Has the regulator implemented rules in relation to remuneration paid by banks to its staff?

Yes, the Office of the Superintendent of Financial Institutions (OSFI) has communicated its expectations in respect of the compensation policies of banks.

In January 2013, OSFI released a revised Corporate Governance Guideline to communicate its current expectations with respect to the corporate governance practices of federally-regulated financial institutions, including all banks. The Guideline outlines, among other things, expectations for the matters that the board of directors of a bank will review and discuss with management. Included in these matters is an expectation that directors will review and discuss with management the bank’s compensation policies. Further, the Guideline provides that directors will review with management the extent to which the polices are consistent with the Financial Stability Board (FSB) Principles for Sound Compensation (FSB Principles) and Implementation Standards (FSB Implementation Standards).

While the FSB Principles do not prescribe particular designs or levels of individual compensation, they do describe practices that are aimed at ensuring effective governance of compensation, alignment of compensation with prudent risk-taking and effective supervisory oversight and stakeholder engagement in compensation.

While the financial crisis of 2008 did not impact Canadian banks to the extent that it impacted banks in other countries, and the need for tighter controls on remuneration policies was not as apparent in Canada as it may have been elsewhere, Canada has adopted a practice of implementing most of the regulatory reforms agreed to or recommended by recognized international agencies. In this vein, Canada has elected to adopt the principles set out by the FSB rather than to create specifically Canadian regulations.

That said, Canada has departed from the FSB’s approach in one notable respect. The FSB Principles state that the principles are intended to apply to significant banks. In Canada, the Corporate Governance Guideline indicates an expectation that the principles apply to all banks, not just those that are considered to be significant.

What categories of staff are caught by the regulator’s rules?

The OSFI Corporate Governance Guideline and the FSB Principles provide that directors must pay serious, sustained attention to the design and operation of compensation practices for the whole firm, not just that of a bank’s most senior executives. Boards therefore have a responsibility to ensure that the practices set out in the FSB Principles are reflected in the compensation plans for all employees. That said, the FSB Implementation Standards do impose certain requirements that apply specifically to senior executives as well as other employees whose actions have a material impact on the risk exposure of the bank.

The OSFI Corporate Governance Guideline acknowledges that the composition of senior management will vary from bank to bank. However, in general, OSFI considers the Chief Executive Officer (CEO) and individuals who are directly accountable to the CEO to be part of senior management. In addition to those employees that report directly to the CEO, such as the heads of major business platforms or units, senior management may also include the executives responsible for the oversight functions, such as the Chief Financial Officer, Chief Risk Officer, Chief Compliance Officer and Chief Internal Auditor. The OSFI Corporate Governance Guideline and the FSB Principles and FSB Implementation Standards both contain guidance pertaining to the compensation of staff of the oversight functions as well as staff in back-office or risk control functions.

Neither OSFI nor the Financial Stability Board has provided guidance to assist banks in determining which of their employees could be considered to have a material impact on the risk exposure of the bank.

What are the key regulatory rules?

The key rules are those set out in the FSB Principles and FSB Implementation Standards.

Are bonuses subject to the regulator’s rules?

While the FSB Principles and the FSB Implementation Standards are mostly principles-based, the Implementation Standards provide fairly specific examples of how the principles could be reflected in a remuneration plan, particularly in respect of incentive compensation plans for senior management and other employees that can expose a bank to material risk.

What is the position concerning role based allowances

The FSB Implementation Standards recommend that a substantial portion of the compensation of senior management and material risk-takers be variable (40% to 60% is a suggested range), but Canadian regulators have not taken a position on whether role-based allowances should be considered to be part of fixed or variable compensation.

Do the regulator’s rules on remuneration have extraterritorial effect?

The expectations with respect to remuneration apply to all employees in all jurisdictions where the bank carries on business. In addition, the expectations likely apply indirectly to all subsidiaries of the bank.

The OSFI Corporate Governance Guideline provides that the board of directors of a bank must exercise adequate oversight of the activities of subsidiaries to ensure that the parent board can meet its responsibilities. These responsibilities include the general responsibility to establish a risk appetite for the bank and to oversee the bank’s risk management practices and the more specific responsibility to review and discuss compensation practices. Given this oversight structure, it can be assumed that, at a minimum, the compensation practices of material subsidiaries of the bank are subject to the requirements of the OSFI Corporate Governance Guideline and the FSB Principles and FSB Implementation standards.

Do you anticipate further reform in this area?

No further action respecting remuneration is expected at this time.

Must an institution’s remuneration policy be disclosed to the regulator?

No, there is no specific requirement for a bank to disclose its remuneration policy to a regulator. However, by letter dated December 1, 2011, OSFI advised banks that, subject to certain exceptions, they must comply with the Basel Committee on Banking Supervision (BCBS) Basel II publication entitled Pillar 3 Disclosure Requirements for Remuneration. Further, the FSB Principles provide that firms should disclose clear, comprehensive and timely information about their compensation practices. FSB Implementation Standards further provide that the disclosure should include information about:

  • the decision-making process used to determine the firm-wide compensation policy, including the composition and mandate of the remuneration committee;
  • the most important design characteristics of the compensation system including criteria used for performance measurement and risk adjustment, the linkage between pay and performance, deferral policy and vesting criteria, and the parameters used for allocating cash versus other forms of compensation;
  • quantitative compensation, on an aggregate basis, broken down by senior executive officers and by employees whose actions have a material impact on the risk exposure of the firm, across a number of specified characteristics.