On June 28, 2021, the Office of the Superintendent of Financial Institutions Canada released the final version of Guideline E-4 on foreign entities operating in Canada through a branch. Guideline replaces obsolete guidelines E-4A (insurance) and E-4B (banking) and takes effect in July 2021, although there is a 6-month compliance transition period, ending in January 2022.
Changes from the draft guideline
The finalized guideline incorporates a number of changes from the October 27, 2020 draft, including several substantive changes in response to public comments:
- Although Canadian branches must always document all arrangements they have with their head office to perform “material functions” on behalf of the branch, the guideline no longer requires this to take the form of a service level agreement – as we noted in our previous message, a branch and its head office are the same legal entity and therefore cannot contract with each other.
- Related to the above, fund transfers between a Canadian branch and its head office will now require 10 working days notice to OSFI rather than the 30 that had been proposed. While clear documentation of these transfers is required, OSFI approval is not required.
- Regarding record keeping, the final version includes a new footnote clarifying that the requirement that records be “updated and accurate at the end of each business day” is not violated when the records include accounting figures which are usually calculated less frequently (for example on a monthly or quarterly basis).
- The finalized guideline states that since electronic records of reinsurance agreements or files on more complex activities may not be sufficient for OSFI’s review, a branch may be required. make available a signed copy of these documents at OSFI’s request.
- Finally, OSFI notes in its response to comments this the foreign entity can determine the composition of the management of the Canadian branch and that OSFI’s expectations of the roles of chief agent (or chief executive officer, in the banking environment) remain unchanged. It also specifies that, although branch management is collectively should have sufficient knowledge of all laws, regulations, guidelines, etc. applicable Canadians, there are no specific expectations for individuals.
OSFI also noted in its response to comments this Guideline B-10 on outsourcing continues to apply, although it is in the study. In addition, he refused to revise the expectations of the E-4 guideline regarding location of recordings, which some commentators have criticized as inflexible and outdated, reiterating that Guideline E-4 reflects OSFI’s legal interpretation of current legislative requirements. A number of other concerns raised by commentators regarding the lack of clarity in the guidelines (for example, the lack of definitions of terms such as “important” and “importance”) met with the response that the guidelines are meant to be “principled” and context specific.
For a broader overview of the E-4 guideline, see our previous update on the October 2020 draft, keeping in mind the changes and clarifications mentioned above.
As part of the publication of the finalized guideline, OSFI also reissued and posted on its website, other guidance documents with deleted references to any requirements from senior officers or senior management. As stated above, the requirements of the new E-4 guideline will be applicable from January 2022, at the end of the 6-month transition period. Canadian branches that were waiting for the final version of the guideline before taking concrete action should now implement their plans, taking into account any adjustments required as a result of the changes described above.