June 26 update: Canadian financial regulatory responses to COVID-19

Office of the Superintendent of Financial Institutions (OSFI), Financial Services Regulatory Authority of Ontario (FSRA), Autorité des marchés financiers (AMF), British Columbia Financial Services Authority (BCFSA), and Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) adjust regulations and guidance for banks, credit unions, financial intermediaries and other market participants.

29 June 2020

Despite the challenges to the global economy and significant pressures on the financial sector, Canada's financial regulators continue to issue guidance explaining and expanding the regulatory requirements applicable to financial institutions.

Since the publication of our latest articles on May 13, 2020,[1] there have been several updates published by federal and select provincial financial services regulators. These updates include notices specific to the economic conditions associated with COVID-19, as well as significant regulatory changes unrelated to COVID-19. In this article, we have compiled the key notices and set out links to the regulators' websites from up to and including June 26, 2020.[2]



The notices relate to the following sectors and categories:


Banks

  1. OSFI's Updated Key Measures for Federally Regulated Deposit-Taking Institutions

On May 21, 28, June 11, and June 25, 2020, OSFI updated its published FAQs for federally regulated deposit-taking institutions about measures it has taken to address issues stemming from COVID-19.

  • Among other updates, OSFI provided various answers to questions regarding restrictions on dividends stemming from OSFI's March 13 announcement, and addressed the issue of how loans funded by an institution in collaboration with federal temporary lending programs should be reflected in Liquidity Coverage Ratios.
  • Please also refer to OSFI's published FAQs for federally regulated financial institutions (FRFIs), which was updated on May 28, 2020 to questions regarding: (i) how much time a FRFI will have if OSFI grants it a filing extension request; (ii) if regulatory filing extensions, or other relief, is only available for the regulatory information submitted via the Regulatory Return System; (iii) how OSFI will monitor financial risk in a timely manner if FRFIs are provided regulatory return extensions; and (iv) how long OSFI will offer regulatory return filing extensions.
  1. OSFI's Updates to the 2020 Regulatory Return Implementation Deadlines

On June 8, 2020, OSFI's Financial Information Committee announced various changes to the 2020 regulatory return implementation deadlines, including that the formal reporting is postponed for:

  • Interbank and Major Exposures Return (EB/ET 2L) from Q3 2020 to Q1 2021.
    • The test data submission scheduled for Q2 2020 will also be postponed to Q4 2020.
  • HELOC return (J2) from September 30, 2020 to March 31, 2021.
    • OSFI has stated that deposit-taking institutions will be expected to participate in an ad-hoc test based on September 2020 data to be submitted by November 15, 2020.
  • Trading Income & GoC Securities Trading Income Return (A3) from Q1 2021 to Q1 2022.
    • The test data will also be postponed from Q2 2020 to Q1 2021.
  • Net Stable Funding Ratio Return (DT1) from Q3 2020 to Q1 2021.
    • It will be subject to Late and Erroneous Filing Penalties (LEFP).
    • Deposit-taking institutions will be expected to formally resubmit all four 2020 quarterly filings in Q1 2021 without penalty.
  • Additionally, any return changes that OSFI was considering implementing in fiscal 2021 will be deferred to fiscal 2022.
  • OSFI has also advised that the following regulatory return implementations will continue as scheduled for Q1 2021:
  1. OSFI Announces that Domestic Stability Buffer level remains at 1%

On June 23, 2020, OSFI announced that the Domestic Stability Buffer will remain at 1.00% of total risk-weighted assets, unchanged from the level set on March 13, 2020.

Credit Unions

  1. BCFSA Issues Liquidity Management Guideline

On June 8, 2020, the BCFSA issued its Liquidity Management Guideline (the "Guideline") that applies to British Columbia credit unions.

  • BCFSA has set January 1, 2021 as the effective date of the Guideline to give credit unions time to meet the expectations that are set out in it. These expectations include:
    • A credit union's liquidity risk appetite (the maximum level of risk that the credit union will accept in its business) must be approved by the board of directors, who must ensure that it is clearly communicated to all stakeholders;
    • A credit union must have a robust liquidity risk management framework that enables it to address its daily liquidity obligations and withstand periods of stress;
    • A credit union must develop and document policies, procedures, and practices to manage liquidity risk in accordance with the board-approved risk appetite;
    • A credit union must understand the role of the statutory liquidity manager and the legal, regulatory and operational limited of the transferability of liquidity;
    • A credit union must have sound processes in place for identifying, measuring, monitoring, and managing liquidity risk;
    • A credit union must regularly undertake liquidity stress tests to measure its exposures to possible future liquidity stresses;
    • A credit union must maintain a cushion of high-quality liquid asset that can be used in liquidity stress scenarios;
    • A credit union must has information systems and controls in place that enable senior management and the Board to review compliance with liquidity risk management policies;
    • A credit union must have a Liquidity Contingency Plan that sets out strategies for addressing liquidity shortfalls in emergency situations; and
    • A credit union must be in continuous communication with BCFSA during times of stress.
  • A summary of BCFSA's responses to the comments and input it received as the Guideline was developed and is included.

Insurance

  1. OSFI's Updated Key Measures for Federally Regulated Insurers

On May 28, and on June 4, 11, and 25 2020, OSFI updated its published FAQs for federally regulated insurers about measures it has taken to address issues stemming from COVID-19.

  • Among other updates, OSFI has provided various answers to questions regarding restrictions on dividends and share buybacks stemming from OSFI's March 13 announcement, which said that OSFI expects insurers not to increase dividends, employee compensation or share buy-backs.
  • Please also refer to OSFI's published FAQs for federally regulated financial institutions (FRFIs), which was updated on May 28, 2020 to questions regarding: (i) how much time a FRFI will have if OSFI grants it a filing extension request; (ii) if regulatory filing extensions, or other relief, is only available for the regulatory information submitted via the Regulatory Return System; (iii) how OSFI will monitor financial risk in a timely manner if FRFIs are provided regulatory return extensions; and (iv) how long OSFI will offer regulatory return filing extensions.
  1. FSRA Releases Guidance for Auto Insurance Claimants While Physical Distancing Restrictions are in Place

On June 3, 2020, FSRA issued new guidance to insurers (and health service providers) regarding the accommodations it expects to be provided to statutory accident benefit claimants where physical distancing or other similar measures to prevent transmission of COVID-19 are required or recommended by the Chief Medical Officer of Health or local Medical Officer of Health. The guidance is effective as of June 3, 2020 and remains in effect until it is withdrawn by FSRA.

  • FSRA has provided examples of reasonable accommodations by insurers, relating to: (i) communication; (ii) requirements for determining initial or ongoing entitlement to benefits; (iii) and access to goods and services related to treatment.
  • FSRA has also set out conditions that insurers must meet for the provision of virtual care to statutory accident benefit claimants.
  1. FSRA Encourages Auto Insurers to continue to offer relief to consumers

On June 17, 2020, FSRA announced the results of its review of relief measures offered by Ontario auto insurers. FSRA noted that while significant relief has been offered to consumers, insurers are encouraged to explore further relief measures in order to ensure that consumers are being fairly treated. FSRA will continue to monitor the appropriateness of the relief provided.

  1. The AMF issues its Report concerning the sale of insurance products by automobile dealerships

On June 3, 2020, the AMF published its 2016–2018 Insurer Disclosure Analysis Report – The offering of insurance products by automobile and recreational and leisure vehicle dealers in Québec. The report discusses four main issues related to commercial practices in this market:

  • Concerning levels of remuneration for the distribution network;
  • Limited added value for consumers in the case of Q.P.F. No. 5 products owing to the high price paid in the dealer distribution network;
  • A high claim denial rate for debtor life, health and employment (DLHE) insurance products; and
  • Issues related to the premium refund in the event of policy cancellation.

Pensions

  1. New Agreement on the Supervision of Multi-Jurisdictional Pension Plans

On June 4, 2020, the Department of Finance Canada announced the signing of the 2020 Agreement Respecting Multi-Jurisdictional Pension Plans (the "2020 Pension Agreement"), which will come into force on July 1, 2020.

The federal government, together with governments of British Columbia, Alberta, Saskatchewan, Ontario, Quebec, New Brunswick and Nova Scotia, have signed the 2020 Pension Agreement. It was developed by the Canadian Association of Pension Supervisory Authorities ("CAPSA") to simplify and clarify the supervision of pension plans in Canada with members in more than one jurisdiction.[3]

  • The key elements of the 2020 Pension Agreement are that:
    • It streamlines the regulatory process by requiring that a multi-jurisdictional pension plan only has to register with one pension regulator, which will be called the "major authority";
    • It sets out the rules for determining who the major authority is;
    • It provides that certain requirements of the major authority's pension legislation will apply to the entire plan;
    • In cases where a member of the plan has been employed in more than one jurisdiction while they are a member, it requires that the "final location" approach be used to determine that member's benefits; and
    • It sets out rules for allocating the assets of a plan between jurisdictions in the event of a plan termination and wind up or a plan split. These rules accommodate recent legislative changes by some jurisdictions to eliminate traditional solvency funding requirements.
  • Please refer to CAPSA's news release; OSFI's FAQ series and June 4, 2020 notice; and the BCFSA's June 2, 2020 news release, for additional details on the 2020 Pension Agreement.
  1. Solvency Special Payments Relief Regulations In Force

The Solvency Special Payments Relief Regulations, 2020 (the "Regulations") came into force on May 27, 2020 and were published in the Canada Gazette, Part II on June 10, 2020.[4] The Regulations provide temporary, short-term solvency funding for federally regulated defined benefit pension plan sponsors.

  • From May 27, 2020 until December 30, 2020, federally regulated defined benefit pension plan sponsors are not required to make monthly solvency special payments.[5]
    • The Regulations also provide accommodations for solvency special payments made since April 1, 2020.
  • All normal cost contributions and going concern special payments will continue to be required.
  • Plan sponsors may continue making contributions in respect of their plans' solvency deficiencies, if they wish.[6]
  • The Regulations also include disclosure requirements to ensure that all plan beneficiaries are aware of the impact of the solvency special payment moratorium on their respective plans.
    • Plan administrators must disclose to members and former members through the annual statement: (i) the amount of reduced solvency special payments for the plan year; and (ii) what payments would have normally been required for the plan year.
  • Plan sponsors must renew making monthly solvency special payments, beginning with the December 2020 payment, which is due by January 30, 2021.[7]
  • Please refer to OSFI's funding relief section to its COVID-19 FAQ series and its notice, for additional details.
  1. FSRA Releases Q1 2020 Estimated Solvency Funded Status of Defined Benefit Pension Plans in Ontario

On June 3, 2020, FSRA released its Q1 2020 Estimated Solvency Report for Ontario's Defined Benefit Pension Plans, updated as at March 31, 2020 (the "Report").

  • The Report noted that Q1 2020 experienced "the most significant quarterly decline in projected solvency ratios since December 2009".
  • The 14% decrease in the estimated median solvency ratio since December 31, 2019 is attributable to: (i) negative Q1 2020 pension fund investment returns from market shocks (caused by the COVID-19 pandemic), and (ii) a decrease in solvency discount rates.
  1. FSRA's New Measures to Support Pension Plans

On May 22, 2020, FSRA issued new guidance on its approach to reviewing applications to transfer commuted values or to purchase annuities under Regulation 909 under the Pensions Benefits Act. It replaces the Financial Services Commission of Ontario's Policy T800-402, Commuted Value Transfers, which became effective on July 7, 2009, until further notice.

  • The guidance was developed to address the situation when a defined benefit pension plan's transfer ratio has declined by 10% or more and the resulting transfer ratio is below 0.9.
  • The guidance outlines the application and review process, minimizing unnecessary disruption of commuted value transfers and annuity purchases.
  • In summary, the guidance identifies that:
    • The trigger for automatic suspension of commuted value transfers (as set out in Section 19(4) and (5) of Regulation 909) is when an administrator knows or ought to know that, since the date of the most recently filed valuation report, events have taken place that result in either (i) a decrease in the transfer ratio from ≥ 1.0 to less than 0.9, or (ii) a decrease of at least 10% from a transfer ratio of < 1.0.
    • During periods of market uncertainty, administrators should be ready to determine if Sections 19(4) and (5) of Regulation 909 apply at any time.
    • Administrators may apply to FSRA for approval to continue commuted value transfers in the scenarios described above, by submitting a Form 10 application. When reviewing applications, FSRA will assess risks posed to plan beneficiaries with an aim to ensure that pension promises can be delivered over the long-term.
    • If an administrator determines that it will not apply to FSRA for approval to continue commuted value transfers, FSRA should be informed of this fact and the reasons for taking this approach. The administrator is also expected to have a plan to allow them to return to a situation where commuted values can be transferred.
  • Please also refer to FSRA's updated information on plausible adverse scenarios in actuarial valuation reports and information regarding temporary relief to employers who are unable to pay their PBGF assessment on time.

AML - FINTRAC Reporting Entities

On June 10, 2020, amendments to the Regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "PCMLTFA") were published in the Canada Gazette, Part II. These amendments further amend and clarify the draft amending regulations published on February 15, 2020, and came into force on May 20, 2020.

Among the changes, all reporting entity sectors (now including non-financial businesses casinos, dealers in precious metals, real estate brokers, accountants, and British Columbia notary publics) will have the obligation to ascertain beneficial ownership and to determine whether clients are politically exposed persons.

In addition, the amendments introduce the following changes to the obligations on reporting entities under the PCMLTFA:

  • Securities dealers must keep records of three persons (amended from all persons) who have access to a business account;
  • Issuers of credit cards must conduct identification verification once the card is activated, rather than when it is issued; and
  • Real estate developers, brokers, and sales representatives are subject to the business relationship monitoring obligations with respect to a client after the first time that the entity is required to verify the identity of that client.

Sector Cyber Security Risks

Cyber security researchers at Positive Technologies have determined that 13 of 14 mobile banking apps tested could be accessed without authorization, and that none of the apps featured acceptable levels of security. Several of the apps could be exploited without a hacker's having physical access to the devices. Generally speaking, Android-based apps are more vulnerable to attack than iOS-based apps. Positive Technologies' report notes that "100% of mobile banking clients [i.e. apps] contain vulnerabilities in their code."

Experts testifying before the U.S. Congressional panel earlier this month advised lawmakers that financial institutions are currently vulnerable to a range of new attacks from cybercriminals and state actors as a result of COVID-19. Remote work has lead to an intensification of attacks as hackers take advantage of remote technologies themselves, and of anxious employees lacking sufficient cyber safety awareness. Experts warned that sophisticated hacking campaigns, ransomware attacks, cryptojacking and intellectual property theft have spiked during the current crisis and that America's financial sector "is the number one target." Attacks on the sector have increased 238% in the first few months of 2020. U.S. lawmakers are attempting to introduce legislation to protect victims of various forms of cyber fraud arising out of the pandemic.

Conclusion

If you have any questions as to how these regulatory changes may impact your organization's obligations, please contact your Gowling WLG professional. Our Financial Services Regulatory Team at Gowling WLG will continue to keep you informed as further developments arise. You may also refer to our recent client webinar on practical tips to keep your businesses safe and secure from emerging cyber security and privacy risks, here.


[2] Please note that while this article outlines some of the key takeaways from the notices published by the listed regulators up until June 26, 2020, it is not an exhaustive list or analysis. Please refer to the full notices on the regulators' websites for a complete list of the revisions.

[3] The 2020 Pension Agreement is the first such agreement that involves the federal government. It replaces the 2016 Agreement Respecting Multi-Jurisdictional Pension Plans that was signed by the governments of British Columbia, Saskatchewan, Ontario, Quebec and Nova Scotia. The 1968 reciprocal agreement (and any similar federal-provincial bilateral agreement) remains in effect for Manitoba and Newfoundland and Labrador; Prince Edward Island has never signed it.

[4] The Minister of Finance previously announced the government's intention to provide this temporary relief on April 15, 2020.

[5] Under the Pension Benefits Standards Regulations, 1985 (the "PBSR"), defined benefit pension plan sponsors must make special payments to pay any solvency and going concern deficits over a 5- and 15-year period, respectively. These must be made at least monthly based on the pension plan's most recent filed actuarial valuation report. They are due no later than 30 days after the end of the month for which they are required.

[6] However, these contributions may only be considered additional payments and applied to subsequent plan years to the extent that the payments exceed the solvency special payments that would have been required in the absence of the Regulations.

[7] Plan sponsors are not required to repay the 2020 solvency special payments under a separate amortization schedule; the normal solvency funding requirements under the PBSR will apply.


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