Do senior bank staff, including non-executive directors, have to be registered with your national regulatory authority?
Although it might not be formally identified as such, Canada has essentially adopted a “non-disapproval” regime for the appointment of directors and senior management. The Office of the Superintendent of Financial Institutions (OSFI) has published an Advisory on Changes to Membership of the Board and Senior Management (the Advisory). Under the Advisory, OSFI has requested that banks provide it with written notice of their preferred candidate for all appointments and elections to director and senior management positions. The Advisory does not specify a minimum notice period. However, it does request that each individual bank approach OSFI to determine an appropriate notice period in the context of the bank. The Advisory also notes that in exceptional circumstances, such as an unexpected departure, the notice period could be “unusually short” or not possible at all.
Although the Advisory does not require that OSFI approve a candidate, the cover letter released with the Advisory states that the early notification approach will permit OSFI to convey concerns or comments, if any, to the bank’s board before an appointment or nomination is made. As the Advisory only came into effect on May 14, 2014, the circumstances in which OSFI might chose to make its comments known and the degree to which OSFI will expect its comments to be addressed remains to be seen.
For the purposes of the Advisory, senior management is composed of the chief executive officer (CEO) and individuals who are directly accountable to the CEO. In addition, senior management may include the executives responsible for the oversight functions, such as the chief financial officer, chief risk officer, chief compliance officer and the chief internal auditor.
In exceptional circumstances, where a bank has become subject to formal restrictions deemed necessary to maintain or improve its safety and soundness, OSFI has the authority to invoke a formal non-disapproval regime. Under the regime, the bank must provide 30 days advance notice of its intention to elect or appoint a director or senior officer. OSFI may subsequently notify the bank that, based on its assessment of the individual’s competence, business record, experience, conduct or character, the individual has been disqualified.
OSFI also maintains a register of all directors and senior officers. In addition to providing the advance notice of an election or appointment under the Advisory, a bank must formally notify OSFI within 30 days of the change in order that OSFI may keep the register current.
If your national regulatory authority requires registration of senior bank staff what are the requirements?
The Advisory requires that a bank provide a curriculum vitae, or equivalent document, of the candidate which demonstrates that he or she has the qualifications and experience appropriate for the position, a description of the rationale for the candidate’s selection and the effective date of the anticipated appointment or election. OSFI also requires that a bank provide it with the results of the internal assessment that the bank conducted into the suitability and integrity of the candidate.
Under OSFI Guideline E-17 – Background Checks on Directors and Senior Management (E-17) – a bank is expected to have a policy for the assessment of the suitability and integrity of responsible persons. A responsible person includes a director and any other person who plays a significant role in the management of the bank. This could include the chief executive officer, chief financial officer and any other officer who has a functional reporting line directly to the board of directors or chief executive officer.
While E-17 does not mandate that any particular information be considered as part of an assessment it does provide examples of the information that a bank may wish to consider, including: criminal records; records of securities-related sanctions or disciplinary actions by a professional regulatory body; evidence that the responsible person possesses the required education, skills, professional qualifications and experience; an attestation that the responsible person has not been held liable in a civil proceeding in connection with financial or business misconduct, fraud or mismanagement of an entity; and an attestation that the responsible person has no conflicts of interests that could create a material risk that he or she will be unable to discharge their duties with integrity and in the best interests of the bank.
When conducting assessments at initial appointment, a bank is expected to verify information using searches of databases and information made available by third parties when such independent sources are available. With respect to attestations provided by a responsible person, banks are encouraged to conduct their own independent verifications, if they have grounds to believe that an attestation is insufficient or inaccurate.
OSFI also expects to review the draft internal and public announcement of the appointment before any appointment is announced.
Is there legislation specific to the banking sector that provides for penalties to be levied against senior staff for mis-managing a bank?
Under the Bank Act (the Act), OSFI has the authority to remove a director or senior officer from office on the basis that the person is not suitable to hold that office due to the competence, business record, experience, conduct or character of the person. A person may also be removed if the person has contravened or, by action or negligence, has contributed to the contravention of the Act or the regulations made under it, a direction of compliance, an order to increase capital, a specific term of the bank’s licence or a term of a prudential agreement with OSFI. The provision does not allow for the imposition of any penalty on the director or officer.
The Act does provide that directors and officers must act honestly and in good faith with a view to the best interests of the bank and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The Act further provides that anyone who breaches the Act, without reasonable cause, is guilty of an offence and potentially subject to fine and imprisonment. To our knowledge, no director or officer of a bank has ever been prosecuted for failing to meet this standard of care. Given the availability of a due diligence defense, it may require almost a total failure by the individual to exercise their powers or discharge their duties for there to be a successful prosecution in reliance on this provision of the Act.
What is the maximum amount the regulator can fine an individual?
Again, the only way that a fine could be imposed under legislation specific to banking would be in connection with a prosecution brought under the Act for a failure to meet the required standard of care. That said, an individual who was found guilty of an offence under the Act could on conviction be subject to a fine of up to $1,000,000 or to imprisonment for a term of not more than five years, or to both.
Is there legislation in place that requires banks to have in place remuneration policies and practices that are consistent with effective risk management?
OSFI has also issued a separate Corporate Governance Guideline (the Guideline), in which it has indicated that it expects that a bank's compensation policy for all human resources will be consistent with the Financial Stability Board (FSB) Principles for Sound Compensation and the related Implementation Standards. While the Guideline does not create a legal obligation for a bank, OSFI has categorized the Guideline as guidance relating to sound business and financial practices. This reference in the Guideline links it to OSFI’s power under the Act to issue Directions of Compliance when OSFI considers a bank to be engaging in an unsafe or unsound business practice. The Act further provides OSFI with the authority to apply to a court for an order enforcing a Direction of Compliance. Therefore, absent any exceptional circumstances, a bank would normally adhere to OSFI expectations set out in a Guideline.
Is there any legislation planned in your jurisdiction that will strengthen the accountability of senior bank staff?
No changes have been announced in connection with senior bank staff generally; however, in December 2016, OSFI issued a letter to all federally regulated financial institutions (FRFIs) indicating that it planned to undertake a comprehensive review of the expectations it has of boards of directors of FRFIs. OSFI has not published anything further on this topic.