OSFI Finds Compliance Control Weaknesses in Financial Institutions

OSFI Review Identifies Compliance Control Deficiencies

A recent review by the Office of the Superintendent of Financial Institutions (OSFI) has identified weaknesses in the compliance control processes of some financial institutions (FRFIs). The review found that many FRFIs lack adequate documentation, verification, and reporting of key information used in compliance reporting, which can lead to ineffective oversight and management of regulatory compliance risks.

Failure to Meet Expectations

According to OSFI’s guidelines, FRFIs are expected to have a robust three lines of defence model, with an independent review function, such as Internal Audit or other independent review function, validating the adequacy, adherence to, and effectiveness of compliance oversight on a rotational or regular basis. However, many FRFIs fail to meet this expectation.

Common Themes and Patterns

OSFI’s assessment of FRFIs’ RCM frameworks will focus on their ability to manage regulatory compliance risks. The regulator has identified some common themes and patterns in the weaknesses it has found, including:

• Lack of Adequate Documentation: Many FRFIs lack adequate documentation and verification of key information used in compliance reporting.
• Inadequate Communication: There is inadequate communication among different levels of management, leading to confusion and inadequate communication.
• Insufficient Reporting: FRFIs do not provide sufficient reporting to Senior Management on compliance issues and remedial actions taken.
• Failure to Validate Compliance Oversight: Many FRFIs fail to validate the adequacy, adherence to, and effectiveness of compliance oversight.

Urgent Action Required

OSFI is urging FRFIs to take immediate action to address these weaknesses and ensure that their compliance control processes are robust and effective. The regulator has also emphasized the importance of a risk-based approach to compliance oversight and internal audit.

Key Takeaways

• Robust Three Lines of Defence Model: OSFI expects FRFIs to have a robust three lines of defence model, with an independent review function validating compliance oversight.
• Clear Documentation of Roles and Responsibilities: Clear documentation of roles and responsibilities is essential for effective communication and management.
• Senior Management Oversight: Senior Management should oversee the RCM framework and receive regular reporting on compliance issues and remedial actions taken.
• Risk-Based Approach: A risk-based approach to compliance oversight and internal audit is crucial for effective management of regulatory compliance risks.