Summary of Stakeholder Comments - Resolution Guidance for Credit Unions and Caisses Populaires
Overview – guidance
FSRA’s Resolution Planning Guidance sets out its interpretation of requirements under the Credit Unions and Caisses Populaires Act, 2020 (CUCPA 2020) relating to Resolution Planning for large credit unions and caisses populaires (CUs), as well as its approach for assessing CU adherence to the requirements. Key aspects covered include a CUs resolution strategy, feasibility of operational continuity and mitigation plans and the roles and responsibilities of CU management and the board.
The Guidance also describes how FSRA will assess whether CU resolution strategies and plans meet the goals of:
removing material barriers to effective resolution
contributing to public confidence in and the stability of the sector
providing members and consumers with insurance against the loss of deposits
ensuring the continuity of critical functions
minimizing exposure of the Deposit Insurance Reserve Fund (DIRF) to loss
Outcome of consultation
Based on the feedback from the consultation, FSRA has made the following changes to the consultation draft of the Guidance:
amended the timeline for submitting interim and final Resolution Plans based on the total assets of the CU. Also, acknowledged that resolutions plans may be required to assist FSRA in arranging for emergency liquidity assistance to the credit union sector and, therefore, timelines are subject to change if earlier dates are necessary to arrange for improved emergency liquidity arrangements
amended the guidance to ensure that Resolution Plans include potential impacts of any existing and new business or investment activity
Feedback from the sector
FSRA received five submissions with feedback on the proposed Guidance during the consultation period (January 5, 2022 to February 18, 2022). The submissions and comments are also available on FSRA’s website.
FSRA would like to thank all stakeholders that commented on the proposed Guidance. FSRA has carefully considered all comments before finalizing.
Contributors: The following stakeholders shared their perspectives with FSRA through the formal consultation:
Organization
Commenter
1
Alterna Savings and CU (Alterna)
José Gallant
2
Canadian CU Association (CCUA)
Andrei Belik
3
Desjardins
Bernard Brun
4
FirstOntario CU (FirstOntario)
Lloyd Smith
5
Libro CU (Libro)
Stephen Bolton and Janet Johnson
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Alterna
CCUA
Desjardins
FirstOntario
Libro
Stakeholders expressed that the current pace of regulatory initiatives is beyond the capacity of the sector and is impacting growth and profitability.
In particular, requirements to develop a Resolution Plan at the same time as a Recovery Pan introduces burden.
Stakeholders requested that FSRA provide direction on the priority of the competing regulatory initiatives to ensure resources can be appropriately allocated.
A modern regulatory framework for deposit taking institutions includes both Recovery and Resolution Planning. This foundational work is aligned with and recognizes the CU sector need for growth and profitability. Resolution Planning further enhances the sector's reputation and is required to enhance the sector's resilience through times of stress. Resolution Planning promotes long-term stability of the sector and is a key component for provincial entities to access federal emergency liquidity facilities.
Based on the feedback received, FSRA will amend the timelines for Resolution Planning. CUs will have a transition period during which they will be required to develop credible Resolution Plans to be submitted to FSRA by the following dates:
January 31, 2024: CUs with total assets greater than $10 billion
July 31, 2024: CUs with total assets between $4 billion and $10 billion
January 31, 2025: CUs with total assets between $1 billion and $4 billion
In order to provide CUs with an opportunity to receive feedback as they develop their Resolution Plans during the transition period, FSRA will require that CUs provide an interim submission detailing the key components of their Resolution Plans by:
April 30, 2023: CUs with total assets greater than $10 billion
July 31, 2023: CUs with total assets between $4 billion and $10 billion
January 31, 2024: CUs with total assets between $1 billion and $4 billion
Note that in the unlikely event that a CU needs to access emergency liquidity, the CU may be required to complete its Resolution Plan sooner, to the extent necessary to facilitate access to such funds and ensure sector stability.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Alterna
CCUA
FirstOntario
Libro
Stakeholders noted that it would be preferable to focus on measures to prevent a CU failure (i.e., contingency and Recovery Planning) and diverting resources to simultaneously develop Resolution Plans would be counterproductive.
Stakeholders proposed that if developing Resolution Plans are necessary, it should occur after Recovery Plans are completed, reviewed and updated.
Even with robust contingency and recovery planning, unforeseen events can still result in the failure of deposit taking institutions (i.e., 2008 Financial Crisis), hence the need for effective resolution planning which is a key part of the comprehensive set of crisis management tools.
Large CUs have a responsibility to contribute to maintaining the stability of the system in the event of a failure, continue to provide delivery of critical functions, and minimize disruption to depositors, members, and other stakeholders in the system. FSRA will utilize information provided in a CUs resolution plan and decide as to whether “Open CU resolution” is possible. An Open CU resolution keeps the CU open during the resolution process, maintaining operational continuity of critical services and minimizing disruption to the sector.
Based on the feedback received, FSRA will amend the timelines for Resolution Planning submissions.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Alterna
CCUA
FirstOntario
Stakeholders indicated their concern with attempting to predict and prepare for a variety of different resolution scenarios. Ex-ante planning will likely be resource intensive and inaccurate, as each resolution event is unique.
Any ex-ante planning related to a CU’s Resolution Plan should be FSRA’s responsibility, who is better suited to estimate what its objectives and priorities will be in the event of a failure.
The Resolution Plan should assume the CU has become long-term non-viable. Therefore, the focus should not be on the scenario design (e.g., how the CU fails) but for example on the description of the CU’s resolution profile, resolution strategy, dependencies for operational continuity, and considerations for divestitures. Resolution Planning activities, if sufficiently performed, will minimize impediments and enable the timely and orderly resolution of the CU to minimize harm to depositors, members and consumers, and protect the sector/DIRF from avoidable loss caused by contagion, which could lead to loss of reputation for the sector.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
CCUA
Libro
Stakeholders indicated it was unclear whether it is FSRA’s role or the CU’s role to develop a CU’s resolution strategy and operational plan.
Stakeholders also expressed that the sector lacks the understanding of FSRA’s powers to develop an accurate resolution strategy.
The CU is responsible for developing a resolution strategy and operational plan as part of its Resolution Plan. Open CU resolution, especially for a large and/or complex CU is FSRA’s preferred resolution option. In keeping the CU open for providing core services to its members while resolving the CU, disruption and contagion will be minimized. Therefore, there is a need for the operational plan and CU’s management involvement. FSRA will review a CU’s Resolution Plan as part of its resolvability assessment and provide feedback.
FSRA’s resolution powers are set out in the Credit Unions and Caisses Populaires Act, 2020. These powers are detailed in the appendix of the Guidance.
FSRA’s use of these powers will vary depending on the resolution event; however, they will likely follow the Recovery and Resolution Continuum detailed in the Guidance.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
CCUA
Libro
Stakeholders recommended that Resolution Planning include the following phases:
Identification and confirmation of critical functions
Resolution Profile
External and Internal Dependencies for Operational Continuity
Funding Sources and Financial Exposures
Data Capabilities
Resolution Strategy
Divestitures
Testing
Each phase should be given appropriate time for all parties to understand the requirements, discuss potential issues, circulate drafts and refine the Resolution Plan.
Resolution Planning should be done in a holistic and integrated manner. A phased approach could separate important components of a CU’s Resolution Plan and be less effective.
FSRA will work with CUs as they develop their Resolution Plans and ensure there are opportunities to identify issues, discuss drafts and refine.
Based on the feedback received, FSRA will amend the timelines for Resolution Planning submissions.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
CCUA
FirstOntario
Stakeholder requested additional information on FSRA’s expectations for table-top exercises and simulation scenarios. Such exercises will likely be expensive to undertake and may not provide any benefit.
A stakeholder proposed that if such exercises are required, it should be undertaken by FSRA, with information provided by the CU.
The Guidance does not require that CUs conduct table-top exercises and scenarios. CUs are required to periodically test their Resolution Plans to validate its effectiveness and ensure it is current with up-to-date information.
Table-top exercises and scenarios may be an effective means to validate the effectiveness of any Resolution Plan. However, such exercises and scenarios should be conducted in a manner that reflects the CU’s size, complexity, and risk profile. FSRA is not prescribing the validation requirements but rather providing some examples of validation methods that could be used for Resolution Planning.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
CCUA
Libro
Stakeholders indicated that it would be beneficial to combine a CU’s Resolution Plan, Recovery Plan and business continuity plan into a unified document.
Doing so will result in a more simplified and robust overarching plan.
While there are some overlaps between elements of the Recovery Plan and the Resolution Plan (e.g., institutional profile and critical functions), the objectives and analysis of the two Plans are different. Recovery Planning is developed from the perspective where the CU is still viable but needs to get back to business as usual; with Resolution Planning the CU has reached non-viability or failed, thus the analysis and perspective are different. A CU after resolution will either not exists or it will exist in a completely different form (e.g., major restructuring).
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Desjardins
A stakeholder recommended that FSRA collaborate with other entities which regulate parent companies or subsidiaries of Ontario CUs to ensure alignment in Resolution Planning.
As referenced in the Guidance, FSRA will work with other regulators, including setting up Memoranda of Understanding (MOU), to coordinate, align, and streamline the activities in planning, coordinating, and implementing resolution.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Alterna
A stakeholder suggested that FSRA develop supportive documents to support Resolution Planning.
FSRA is committed to a principles-based approach to supervision and therefore is not intending to develop prescriptive supporting documents, as doing so would limit flexibility in applying the Guidance. After CUs submit their interim Resolution Plans, FSRA will engage with CUs to provide feedback as they develop their final Resolution Plans.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Alterna
A stakeholder expressed their view that Resolution Planning is unreasonable for institutions that are not considered Domestically-Systemically Important Banks (D-SIBs).
Resolution Planning may not be justified for Ontario CUs whose failure would not present a systemic issue.
A modern regulatory framework for deposit taking institutions includes both Recovery and Resolution planning. It is important for any institution that could have an impact on the stability of the sector (e.g., if its failure could cause a disruption to the sector and/or could expose the DIRF to losses or cause contagion) to have a Resolution Plan in place. Resolution Planning is a mitigating strategy to help promote the timely and orderly resolution of the CU to minimize harm to depositors, members and consumers, protecting the sector from loss, contagion, and reputational risk.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Alterna
A stakeholder suggested that FSRA’s interpretation of section 109 (Duty of Care) of the CUs and Caisses Populaires Act, 2020 (CUCPA 2020) could be challenged and adds unfair expectations on a CU’s Board.
Additionally, FSRA’s interpretation could unfairly expose a CU to losses not covered by director and officer liability insurance.
FSRA’s interpretation of section 109 of the CUCPA 2020 is that it is an extension of duty of care. Resolution Planning is part of a modern financial institutions framework and a necessary activity under the duty of care for a Board of a CU which, in the event of a failure, could have a material impact on the broader sector or the DIRF.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
CCUA
A stakeholder requested the rationale for the $1 billion total asset threshold to develop Resolution Plans.
It is important that institutions whose failures could materially impact the Ontario CU sector, for both their members and the sustainability of the DIRF, have a Resolution Plan in place. FSRA’s view is that a CU with $1 billion or more in assets could have such an impact.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
CCUA
A stakeholder requested a more detailed definition of what constitutes a critical function.
The Guidance defines critical functions as activities, services or operations that would need to be continued, as their discontinuance would cause significant disruption to the financial stability of the Ontario CU system. A CU would be responsible for defining its own critical functions, but some examples may include lending and deposit-taking activities in the retail and commercial sector. Further, we have clarified in the Guidance that CUs should consider the potential impacts of any new business and investment activities in their Resolution Plans.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Desjardins
A stakeholder suggested that Resolution Planning should be proportional to the CU’s size, complexity and risk profile, of their operations.
The Guidance reflects proportional application. The Interpretation section of the Guidance states that a CU’s Resolution Plan must be tailored to the size, complexity, and risk profile of the institution. A Resolution Plan should have sufficient detail to describe all the suggested elements of the plan in the Approach Guidance to facilitate effective resolution when necessary.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
First Ontario
A stakeholder proposed that key contracts that may need to be renegotiated to reflect the requirements in the Guidance should occur at contract renewal.
Requiring renegotiation before the planned renewal period could impact third-party relationships and be costly.
As identified in the Guidance, relevant terms and provisions on termination should be assessed by the CU in ongoing or upcoming contract negotiations to promote operational continuity of services in resolution. CUs should consider involving vendors in this type of discussion when renegotiating contracts.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
First Ontario
A stakeholder expressed concern with having to maintain a valuation of the CU to assist with resolution.
Accurately determining the valuation of a CU is time specific and may be out-of-date in the event of a resolution scenario. Developing a rolling valuation system could be costly to implement and maintain.
The Guidance does not necessarily require CUs to ensure accuracy in transacted values under all scenarios. Rather, FSRA will assess a CU’s valuation capabilities, including valuation principles currently applied to various types of assets, the information and system capabilities that will be required for that valuation, the point in time at which the valuation is to take place, and any current engagement with business valuators.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Libro
A stakeholder requested information on how FSRA will communicate to the sector a CU failure and its plan to mitigate contagion and run-off.
FSRA has an internal communications protocol in the event of a CU failure. FSRA’s communication would vary depending on the size, complexity, and risk profile of the failed institution.
Stakeholders
Summary of stakeholders’ feedback
FSRA’s response
Libro
A stakeholder proposed that FSRA identify critical shared services with the sector (i.e., payments, technology, investments) to understand how best these services may be impacted in the event of a failure.
Additionally, FSRA should communicate with other regulators to better understand the criticality of CU services that are shared across provinces.
Critical shared services for each CU may vary and it is up to the CU to identify these services and dependencies. As captured in the Guidance, operational continuity can only be enabled if key internal and external dependencies have been identified and favourable terms are present in the corresponding governing contractual agreements. Further, the Guidance provides possible examples of critical shared services. FSRA will provide feedback on areas such as critical shared services upon its review of Resolution Plans.
FSRA will consider, where appropriate, having discussions with other regulators regarding critical services that are shared across provinces.