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Regulatory Oversight of Financial Institutions in Canada: A Review

In an effort to ensure the sound financial management of financial institutions (FIs) in Canada, regulatory bodies have implemented guidelines and advisories that focus on principles rather than prescriptive rules. This approach is designed to promote best practices among FIs, which are responsible for managing their own policies and procedures.

Capital Adequacy Requirements

The Office of the Superintendent of Financial Institutions (OSFI) requires Federally Regulated Financial Institutions (FRFIs) to maintain adequate capital levels to ensure their ability to withstand financial shocks. OSFI also sets prudential limits on:

  • Commercial lending
  • Lending exposures
  • Asset securitization
  • Related-party transactions

Securities Registrants

Legislation applicable to securities registrants is more prescriptive, requiring these firms to:

  • Establish an internal control system
  • Maintain adequate policies and procedures
  • Appoint a qualified chief compliance officer responsible for monitoring compliance with regulatory requirements

Anti-Money Laundering (AML) and Terrorist Financing (TF)

The Proceeds of Crime Money Laundering and Terrorist Financing Act (PCMLTFA) requires reporting entities, FIs, and securities registrants to maintain AML/TF programs designed to:

  • Identify customers
  • Assess transaction risk
  • Report suspicious transactions

Gatekeepers

Gatekeepers, including:

  • Chief compliance officers
  • Internal auditors
  • Company risk managers
  • Board members

play a crucial role in ensuring the integrity of financial institutions. Failure by gatekeepers to perform their duties can result in administrative sanctions if financial markets or customers are put at undue risk.

Directors’ Duties and Liability

Directors of FIs and securities registrants have a fiduciary duty to:

  • Act honestly and in good faith with a view to the best interests of the corporation
  • Establish an audit committee, conduct review committee, and maintain policies for:
    • Disclosure
    • Conflict resolution
    • Complaint handling

Private Rights of Action

FI legislation does not provide a regime for private rights of action, but customers have rights to file complaints with regulators and independent complaint bodies. Securities legislation introduces various private rights of action, including:

  • Misrepresentation claims in primary and secondary markets
  • Insider trading claims

Standard of Care for Customers

FIs are subject to a standard of care when dealing with retail customers, which is designed to ensure that their interests are protected. This standard is integrated into the provisions of relevant legislation and regulations.

Conclusion

Canada’s regulatory framework for financial institutions emphasizes principles-based regulation, capital adequacy requirements, AML/TF compliance, and the importance of gatekeepers in ensuring the integrity of these institutions.