Regulation Matters Webinar Series Summer 2015 June 11, 2015

www.pwc.com/ca/regmatters
Regulation Matters
Webinar Series
Summer 2015
June 11, 2015
Agenda
1.
IFRS 4 (Phase II) for Insurance Contracts - Ongoing changes and
interaction with IFRS 9 Financial Instruments
2. Changes to National Instrument 45-106: Prospectus Exemptions
3. Operational risk: The importance of risk culture and conduct
PwC
2
IFRS 4 (Phase II) for Insurance
Contracts - Ongoing changes and
interaction with IFRS 9 Financial
Instruments
Regulation Matters
PwC
June 2015
3
Timeline
Where are we now?
IFRS 9
2014
2018
IFRS 9 issued
IFRS 9 effective
date
2014
IFRS 4
Regulation Matters
PwC
2015
2016
2017
2018
2019
2016?
2019?
Final IFRS 4
issued
IFRS 4 effective
date
June 2015
4
Timeline
Getting closer…
?
?
Includes IFRS 9
Includes IFRS 4
Comparatives not
required to be re-stated
Comparatives are
re-stated i.e. 2017
Regulation Matters
PwC
June 2015
5
Polling question #1
Which standard do you think will have a bigger impact on your
financial reporting?
• IFRS 4
• IFRS 9
• Not applicable
Regulation Matters
PwC
June 2015
6
What’s new?
• Substantially complete for general model
• Re-deliberations in 2015
- Aggregation of contracts
- Interaction with IFRS 9
- Participating contracts
Regulation Matters
PwC
June 2015
7
Aggregation of contracts
• Measurement objective is at an individual contract level
• Group similar contracts together
• Onerous contracts
• Further guidance to be included in final standard
• Practical considerations
Regulation Matters
PwC
June 2015
8
Interaction with IFRS 9
• Concern over effort/cost of adopting separately
• Will not delay IFRS 9
• Revisit Fair Value Option (FVO) designations
• IASB considering further transition relief
Regulation Matters
PwC
June 2015
9
Interaction with IFRS 9
Recap of IFRS 9 classifications
Debt instruments
Business model
“hold”?
no
Derivatives
Business model
“hold & sell”?
yes
no
Equity instr.
yes
no
yes
Solely Payment of Principle and Interest
(SPPI-criteria)?
yes
Amortized
cost
no
no
yes
FVOCI-option?
yes
yes
FVO?
no
Trading?
no
Fair Value though Other
Comprehensive Income
(FVOCI)
(with recycling)
Fair Value through
Profit and Loss
(FVPL)
FVOCI
(no recycling)
New class
Regulation Matters
PwC
June 2015
10
Interaction with IFRS 9
IFRS 9
• Consider interaction
of IFRS 4 and 9
• Avoiding mismatches
- Business model
- Policy choices
- FVO
= Interest sensitive
in Other
Comprehensive
Income (OCI)
FVOCI
debts
Insurance
Liabilities
≠ Not interest
sensitive
Amortized
cost
≠ Not interest
sensitive
FVOCI
equity
OCI
FVPL
Equity
= Interest sensitive
in Profit and Loss
(P&L)
Regulation Matters
PwC
IFRS 4
= Interest
sensitive in OCI
or P&L
June 2015
11
Interaction with IFRS 9
• Practical considerations
- Granularity of portfolio level for assets and liabilities
- Will business model for managing assets change with the
adoption of IFRS 4?
- Systems/resources planned for transition
Regulation Matters
PwC
June 2015
12
What’s left to do?
• Participating contracts
- Final area being re-deliberated
- Three critical issues remaining for participating policies
o
Accounting for an entity’s share of the participating policy
o
Allocation of contractual service margin to income
o
Calculating interest expense
• Consider any impacts on general model for decisions reached
on participating contracts
Regulation Matters
PwC
June 2015
13
Next steps
Prior to the final standard being issued
• Monitor ongoing developments
• Education for preparers and stakeholders
• Impact assessment
- Modelling of core products
- Gap analysis – data and systems requirements
- Assess interaction with IFRS 9 adoption impacts
- Assess synergies with finance, risk and regulatory projects
- Lay groundwork for detailed project plan once final standard
is issued
Regulation Matters
PwC
June 2015
14
Regulation Matters
PwC
June 2015
15
Changes to National Instrument
45-106: Prospectus Exemptions
Regulation Matters
PwC
June 2015
16
Background on changes
• Economic developments
• Compliance and enforcement results – Complaints and
investigations
• Protection of retail investors
• View that minimum amount exemption of $150,000 may not be
a proxy for sophistication or ability to withstand financial loss –
Originally set in 1987
• Need for balance so as to maintain, not limit, access to capital
PwC
17
Changes at a glance
• Effective May 5, 2015
• Accredited investor changes
• Friends, family and business associates exemption
• Asset backed commercial paper
• Risk acknowledgement form (45-106F9) for individual investors
that are not permitted clients
• Minimum amount amendment
PwC
18
Accredited investor changes
• Fully managed accounts
• New category of individual accredited investor – Net financial
assets greater than $5 million
• Family trusts
• Risk acknowledgement form (45-106F9)
PwC
19
Friends, family and business associates
• Friends, family and business associate exemption will now be
available in Ontario
• Permit distribution to directors, officers, control persons and
founders, as well as certain family members, close personal
friends and close business associates
• Will require completion of risk acknowledgement form
(45-106F12)
• Not available to investment fund issuers
PwC
20
Asset backed commercial paper
• Short-term securitization exemption (conduits)
• Must meet certain conditions – Credit rating, liquidity agreement
with financial institution
• Requires disclosures – Information memorandum, monthly
report, significant events
PwC
21
Minimum amount
• Minimum amount will not be available to individual investors
• Minimum amount was being misused
• Did not indicate sophisticated investor
• Will still be available to institutional investors
PwC
22
Polling question #2
The removal of the minimum amount exemption will have a
significant impact on me:
• Yes
• No
• Unsure
• Not applicable
PwC
23
Risk acknowledgement form
• Different versions depending on category of exemption
PwC
24
Polling question #3
I will need to amend the following documents due to the new rules
in this area (check all that apply):
• Subscription agreements
• Offering documents
• Know your customer/client (KYC) forms
• Other
• Not applicable
PwC
25
How will the change impact me?
• Subscription agreements
• Offering documents
• Compliance manuals
• KYC forms
• Training of sales staff and dealers
PwC
26
Operational risk: The importance
of risk culture and conduct
Regulation Matters
PwC
June 2015
27
Overview: Risk culture and conduct risk
A number of weaknesses in risk culture were identified as the root cause of the financial crisis and other compliance
events. A financial institution’s risk culture fundamentally defines and sets direction for the actions and decisions taken
by individuals within the institution.
PwC defines culture as the assumptions or beliefs common in an
organization that allow you to predict how your people will behave
and what they will achieve. Conduct risk is defined as the risk
arising due to the individual or organizational behaviours
OSFI, OCC – While there is no regulatory definition of risk culture,
risk culture is widely acknowledged as the shared values, attitudes,
competencies and behaviours present throughout the bank that
shape and influence governance practices and risk decisions
The Financial Stability Board (FSB) - In 2014 the FSB launched guidance
on supervisory interaction with financial institutions on risk culture,
expecting bank supervisors around the world to assess financial services
companies’ risk culture - their starting point will be the boards’ own
assessments comprising - tone from the top, accountability, effective
communication and challenge, and incentives
PwC
Risk culture and conduct are in the spotlight
$14.8 Billion
JP Morgan pays in fines for various
conduct-related issues, from the London
Whale incident to the mis-selling of
residential mortgage-backed securities
in the US.
Culture as ‘the problem’
•
Regulatory investigation – Shows culture to be
root cause
•
Reputation – Culture can be quickly damaged
by social media
•
Loss of trust – In organisational culture
•
Systemic behavioural issues – Gradual
accumulation of negative outcomes from ‘bad
behaviour’ and poor decision making’
•
Customer outcomes – Inconsistent or negative
outcomes
•
Disengaged employees – Loyalty, retention and
performance issues
Culture as the key to competitive advantage
For example:
• Reputation – Positive external perception
• Customer retention – Customers treated fairly
• Resilience – Issues are escalated quickly without
blame
• Talent – Recruiting and retaining the best talent
• Innovation – Better ways of doing things
• Adaptable – Embrace change
• Productivity – Clear understanding of role and
purpose
PwC
$3.4 billion
Litigation and conduct costs for Royal Bank of
Scotland (RBS) for 2014. Fines for 2015 could be even
higher.
The regulatory focus
Global regulators and their focus on culture
FCA –
Corporate
governance
and culture
PRA –
Corporate
governanc
e
9
1
Basel
2
8
Comprehensive
and evolving
regulatory
landscape
7
6
Senior
manager
approved and
certification
regime
PwC
Canadian regulatory expectations
emphasize the need to shift
accountability for risk towards the
first line of defense.
FSB
OCC
3
Institute of
internal
audit
guidance
4
5
OSFI
A Canadian perspective
COSO 2013
In addition, regulators are stressing
that there is a need for clear messages
about risk starting at the top of the
organization. These messages need to
be aligned to training, performance
metrics and risk appetite. Over the
last three years OSFI has updated it’s
regulatory guidance that reflects
changing expectations, for example:
•
Corporate Governance Guidelines
•
Regulatory compliance
management
How culture translates into conduct
Globally, the financial services industry is trying to tackle the question of risk culture - Some firms are focused on
assessing whether they have any reason to be concerned about the culture across the business, but many have moved into
the phase of correcting or reinforcing culture and monitoring conduct.
Business strategy and planning
Current areas of focus for
our clients :
Risk framework
Strategy link
Risk strategy
Risk appetite
Risk management
Organization and
policies
Governance
Risk appetite
Risk assessment
Idea and
concept
Design
and build
New product
approval process
Management
information
Sales
Technology
Management information
Business strategy and
planning
Post sales
servicing
Remediation
Behaviour and ways of working
PwC
New product approval
Risk assessment
Infrastructure
People and reward
Product lifecycle
Risk profile
Product
close
Remediation
Embedding conduct risk into
behaviour and work
processes
Polling question #4
Has your organization started to think specifically about conduct risk
and how it may be impacting risk or performance?
• We are not thinking or discussing conduct risk
• We are thinking about conduct risk and discussing it informally
• We have formally initiated board approved frameworks, developed
management processes, launched initiatives to formally address
conduct risk
• I don’t know
• Not applicable
Regulation Matters
PwC
June 2015
32
A model for organizational culture and behaviours
Decisions
Behaviours
Judgement
trade-offs,
moments
that
matter
Routines
and habits
Purpose
Vision
Values
Behaviours
Ways of
working
Business
results and
outcomes
PwC
External
environment
Organizational
structure
Performance
management and
reward
People
practices
Communication
Leadership
action
Behavioural reinforcers
Alignment of behaviour is key to manage
conduct risk
Intended – What we want
Intended
Expressed
Actual
1
2
3
•
•
•
•
•
Expressed – How we set ourselves up
Behavioural reinforcers
Actual – what we get
The behaviour displayed
by employees, driven by
the reinforcers but also
intrinsic motivation and
personal alignment to
PVVB
PwC
Purpose
Vision
Values
Behaviours
Customer outcomes
What are the moments that matter?
Understanding where to look
It is impossible to examine all
behaviours at all times. You
need to have a focus.
This can be achieved by
looking at the ‘moments
that matter’ – Explicit
interactions and decision
points where behaviours
have a disproportionate
effect on outcomes.
PwC
Escalation of issues
(‘Raising your
hand’)
Key customer
interactions
Board and
committee meetings
Reputational
incident
Promotions
selection and
moderation
Recruitment of
key staff
Health and
safety checks
Performance
coaching
Complaints
handling
Polling question #5
Within your organization, who would be responsible for conduct risk?
• Chief Risk Officer and/or the Enterprise Risk Management
• Chief Compliance Officer and/or the Compliance department
• Chief Internal Auditor and/or Internal Audit department
• I don’t know
• Not applicable
Regulation Matters
PwC
June 2015
36
Questions?
Regulation Matters
PwC
June 2015
37
Thank you
Sandeep Dhiman
Director, Financial Services,
Consulting & Deals
+ 1 (416) 687 8142
[email protected]
Barb Elliott
Partner, Asset Management Audit
and Regulatory Advisory
+ 1 (416) 869 2315
[email protected]
Owen Thomas
Senior Manager, Assurance
+ 1 (416) 687 8009
[email protected]
This content is for general information purposes only, and should not be used as a substitute
for consultation with professional advisers.
© 2015 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights
reserved.
PwC refers to the Canadian firm, and may sometimes refer to the PwC network. Each member
firm is a separate legal entity. Please see www.pwc.com/structure for further details.