OSFI issues final version of Guideline E-4 (Foreign Entities Operating in Canada on a Branch Basis)

On June 28, 2021, the Office of the Superintendent of Financial Institutions Canada (OSFI) issued its final version of Guideline E-4: Foreign Entities Operating in Canada on a Branch Basis (Guideline E-4). Previous guidance in respect of foreign insurance branches and bank branches (Branches) was contained in Guideline E-4A: Role of the Chief Agent & Record Keeping Requirements and Guideline E-4B: Role of the Principal Officer and Record Keeping Requirements, respectively. OSFI has now consolidated its guidance in respect of foreign insurers and banks (Foreign Entities).

As discussed in greater detail below, Guideline E-4 provides for the following:

• OSFI requires individuals who have the authority and responsibility of overseeing the business in Canada for, or on behalf of, the Foreign Entity (collectively, Branch Management) to be knowledgeable on all applicable legislation, regulations, guidelines and any other supervisory or regulatory matters related to the business carried on through the Branch in Canada
• Where a Foreign Entity’s home office performs material functions on behalf of the Branch, either directly or through its own outsourcing arrangements, OSFI expects Branch Management to document such arrangements
• Where Branches store records regarding their business in Canada (Records) outside of Canada (pursuant to an exemption under the Insurance Companies Act or the Bank Act, as applicable), OSFI requires immediate, complete, and ongoing access to such Records
• Records must be updated and accurate as at the end of each business day

All Foreign Entities operating in Canada on a Branch basis must be compliant with Guideline E-4 by January 1, 2022.

Branch management

Guideline E-4 indicates that OSFI expects the composition of Branch Management to be commensurate with the overall size and complexity of the Foreign Entity’s business in Canada. New entrants in particular should consider this expectation as their Canadian business develops. While the historical guidance focused primarily on OSFI’s expectations for the chief agent or the principal officer of the Branch, Guideline E-4 takes a more holistic approach in focusing on the overall management of the Branch. 

OSFI expects Branch Management to be responsible for the effective adaptation, implementation and oversight of a Foreign Entity’s:

• Business objectives, strategies and plans
• Risk management policies and procedures, and related risk management controls which should include, among other items, appropriate goals, benchmarks, parameters and limits as to the amount of risk related to the business in Canada that the Foreign Entity is willing to accept
• Policies and procedures to manage the assets and liabilities recorded on the Branch’s books and related accounts
• Independent assessments of the adequacy and effectiveness of the controls referenced above. An independent assessment may be obtained from individuals or groups designated with that role, such as internal audit or risk management (either at the Branch or the Foreign Entity’s home office), or qualified third parties. Additionally, Branch Management should be aware of any independent assessments conducted by the Foreign Entity’s home office relevant to its Canadian business and any resulting implications.

OSFI also requires Branch Management to be knowledgeable on all applicable Canadian legislation, regulations, guidelines and any other supervisory or regulatory matters related to the Foreign Entity’s federally regulated business in Canada carried on through the Branch.

We recommend the use of a regulatory compliance management system to ensure that Branch Management is aware of and, where appropriate, receives training on applicable legislative and regulatory requirements. The requirement that Branch Management be knowledgeable on applicable Canadian legislation generally applies to Branch Management as a whole and not to each member of Branch Management or to any particular individual.

Transfer of funds between the foreign entity’s home office and its branch

Where a Foreign Entity’s home office performs material functions on behalf of the Branch, either directly or through its own outsourcing arrangements, OSFI expects Branch Management to document such arrangements. All outsourcing arrangements should be compliant with OSFI Guideline B-10: Outsourcing of Business Activities, Functions and Processes and any future guidance on this topic.

This includes the clear documentation of any arrangements that involve the flow of funds between the Foreign Entity’s home office and its Branch. Branch Management must provide OSFI with ten business days advance notice of any proposed fund transfer(s), or series of proposed fund transfers, to the Foreign Entity’s home office that materially deviates from the documented process provided to OSFI.

Record keeping requirements

It is important to note that if Branches store Records outside of Canada (pursuant to an exemption under the Insurance Companies Act (the ICA) or the Bank Act (the BA), as applicable), OSFI requires immediate, complete, and ongoing access to such Records.

Branches must also ensure that:

• Records are updated and accurate as at the end of each business day

• Records are capable of being reproduced in an intelligible written form within a reasonable period of time

• Electronic Records are accessible without incurring additional costs and by using readily available commercial applications

For certain Records, such as reinsurance arrangements or files on more complex activities, OSFI may require the Branch to produce original documents.

OSFI also requires that such Records contain sufficient detail to allow for:

• OSFI to conduct an examination and inquiry into the business of the Branch

• OSFI to manage the Branch’s assets, prior to the appointment of a liquidator, should OSFI take control of the Branch’s assets in Canada

• If applicable, a liquidator to conduct an effective liquidation of the Branch’s assets in Canada

Accountability to OSFI of Foreign Entities and their Branches

Branches must provide prompt notice of any substantive changes or issues impacting the management and/or operations of the Branch to OSFI.

OSFI also requires early notice of any potential changes to Branch Management, including the qualifications of any new members of Branch Management and any circumstances that may adversely affect their suitability for the role.

Conclusion

Guideline E-4 does not contain any material changes to OSFI’s expectations for Branches, or their chief agents or principal offers, as the case may be, in Canada. However, we believe the updated structure of the Guideline may signify that OSFI could be more focused on the overall governance of Branches, particularly in cases where the chief agent or principal officer are the only representatives in Canada. In these cases, it is generally recommended that a steering committee consisting of individuals from each of the Branch’s operational areas be established.

The publication of the final version of Guideline E-4 is timely as the amendments to the record-keeping requirements in the ICA and the BA pursuant to Bill C-4: An Act to implement the Agreement between Canada, the United States of America and the United Mexican States became effective July 1, 2021. These amendments will permit certain Branches to store Records outside Canada, so long as the Branch can provide OSFI with complete and immediate access to such Records. 

Please do not hesitate to contact a member of Dentons’ Insurance team or Banking & Finance team with any questions or if you require assistance with an insurance or bank regulatory matter.