Bank executives must manage culture risk, Canada regulator says

Canada’s banking and insurance regulator said it expects executives and boards to be accountable for their company culture, and it’s beefing up its rules on how to do that. 

The Office of the Superintendent of Financial Institutions released a regulatory notice on “culture risk management” — a document that outlines what boards and senior managers must do to stamp out behavior that can “weaken a financial institution’s safety, soundness, integrity and security.”

Risk management and corporate culture have been in the spotlight for Canadian banks after Toronto-Dominion Bank was fined $3.1 billion and pleaded guilty to criminal charges related to its failure to stop money laundering by drug cartels and other criminals in the US. 

Prosecutors said the bank failed for a decade to root out suspicious activities as required under US anti-money-laundering laws, due in part to a lax culture that sought to limit spending on compliance systems. The No. 2 Canadian bank is now facing years of restrictions on the size of its US operation as it works to repair those systems.

OSFI’s regulatory notice emphasizes that all of senior management is responsible for ensuring sound governance and a culture of compliance — including chief executive officers, their direct reports and the heads of major business units and oversight functions.

“It’s not just the business of chief compliance officers to make sure — although they play a very key role — that regulatory requirements in Canada and abroad are complied with,” Tolga Yalkin, OSFI’s assistant superintendent of regulatory response, told reporters. 

Yalkin declined to speak about specific institutions or cases, saying the regulator’s notice was finalized in response to stakeholder requests for clarity. 

Financial firm cultures that tend to respond well to potential compliance problems “are ones of openness, of receptivity, of hearing different perspectives on issues,” and don’t allow issues to languish, he said. 

“Those cultural behaviors and norms within financial institutions are really key to ensuring that some of those risks don’t come home to roost.”

Stress Relief

OSFI also confirmed that it no longer requires borrowers to go through a new “stress test” on uninsured mortgages when they do a straight switch to a different loan provider. 

The stress test is designed to ensure that borrowers can handle financial shocks such as higher interest rates. The change will make it easier for consumers to shop around to different lenders when their mortgage comes up for renewal.  

OSFI also released revised rules on managing risks in commercial real estate lending, such as the practice of granting concessions to distressed borrowers, known as forbearance.   

“Forbearance should not be used to mask or delay taking necessary actions to mitigate credit risk,” Yalkin said. “This undesirable practice is often referred to in the business as ‘extend and pretend.'”