Office of the Superintendent of Financial Institutions Financial Highlights For the period ended September 30, 2014

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1 Introduction Raison d être The (OSFI) was established in 1987 by an Act of Parliament: the Act (OSFI Act). It is an independent agency of the Government of Canada and reports to Parliament through the Minister of Finance. OSFI supervises and regulates all banks in Canada and all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and private pension plans. OSFI s mandate does not include consumer-related issues or the securities industry. The Office of the Chief Actuary, which is an independent unit within OSFI, provides actuarial valuation and advisory services for the Canada Pension Plan, the Old Age Security program, the Canada Student Loans Program and other public sector pension and benefit plans. Responsibilities OSFI s legislated mandate was implemented in In support of a safe and sound Canadian financial system, OSFI s mandate under the legislation is to: Supervise federally regulated financial institutions and pension plans to determine whether they are in sound financial condition and meeting minimum plan funding requirements respectively, and are complying with their governing law and supervisory requirements; Promptly advise institutions and plans in the event there are material deficiencies and take, or require management, boards or plan administrators to take, necessary corrective measures expeditiously; Advance and administer a regulatory framework that promotes the adoption of policies and procedures designed to control and manage risk; Monitor and evaluate system-wide or sectoral issues that may impact institutions negatively. The Office of the Chief Actuary provides a range of actuarial and valuation services, under the Canada Pension Plan Act and the Public Pensions Reporting Act to the Canada Pension Plan (CPP) and some federal government departments, including the provision of advice in the form of reports tabled in Parliament. 1

2 OSFI also provides supervision services to the Canada Mortgage and Housing Corporation in accordance with the National Housing Act. Basis of Presentation These quarterly financial statements have been prepared by management as required by Section 65.1 of the Financial Administration Act and in accordance with International Financial Reporting Standards (IFRS), using the accrual basis of accounting. These quarterly financial statements have not been subject to an external audit or review. OSFI s Funding Model OSFI recovers its costs from several revenue sources. OSFI is funded mainly through asset-based, premium-based or membership-based assessments on the financial institutions and private pension plans that it regulates and supervises, and a user-pay program for legislative approvals and other selected services. OSFI also receives revenues for cost-recovered services. These include revenues from provinces for which OSFI provides supervision of their institutions on contract, and revenues from other federal organizations to which OSFI provides administrative support, and other services. The accompanying quarterly financial statements reflect OSFI s legislated authority to spend assessments and revenues per Section 17(2) of the Office of the Superintendent of Financial Institutions Act, 1987 (OSFI Act) as well as any authorities granted by Parliament and used by OSFI. OSFI receives an annual parliamentary appropriation pursuant to Section 16 of the OSFI Act to support the operations of the Office of the Chief Actuary. Such funding is presented as Government Funding in the Statement of Operations and the amount is consistent with the Main Estimates and Supplementary Estimates per the Appropriation Act in effect for the reporting period. Financial Review and Highlights - Fiscal Year to Date Statement of Financial Position and Statement of Cash Flows The majority of OSFI s revenue is derived from base assessments on federally regulated financial institutions. Assessments are billed annually and usually in the second or third quarter of the fiscal year. As a result of this annual cycle, some accounts in OSFI s Statement of Financial Position can vary significantly throughout the year. In between base assessment billings, OSFI s cash entitlement balance decreases gradually as payments pertaining to operational costs and asset acquisitions are issued. Similarly, OSFI s accrued base assessments balance increases, to reflect expenses incurred but not yet billed. After the base assessments are billed, cash and 2

3 accounts receivable increase as well as unearned base assessments. OSFI last invoiced its base assessments in August During the six months ended September 30, 2014, OSFI s cash entitlement balance increased by $3.2 million, its trade and other receivables increased by $65.2 million and its unearned base assessments increased by $64.0 million. During the six months ended September 30, 2014 OSFI collected $81.2 million of cash receipts compared to $113.6 million for the comparable period last year. The decrease is due to a slightly later invoicing of base assessments in the current year. The cash balance will increase in the next month as the remaining base assessments are collected. Thereafter, the cash balance and the unearned base assessment balances will continue to decrease as OSFI incurs expenses in the second half of the year. As explained in Note 4 (a) to the financial statements, OSFI secures a revolving expenditure authority from the Treasury Board Secretariat to draw upon the Consolidated Revenue Fund to ensure the availability of funds prior to receipt of revenue. Additional information on OSFI s sources and uses of cash can be found in its Statement of Cash Flows. Statement of Operations OSFI operates on a cost recovery model. Assessment revenue is recorded at an amount necessary to balance revenue and expenses after all other sources of revenue are taken into account. OSFI s total revenue and expenses for the six months ended September 30, 2014 were $72.4 million, a $1.7 million increase, or 2.4% increase from the same period last year. The increase in expenses is primarily due to an increase in Information Management/Information Technology (IMIT) costs of $1.5 million or 22.4% increase from the same period last year. The increase reflects additional planned costs incurred to support OSFI s IMIT renewal plan. Administrative costs have increased by $0.2 million or 10.0% primarily as a result of planned change management costs related to OSFI s IT renewal projects. Facilities cost increased by $0.5 million or 10.1% as a result of additional space added to accommodate previous year s growth in staff. Human resources costs decreased by $0.3 million or 0.5% due to some one-time costs incurred in for retroactive salary adjustments in accordance with collective agreements. All other expense lines remained relatively unchanged from the prior year, decreasing by $0.2 million in total. 3

4 OSFI s total expenses for the six months ended September 30, 2014 of $72.4 million represented 96.5% of its budgeted expenses for the period, compared to 99.4% for the same period last year. The total variance to budget is $2.6 million compared to $0.5 million for the same period last year. The increase in budget variance is primarily due to savings on human resources costs due to unfilled vacancies and timing differences on other expense items that are expected to reverse as the year progresses. Financial Review and Highlights - Fiscal Quarter OSFI s total revenue and expenses for the three months ended September 30, 2014 were $36.8 million, a $1.4 million increase, or 3.8% increase from the same period last year. The increase in expenses is primarily due to an increase in IMIT costs of $1.1 million and an increase in facilities costs of $0.2 million. The explanations for these increases are provided under the section entitled Financial Review and Highlights Fiscal Year to Date. 4

5 Compared to the same period last year, travel costs increased by $0.3M and administrative costs decreased by $0.2 million. The variance is due to the timing of expenses across the first two quarters. The year to date travel expenses are unchanged from the previous year and the explanation for the year to date increase in administrative costs is provided under the section entitled Financial Review and Highlights Fiscal Year to Date OSFI s total expenses for the fiscal quarter were 98.5% of its budgeted expenses for the period, compared to 99.5% for the same period last year. The total variance to budget is $0.6 million compared to $0.2 million for the same period last year Government Funding In addition to its revenues from asset-based, premium-based or membership-based assessments on the financial institutions and private pension plans and its revenues from costrecovered services, OSFI was granted a parliamentary appropriation of $0.9 million for the fiscal year ending March 31, 2015 ( $0.9 million). During the six months ended September 30, 2014 OSFI utilized $0.5 million ( $0.5 million) of this appropriation. 5

6 Risks and Uncertainties Business risks and financial statement implications Business risks result from significant conditions, events, circumstances, actions, or inactions that could adversely affect OSFI s ability to achieve its objectives and execute its strategies. Business risk is broader than the risk of material misstatement of the financial statements. Business risks may eventually have financial consequences and, therefore, an effect on the financial statements. Enterprise Risk Management OSFI operates in a constantly changing environment reflected in uncertain economic and financial conditions and an industry that can undergo periods of rapid change and that is becoming increasingly complex. OSFI's ability to achieve its mandate and objectives is impacted by the range of risks that exist in such circumstances. OSFI is challenged to effectively and efficiently identify, evaluate, prioritize and develop initiatives to address areas where exposure is greatest. OSFI's Enterprise-wide Risk Management (ERM) framework divides risks into external and internal categories. The external risk category consists of economic and financial conditions, the financial industry environment, OSFI's legal environment and catastrophic events. External risks arise from events that OSFI cannot influence, but are monitored in order to mitigate their potential impact on OSFI's operations. The internal risk category consists of operational risks that are broadly categorized as people, processes (governance processes, internal processes, and relationship management processes), enabling supporting systems, and culture (core values and change management). OSFI has a well-established and mature ERM process and provides regular updates to the Executive Committee and Audit Committee. Risks are reviewed periodically and closely monitored. OSFI s ERM process has identified the following key risks to the achievement of its mandate and objectives: External Risks Economic, Industry and Regulatory Environment This risk pertains to the ability of federally regulated financial institutions and pension plans to cope with the slow economic growth accompanied by exceptionally low interest rates and rising household indebtedness. The risk also links to strategies and business models adopted by FRFIs and pension plans to yield benefits in such an environment; and OSFI s ability to foster resilience by positively influencing regulatory changes in the financial sector and through the design and application of its supervisory framework.. 6

7 Capital Adequacy, Leverage and Liquidity This risk stems from the redesign of the Basel capital framework for banks and from the need to update prudential regulatory frameworks to address past disruptions in global financial markets. The risk encompasses the downstream effects intended and unintended of the changes made. Internal Risks People Risks OSFI's success is dependent upon having employees with highly specialized knowledge, skills and experience to regulate and supervise financial institutions, identify significant issues, and perform accurate risk assessments. A volatile global economy, increasingly complex products, changes to prudential regulation and emerging risks in the industry also mean that OSFI needs to be able to attract, motivate, develop and retain skilled people, particularly those whose skills are in demand in the financial sector. Although OSFI has grown significantly in recent years and turnover remains low, new OSFI responsibilities or existing areas which are of increased concern to OSFI could result in the need for new resources going forward. OSFI promotes a continuous learning environment to enable employees to meet the challenges under constantly changing conditions. Not having sufficient skill sets in place can result in an over reliance on certain key resources, which can lead to other people risks. Process Risks As Canadian financial institutions moved to IFRS in 2011, OSFI is now focused on new projects by the International Accounting Standards Board (IASB) that will have a significant impact on FRFIs going into the next two to three years. OSFI continues to monitor key accounting projects proposed by the International Accounting Standards Board (IASB) and their impacts on FRFIs. Changes in standards will affect accounting, loan values and provisions, actuarial standards, and the regulatory capital regime. The risk relates to OSFI s ability to perform accurate risk assessments of financial institutions and to adjust the regulatory capital framework in response to the changing accounting standards. 7

8 Systems Risks Enabling technology and a robust, secure and well-supported Information Management/Information Technology (IM/IT) infrastructure are key success factors to OSFI in meeting its mandate. OSFI must ensure that the necessary information systems and infrastructure are in place to effectively support its supervisory and regulatory activities. OSFI has undertaken a multi-year information technology renewal initiative (ITR) in support of a long term IM/IT Strategy to mitigate this risk. Implementation issues related to this initiative are being closely monitored and evaluated. These systems are required on an ongoing basis in response to a complex and rapidly changing environment, and the strategy itself reflects a vision of the future state. Key milestones, deliverables and checkpoints have been built into the implementation roadmap to monitor progress. Financial Risks Financial risks, primarily liquidity risk and credit risk, are closely managed and continue to be rated low. Please refer to Note 16 of the financial statements for a full analysis of the financial risks that OSFI is exposed to. 8

9 Significant Changes in Relation to Operations, Personnel and Programs The Deputy Superintendent, Supervision Sector will be leaving OSFI effective November 1, The Superintendent is currently considering various options in light of this change. There have been no other significant changes in relation to Operations, Personnel and Programs during the quarter ended September 30, Approval by Senior Officials Approved by, Michele Bridges, CPA, CGA Chief Financial Officer Jeremy Rudin, Superintendent 9