnesses, could you confirm that for us?
Mr. Sarrazin: The height of the regulations? Can I ask that you rephrase the question?
The Chair: That wasn't a question. She was giving evidence.
Senator Hervieux-Payette: As a lawyer, we know that regulations have to comply with the legislation. But here, I must say I would never have known that the guidelines were almost as stringent as the regulations, and there was no elementary review of these guidelines. They are very specific and they are very numerous. So let's forget about the size of the book, but the guidelines are a very special thing in OSFI, and they are very detailed. I hope this is helpful.
The Chair: Yes, I think that's very helpful. Senator Smith has a follow-up question.
Senator L. Smith: Maybe the senator can answer this one too.
[Translation]
Senator L. Smith: The 2007-08 collapse of financial markets has had some repercussions.
[English]
What was the impact on you people? What challenges did you face? Could you walk me through and give some examples of what you lived through? How did that impact your operations and your relationship with your clients?
Mr. Sarrazin: For the government's part, I think the Department of Finance was fairly quick in Budgets 2008, 2009, and 2010 to react to the crisis and create the required powers, if you will, in the legislation to allow for resolution of problem companies, were there to be some.
With respect to the impact on OSFI, maybe Ms. Caron can answer, in terms of numbers, what the trend has been since the crisis. My impression has been that we have been increasing our resources on the supervisory front as a result, so more presence in the field and at each institution, and allowing ourselves to go to the risks. I said ``risk-based.'' There's a certain budget you have in terms of numbers of hours if you have certain staff. Increasing the number of staff increases the number of hours that you can spend on risk that you otherwise might not have paid attention to.
Ms. Caron: We've increased our resources, in terms of number of people, by over a hundred employees since 2007 and 2008.
Senator L. Smith: Is this because the regulations have increased or because your workload has increased?
Ms. Caron: It's mostly because of the crisis and our ability to manage and react to the crisis, and also lessons learned. There have been increases starting in 2007 and 2008, and after. There have been increases since, to a lesser extent, but some of those increases in staff complement are because of the lessons learned from the crisis.
Senator L. Smith: One last question. Could you give me two or three lessons learned that you could share with us so that we could be informed?
Mr. Sarrazin: Operational risk, credit risk, paying more attention to a larger variety of risks that institutions are facing.
Senator L. Smith: If I understand correctly, the scope of the issues exploded or expanded, and the lesson learned was that you had to not necessarily be more up to par, but you had to be able to identify and then fix these issues that your clients faced.
Mr. Sarrazin: I think we have an expression for it — it's supervisory intensity, which has perhaps increased a notch and which explains more hours, more time and more staff involved in supervision.
The Chair: Can you tell us what your total number of staff is now?
Ms. Caron: The exact number is 647.
Senator Buth: I would like to shift over to the evaluation of pension funds.
Can you tell me, with pension funds that are federally supervised or had federal oversight, what are those? These are private funds. What essentially are you looking at? How are the plans evaluated?
Mr. Sarrazin: This is when bringing your OSFI Act with you comes in handy.
The pension plans that we look after are defined in our own constituent legislation. It has the same meaning as in subsection 2(1) of the Pension Benefits Standards Act, 1985 or the meaning assigned by the definition of ``pooled registered pension plan'' in subsection 2(1) of the Pooled Registered Pension Plans Act. Basically, you're looking at federal pension plans under the 1985 act.
Senator Buth: Are those private company plans? Federal oversight of pension plans.
Ms. Caron: They're federally regulated private pension plans.
Senator Buth: Would those be bank pension plans, insurance company pension plans and anyone's pension plan?
Mr. Sarrazin: As enacted under that piece of legislation, yes, it would be.
Senator Buth: How many pension plans would you review in a year? How often would you review them?
Mr. Sarrazin: I don't have that figure.
Ms. Caron: No, I don't have that figure, either.
Senator Buth: I'm interested in when you look at a pension plan, what are you looking at? What can you do about it? Do you look for the weaknesses in the plan, the liabilities?
Mr. Sarrazin: You would look at their asset base and how the assets are performing for sure vis-à-vis the actuarial liabilities and future obligations of the plan and determine if they are overfunded or underfunded.
Within OSFI, there is a special group dedicated solely to pension plans because they are so unique and so different than financial institutions. I would have to go to their staff to give you more of an answer as to what we look for. I can answer your question only in general terms. I'm sorry.
Senator Buth: I think it would be helpful for us to understand what you're doing with the pension plan. Could you provide me with a summary of what you do with them?
Ms. Caron: If I can refer you to the Reports on Plans and Priorities, on page 18, we have a program summary for the pension plans. I don't know if you want me to read from that.
The Chair: You can give us a summary.
Ms. Caron: It involves regulating and supervising federally regulated private pension plans to determine whether they are meeting minimum plan funding requirements and complying with their governing laws and supervisory requirements. It is also risk-based, the same basis as our supervision group. It is a risk-based approach.
We don't have the exact numbers, but I believe it is outlined in our annual report, which is public information and published on our website.
Senator Buth: Can you tell me what powers of enforcement you have?
Ms. Caron: That is under the Pension Benefits Standards Act. That legislation governs the private pension plans that we regulate and supervise.
Senator Buth: Is the $909,000 that you're asking for related to the actuarial service of the pension plans?
Ms. Caron: No, not at all. The $909,000 is strictly related to Office of the Chief Actuary, and it is for them to provide actuarial evaluations and reports on a variety of pension plans, but not the ones that we supervise here. The Canada Pension Plan is one of the key plans that our actuary is looking at. They are looking at the pension plans for the appointed judges and for parliamentarians. They also look after the Canada Student Loans Program, not in terms of pension plans but in terms of providing an actuarial report on student loan debt.
There are a variety of actuarial services for which they produce reports, not on an annual basis. Most of them are statutory, and they're based on a three-year cycle. They are also tabled in Parliament.
Senator Buth: Is the Office of the Chief Actuary within your organization?
Ms. Caron: Yes.
Senator Buth: It wasn't clear to me that it was actually within your organization. We've had the Chief Actuary here to talk about what they're doing. So this $909,000, then, is to support the Office of the Chief Actuary?
Ms. Caron: It's to support part of the work that they do because obviously they do a lot more, which is based on cost recovery through MOUs they sign with different organizations that require their services.
Senator Buth: Okay. That's very helpful. Thank you.
The Chair: I'm glad you explained that. I was wondering about the partial funding, and you explained that for us.
Senator Eaton: I'd like to stay on the topic of pensions.
Do you regulate government pension plans or the post office pension plan? Are those considered private or federal government pension plans? Who would regulate those?
Mr. Sarrazin: I don't believe we regulate those.
Ms. Caron: No, I don't think so, but I cannot say I'm 100 per cent sure about that.
Mr. Sarrazin: It would be the Chief Actuary who renders services.
Senator Eaton: Would you regulate union pension plans? There's a great deal of talk right now in Canada that a lot of pension plans are not long-term, they're not viable and there's not enough money in them. Should we be raising the age again? Should we be putting more money into pension plans?
Are you strictly very private pension plans? And by that I mean a company that sets a pension plan for their employees. Are those the ones you go in and look at? You would not look at, for instance, something as private as a union pension plan or the teachers' pension plan, would you?
Ms. Caron: They have to be federally regulated pension plans.
Senator Eaton: If it was a national union, then they would be federally regulated, wouldn't they?
Mr. Sarrazin: They would have to fall under the Pension Benefits Standards Act, 1985. I don't know which ones they are because it's not my line of responsibility. We probably have a full list of the pension funds that we look after on our website.
Ms. Caron: We have the number in the annual report. There's a lot of information in our annual report.
Senator Eaton: We should probably get the annual report.
To switch gears again, once you've looked at companies and assessed their risk ratio, do you go back every three to five years, or you do check a company once and then it's checked off? How often do you go into the banks, for instance?
Mr. Sarrazin: Each bank would be a different answer.
Senator Eaton: Well, give me some examples.
Mr. Sarrazin: Okay. Well, the work that a supervisor has to do in a given year is decided at the beginning of the year, so there are a certain amount of hours he's able to dedicate to his portfolio of institutions. He will look at the risk profile at the beginning of the year and establish a work plan, if you will, for the entire year dedicated to where the risks are, as I alluded to earlier. As the year progresses and risks change, he's allowed to change his schedule and allow more time for developing risks that were not anticipated.
At the end of on-site reviews, he will determine if he can satisfy his concerns with desk audits or just analytics and monitoring. To the extent that that is not sufficient and on-sites are required, as many on-sites as he thinks are necessary, he will perform, so go to the institution, go through their documentation, ask questions, run some stress tests. He will note down the deficiencies or the perceived deficiencies, and at the end of the exercise, he will send a supervisory letter to the institution saying, ``In the view of this supervisor, this, this, and this need to be addressed.''
It is up to this person to escalate these issues high enough in the institution for them to receive proper attention from the proper levels at the institution. After a certain time, we issue a follow-up letter or document, and we verify whether —
Senator Eaton: You follow to make sure they've done it?
Mr. Sarrazin: Yes.
Senator Eaton: If you go to see Bank A this year, will you go back next year or three years from now to re-evaluate what they're doing?
Mr. Sarrazin: I can't speak for supervisors, but I've seen this happen, so I might as well share this as our answer: When we think follow-ups need to be carried out, with a set timeline because the risk is high enough and suggests that quick action is warranted, we also establish timelines with the institutions and goals for things to change on a certain path. It would be with respect to this timeline that we would follow up at the right intervals. To your question: Yes, indeed we do follow up. It's not once and then we forget.
Senator Eaton: No, no. I just wanted to say it's an ongoing process.
Mr. Sarrazin: Definitely.
Ms. Caron: It's a rotational basis, depending on the results of the desk audit and the follow-up that is required from each institution.
Senator Eaton: I see from your paper, Mr. Sarrazin, that you haven't mentioned mortgage companies. Are they part of your regulatory —
Mr. Sarrazin: Mortgage insurance companies are labelled as property and casualty insurers, so they would fall under our supervisory responsibilities, yes.
The Chair: Including CMHC?
Mr. Sarrazin: CMHC is not a company. However, I believe in 2012 OSFI was asked to play a role in terms of reporting to the minister on the status and financial situation of commercial activities for CMHC.
Senator Eaton: So thanks to you, we couldn't have a Freddie Mac in this country, right?
Mr. Sarrazin: I can't promise anything for the future.
The Chair: Your answer is no, or yes.
Mr. Sarrazin: We do our best.
The Chair: I'm sure you do, and we appreciate that.
Senator Callbeck: Thank you both for coming this evening. I have two or three questions I wanted to ask you.
I want to go back to what we were talking about. You direct companies to take corrective measures. If the companies do not take those corrective measures, do you have the authority to shut that company down, or who does that?
Mr. Sarrazin: That's a very good question. Before we would shut down an institution, a lot of things would happen. First, we talk about supervisory intensity, so identify risk, be present at the institution, notify them of weaknesses, give them the time to react and bring the corrective measures.
If they don't comply with our requirements, by virtue of our statute — and this is where we leave the guideline world and jump into the statute world — OSFI has certain intervention powers. We have the power to order institutions to comply. We have not used it much because we have moral suasion, as we call it, within OSFI. It has worked fairly well, perhaps because of the good relationship we have with our industry and the trust that they have in our capacity to point them to weaknesses. We get the reaction that we need from the ongoing relationship we have with the institutions.
To the extent that we would be in the situation you're describing, which is refusal to comply, we have the statutory authorities, and if they did not comply with those, the order of compliance can be court-enforced as well. That's escalation up to that level.
To the extent that the financial situation of the institution would decline to a point where its solvency would be at stake, we also have the power to take control and, as you said, eventually force the shutdown. Fortunately, that does not happen very often.
Senator Callbeck: That hasn't happened in, say, the last 10 years?
Mr. Sarrazin: I cannot recall, personally. I've been with the office for eight years now and that has not happened.
Senator Callbeck: That's good.
You're a self-financing agency, and I see in the paper we were given here, the chart on the Main Estimates, that the expenditures for 2011-12 were $910,226. Statutory items, apparently you took in $13,515,038, so you're left with a balance of $12,604,812 for that year. What happens with that $12 million?
Ms. Caron: What happens is the Main Estimates are being produced on a modified cash basis, and OSFI produces financial statements based on an accrual basis of accounting. There are two different accounting languages here. What happens for the purpose of the Main Estimates is that it's a difference between the two bases of accounting.
What happened in particular there is because in our financial statements we have accounts receivable, and in that particular year we sent our invoices to the industry in February, our accounts receivable balance was high at March 31 when we closed our financial statements, and when we produced our Main Estimates, because it's on a cash basis, all that money owed to OSFI came in in April and May. That's why you see the balance of the $12 million. It's the difference in the basis of accounting from an accrual basis to a cash basis.
Senator Callbeck: What were your accounts receivable, let's say March 31, 2013?
Ms. Caron: They were $6.8 million.
Senator Callbeck: How long do companies or institutions have to pay that?
Ms. Caron: It's paid 30 days, the same as any other invoice.
Senator Callbeck: You haven't had problems with collection?
Ms. Caron: No. We hardly ever have any problems. These are financial institutions and life insurance companies, so they're pretty good at paying their bills.
Senator Callbeck: On another topic, the Canadian chartered banks, are you just interested in their domestic activities, or do you look at the international activities of those banks?
Mr. Sarrazin: Our job being to ensure their solvency, liquidity and stability, we would be missing a large part of the picture if we were to stick to the domestic part, so we do have to pay attention to their international activities, yes.
Senator Callbeck: We hear a lot about the tax havens and money going there. Are you involved in that at all?
Mr. Sarrazin: We look at what banks do that could attract negative consequences on their solvency. I'm not familiar with how tax havens could play a role in the solvency of a bank. If it became an issue at a bank and could affect its financial situation, we would label this as a risk, as we were saying earlier, and we would pay attention, but I have difficulty conceptualizing how that could happen.
Senator Callbeck: The 909,000 that's going to the Chief Actuary, what really is the total expenditure of the Chief Actuary? You said it's that plus what they take in in fees.
Ms. Caron: For the year 2013-14, for the year that is of interest to us, their planned expenditure is $7.6 million.
Senator Callbeck: That's part of the $140 million?
Ms. Caron: Yes.
Senator Seth: We are aware that in the past few weeks the Canadian dollar has been decreasing in value tremendously. What would be the effect or the impact to the operational office, to your office? I'm talking about the pension plan, Old Age Security, Canada's student loans programs, et cetera. How will it affect this? How do you manage it?
Mr. Sarrazin: Just a point of clarification: Are you talking about our own budget and how it affects OSFI?
Senator Seth: Would the value of the dollar going down now affect all these things and the values?
Ms. Caron: It would have no effect on our operational budget from the office. All our activities are in Canadian dollars.
Senator Seth: I understand that.
Ms. Caron: It would have no effect on Canada Student Loans, nothing in our budget. We don't do business in foreign currency. All our activities are done in Canadian dollars, so it wouldn't affect our own budget at all.
Senator Seth: What do you consider the biggest risk for the well-being of the financial institution, just like a pension plan? What do you worry about the most with these items? You have different programs. What is something you consider very important for your well-being and that you have to manage most appropriately?
Mr. Sarrazin: If you take a look at our plans and priorities, one of the concerns that have been noted there is to pay attention to continuing low interest rates — I think someone coined the expression ``low for long'' — so how a low interest rate for a long period of time affects pension funds and how that affects insurance companies as well. We are monitoring the impact of interest rates and stagnating low interest rates.
Senator Seth: Do you preplan all those things, in case it happens? Do you preplan not seeing those risk factors?
Mr. Sarrazin: I think the low interest rates have been around for quite some time now, so no one can really say that they are caught by surprise anymore by this.
We expect certain behaviours or certain reactions from financial institutions to try to cope and predict how long the situation will last.
Senator Seth: Your planning is already done for that?
Mr. Sarrazin: Yes. The planning that is relevant for us is the planning that institutions make to cope with the situation; for instance, with non-performing assets because of low interest rates, institutions should be trying to invest in other areas to diversify and to combat the impact that low interest rates have on their assets.
Ms. Caron: In our Report on Plans and Priorities, again starting on page 6, we have some discussion of our risk analysis, both on the external and internal risks. I can refer you to that document as well.
[Translation]
Senator Chaput: A number of my questions have already been asked and answered, but I still have two that will be fairly brief. In the 2013-2014 Main Estimates of the Office of the Superintendent of Financial Institutions, there are some overdue accounts. What exactly do you mean by that, and is this a regular occurrence?
Ms. Caron: I may have misspoken, but I did not mention any overdue accounts; it is rather a matter of accounts receivable.
Senator Chaput: Are there any overdue accounts?
Ms. Caron: There are very few of those. The figures are published in the financial statements, but they are minimal. What I talked about earlier were accounts receivable.
Senator Chaput: The figures I am talking about come from the budget and not from what you talked about earlier. Here is the excerpt I am talking about: ``On the appropriation basis of accounting, OSFI reported a budgetary surplus of $12.6 million in 2011-12, largely due to a higher level of outstanding accounts receivable...''
Ms. Caron: Those are actually accounts receivable.
Senator Chaput: Is that not problematic?
Ms. Caron: No, not at all.
Senator Chaput: Your office's 2013-14 report on plans and priorities states that you will be taking on a new role as the registrar and supervisor of pooled registered pension plans. What does that new responsibility, that new role, entail?
Mr. Sarrazin: I am not very familiar with the concept, but a new piece of legislation was passed regarding the creation of those pension plans.
Ms. Caron: The English term is pooled registered pension plan.
Senator Chaput: Is that a new concept?
Ms. Caron: Yes, it is new.
Senator Chaput: Is that a new role you will have to take on?
Mr. Sarrazin: We are the registrar of those plans. As for the exact role the Office of the Superintendent of Financial Institutions is expected to play, I will not venture a response. Sorry.
Senator Chaput: What is the difference between these plans and those that already exist?
Ms. Caron: I know little about this, but these plans are dedicated to small companies without pension plans. So we are talking about small companies that cannot afford to provide pension plans to their employees and would like to join forces with other companies in order to create and provide a pooled pension plan for the employees. That is the idea for a number of companies that want to join forces in order to be able to provide their employees with pension plans.
As Philipe was saying, we are only the registrar, so all we do is consider the requests we receive. To date, our role is still unknown.
Senator Chaput: Is this a new pension plan?
Ms. Caron: Potentially. This is not a new pension plan as such. A new piece of legislation was created to enable companies to proceed in this way.
Senator Chaput: So, to use the term someone brought up earlier, would this become a new federally regulated pension plan?
Ms. Caron: That is something else, since a different piece of legislation regulates the pooled registered pension plan for which, to date, I think no regulations have been drafted. So this approach is at its very beginnings.
Senator Chaput: Do you have any idea of why that is? Did someone suggest that?
Ms. Caron: That is an excellent question, but I do not have an answer to it. A request was definitely made.
Senator Chaput: So a request was made at some point.
Ms. Caron: A request was definitely made, perhaps by companies or perhaps even by company employees who did not have a pension plan.
Senator Chaput: What is the name of this legislation?
Mr. Sarrazin: It is called the Pooled Registered Pension Plans Act.
Senator Chaput: Was this just passed?
Ms. Caron: It was passed within the last 12 months. I do not have the exact date, but it was within the past year.
[English]
The Chair: The point that Senator Chaput made in relation to comptes en souffrance — is that your wording? You say it shouldn't be that wording.
[Translation]
Ms. Caron: I will definitely check the translation when I return to the office. If the term given is ``comptes en souffrance,'' it must be a translation error.
[English]
The Chair: Do you think we should speak to Treasury Board about that or is that you?
[Translation]
Ms. Caron: Definitely not. We are really talking about client accounts. Invoices were issued in February and March, so in our financial statements as of March 31, there was a relatively high number of client accounts and not overdue accounts.
Senator Chaput: If allowed to linger, unpaid accounts can become overdue accounts.
Ms. Caron: Yes, they can, but as I said in response to an earlier question, the invoices we send out are intended for financial institutions, which are mostly involved in pension plans and life insurance. All those companies pay their bills. I cannot say that we have zero overdue accounts. We do have a few, but the number is minimal.
The Chair: Who will correct that? Will you do it?
Ms. Caron: You mean the overdue accounts?
The Chair: Yes.
Ms. Caron: Yes. The superintendent has the authority to write off any overdue accounts. A process must be in place for reviewing the collection process and overdue accounts, and then recommending to the superintendent to write off certain accounts.
[English]
The Chair: Before I go to the second round, I have a couple of short questions that may provoke some other questions. Through my researcher, I have determined that your expenditures between 2009 and 2013 — the total amount that you spent — increased 43 per cent. It was $113 million; you're now telling us that it's up to $140 million for this year.
First, do you confirm those figures? Second, who supervises you to say you can increase by those kinds of numbers when every other department is reduced in the amount they can spend?
Ms. Caron: Because we are a cost-recovery organization, we meet with the industry associations every year, in the spring usually, and we present our budget to the industry. Ultimately, they are paying our bills; they pay the invoices.
So every year we go to the industry. We have an in-person meeting with them where we discuss the priorities of the office and the concerns of the industry. At the same time, we present our budget.
In the years I've been with OSFI, there has never been any concern about our budget. To the contrary; they are glad that we're paying attention to the industry, and they have no concerns with the fact that we increase our resources in order to supervise and make the system right.
The Chair: That's interesting. That's a significant increase. The staff increase from 2009 to 2013 was 24 per cent. That was up to 622, and now you're up to 647. Same thing? Hire on more — doesn't matter; keep bringing them in?
Ms. Caron: We have solid business plans that we present to the industry. It's not just increasing resources for the sake of increasing resources. We do have plans and priorities. We do have a solid budget that we present to them, which we discuss on a yearly basis.
Like I said, they have no concerns with our budget.
Mr. Sarrazin: If you will allow me to complete the answer, the period you are quoting is the period in the aftermath of the financial crisis. As we were discussing earlier, part of our increase in resources has been in response to the crisis, as well as in response to adjustments to our mandate. We're talking about CMHC being sent our way for some additional responsibilities. That, coupled with some of our information technology expenses to take care of an aging information technology system, partly explains the additional resources since 2009.
Ms. Caron: The other part of the increase that you would not see in another government organization is the fact that we pay our own leases for our buildings. We are not in a government building. Through our expenses, we do have to pay our leases. That is different from another government organization, which would be covered through an appropriation and managed by PWGSC.
The Chair: And you pay quite a bit in professional fees to outside consultants as well?
Ms. Caron: Yes. In the recent years, as Philipe mentioned, we did have a number of consultants related to our infrastructure renewal strategy. Our IT systems were aging, so we have a five-year strategy to renew our systems. We are currently in the fourth year of that five-year strategy. A number of consultants have been hired for that reason, along with other consultants throughout the organization.
The Chair: You spent $5 million on transportation as well. Is that sending people to all the institutions around the country?
Mr. Sarrazin: As an international regulator, we take part in leading-edge development of international rules. We like to be present on the international scene to influence and share our experience with other regulators, so there are a few international travel budgets that are required to accomplish that.
As I said in answer to another question, we do need to pay attention to the international activities of our institutions.
The Chair: We're not objecting to that. We're just trying to find out how you spend the money you bring in. You're helping us very much in that regard.
We looked at Bill C-4 before Christmas. There was a recommendation in there — it is now law — that you will be implementing and following allowing for public servants to serve on the boards of banking institutions, which previously was not allowed.
Was that based on a recommendation by you to the minister? Where does that come from?
Mr. Sarrazin: I honestly don't remember what started the discussion, but we were involved in early discussions with the Department of Finance on that particular provision. For the actual policy and reasoning for the decision, I would have to refer you to the Department of Finance, because they are the ones who carry out the policy.
The Chair: Since you're the supervisor and regulator on this, I just wondered if you participate in these initiatives, especially in your position. That's why I was interested in seeing that you're involved in policy development.
Mr. Sarrazin: Yes.
The Chair: There's another policy development we've read a little bit about, and that is women on boards and trying to encourage more women to serve on boards — maybe setting a quota. Are you involved in that discussion?
Mr. Sarrazin: The office is involved in a number of initiatives that are related to governance matters. In 2013, we issued a refreshed, updated corporate governance guideline. In the footsteps of that guideline, we are now consulting on an advisory with respect to early notification of changes to boards.
If I can refer to the corporate governance guidelines for a moment, I guess OSFI's focus and concern about boards is that they have the right complement. By that we mean the right skills, the right experience and the right financial institutions experience. So our focus is an experienced board with notions of risks in the areas where the particular institution is present.
I would say that skills and experience have no gender, so we would not necessarily pay attention to the complement in terms of gender but in terms of skills.
The Chair: Thank you for that. Tell me about this issue of some banking management being concerned that you may wish to require notification of senior appointments within banking before they happen. Where did that come from, and why would you be involved in that?
Mr. Sarrazin: This refers to an expectation that we had included in the corporate governance guidelines that may not have been picked up by stakeholders, but this has been present in that guideline for more than a year now. This latest advisory that we are consulting on currently aims to give more details as to what the office's expectations are for early notification simply because the office believes in meeting with directors on a timely basis in order to set the stage and inform these directors of the OSFI expectations, guidelines and — as I think we were saying earlier — the volumes of guidelines and responsibilities that institutions have and, I guess, the philosophy of the office vis-a-vis governance. I was also speaking to how important it is to determine the risk profile of institutions, starting with their governance. So it is good practice for OSFI to meet with boards, which we have been doing for years now. This practice would simply be formalized in a document.
The Chair: In keeping with that practice, can you give us any information on who might be replacing the superintendent?
Mr. Sarrazin: I wish I knew.
The Chair: She's long overdue to be replaced, I understand.
Mr. Sarrazin: I would not have an opinion on that, but the process —
The Chair: Well, she was appointed for seven years, which has expired; let's put it that way.
Mr. Sarrazin: Correct. She was appointed for seven years. There is a government process to replace her, but —
The Chair: You're not going to share with us any preliminary information. Nothing has happened since yesterday?
Mr. Sarrazin: Nothing has happened since yesterday that I am aware of, no.
Senator Callbeck: It mentions here the 2014 Actuarial Report on the Employment Insurance Premium Rate. Is that report done every year, a forecast, a break-even point?
Ms. Caron: I believe it's every three years.
Senator Callbeck: It talks about the projected Employment Insurance operating account as of December. Is that report done for a calendar year or for a government year?
Ms. Caron: The Employment Insurance account has, I believe, a December year-end. That's why we refer to December as the year-end.
Senator Callbeck: Do you know what the projected balance is for December 2014?
Ms. Caron: I would not know. I know they publish their report on a periodic basis. I believe it's every three years, and any information would be in that report. I'm not privy to that information.
Senator Callbeck: But that report is public?
Ms. Caron: That report is public. The latest was published in October 2013, so it is public information. It is available on our website, under the actuary.
Senator Callbeck: That report would give us a projection for December 2014.
Ms. Caron: Again, I cannot confirm that. It would be in the report, but, yes, I think that would give you the projection for 2014.
Senator Callbeck: Okay. Thank you.
Ms. Caron: And it is available on our website.
The Chair: Well, Ms. Caron and Mr. Sarrazin, thank you very much for being here. You've helped us to understand the work of the office. We wish you well. We came through the economic downturn very well because of the good work that you're doing and the good financial institutional base that we have, and we thank you for continuing to maintain that.
If there are ever any issues that you want to bring before our committee or discuss with us, we'd be pleased to hear from you at any time. We don't see you that often, but whenever we do, it's always very helpful. Thank you.
Colleagues, this meeting is now concluded.
(The committee adjourned.)