Results of FSRA consultation on proposed Recovery Planning Guidance for Credit Unions

• Desjardins Ontario Credit Union (DOCU) is an integrated component of Desjardins Group/ecosystem. The interconnectedness of Desjardin’s business model allows for many activities, including recovery planning to be centralized. Further, Desjardins Group is designated as a “domestic systemically important financial institution,” (“D-SIFI”) resulting in greater supervision and a specific bail in regime, as well as additional capitalization and disclosure requirements. For these reasons, Desjardins asks that FSRA consider the DOCU’s D-SIFI obligations as an integral and affiliated entity of the Desjardins Group when considering recovery planning.
• The Ontario credit union sector is still adapting to FSRA’s series of recently amended guidance documents, particularly those pertaining to capital and liquidity. Desjardins recommends providing the Ontario credit union sector with at least 18 months to implement the new requirements into their respected Recovery Plans. Desjardins encourages FSRA to consider a submission schedule for credit unions with total assets greater than $4 billion to be no earlier than December 2023 in order to provide sufficient time to develop comprehensive Recovery Plans.

FSRA welcomes the opportunity to initiate a dialogue with DOCU to better understand its unique framework and how this will contribute to recovery planning. FSRA will take Desjardins’ structure into account and this structure should also be reflected in its recovery plan.

Regarding implementation, FSRA will include a transition period after the Guidance becomes effective. FSRA will require that credit unions submit credible recovery plans by January 13, 2023. However, in order to provide credit unions with an opportunity to receive feedback before this deadline, FSRA will request that credit unions provide an interim submission detailing the key components of their recovery plans by January 14, 2022. The submission should include the following:

• A description of the categories of key measures and associated triggers that may cause the activation of the recovery plan and escalation to the credit union’s senior management or Board for decision making (please refer to “B. Key measures and associated triggers” in the Approach section of the Guidance)
• Identification of draft recovery options which can be presented in the format as suggested in Appendix B to the guidance. This will lead into the comprehensive analysis to be performed after the interim submission (please refer to “C. Recovery options” in the Approach section of the Guidance)
• A description of the credit union’s stress testing procedures in accordance with FSRA’s Stress Testing guidance, issued on January 1, 2021, and a brief description of how these scenarios (backdrop) will impact the execution of recovery options identified. This includes an outline of one or more than one type of scenarios that the credit union is planning to consider (please refer to “D. Scenario Analysis” in the Approach section of the Guidance)

• Principles-Based Regulation-Acknowledging that FSRA is a principles-based regulator, it is requested that FSRA respond to specific questions and inquiries from individual firms on regulatory expectations and standards, especially regarding appropriate risk tolerances and risk mitigation for their size and complexity.
• Proportionality-While the framework intends to apply proportionality, it may be more difficult for smaller firms to apply a framework than for larger firms. FSRA should be conscious of this in its expectations of credit unions and their recovery plans.
• Integration, Coordination, Alignment with Current Reporting- For some credit unions, most aspects of recovery planning may already be accounted for in their strategic business plans and enterprise risk management frameworks. In this light, CCUA asks FSRA to consider existing resources that have gone into developing policies and procedures to mitigate risk as part of a firm’s recovery plan, in order to avoid duplication.
• Institutional Analysis- For many firms, a streamlined approach that allows credit unions to link to existing documents (e.g., financial statements, offering statements, vision/ mission statements, articles of incorporation/ amalgamation) could be as effective as re-stating and/or re-incorporating such information in a separate recovery plan. Regular enterprise risk management processes include assessing/ remediating potential supply chain weaknesses, but exploring alternatives to certain foundational relationships (e.g., with Central 1 or Collabria) may be cost prohibitive and unnecessary. A table similar to that in Appendix B of the guidance could be beneficial for credit unions to track potential supply chain weaknesses.
• Key Measures and Associated Triggers- The guidance should be explicit that the occurrence of a “trigger” (i.e. single data point or negative trend) will not automatically force a credit union to begin the remedial action described in its recovery plan. An immediate and meaningful Management/ Board discussion should be the first step of escalation if a trigger is breached. Further, data trends should be considered equally or more important than a single trigger to inform a credit union’s financial and operational status.
• Recovery Options- Recovery options for Ontario credit unions are limited and it may be challenging to meet FSRA’s expectations in this regard. Reducing costs, issuing dividends, and selling assets may be impractical or have limited usefulness for firms. In the extremely unlikely event where the recovery options activated fail and a merger/purchase becomes necessary, CCUA recommends that FSRA articulate its own internal protocols to quickly provide regulatory certainty to both firms, especially with respect to clarity on temporary waiving of mandatory capital and liquidity minimums and process to emerge from the watchlist/supervision/administration once a recovery plan has been initiated.
• Scenario Analysis- The purpose of a systemic stress scenario should be to test how recovery break options can be/are deployed and not to identify the series of events that would lead to a credit union going under minimum capital requirements. Further, FSRA should be clear to the degree credit unions are expected to test the monetary value of these extreme scenarios. FSRA should also structure and share appropriate data sets with credit unions so that they can measure themselves against benchmarks and set appropriate scenarios.
• Implementation Plan- FSRA should outline its expectations for “effective challenge”.
• A biennial formal review frequency should be adopted for all firms above $500M, and the adoption be done in stages: largest credit unions to the smallest, with consideration of a firm’s RWA and recent examination findings.
• Firm’s with more than$1B in assets should be given 18 months from the proclamation of the new Credit Union and Caisses Populaires Act to submit their completed Recovery Plans to FSRA. In addition, credit unions should be given 120 – 180 days to submit a new Recovery Plan in response to questions and challenges stemming from FSRA’s review and a specific service standard for feedback and approvals should be adopted.

FSRA has committed to adopting a principles-based supervisory approach, under which it is the responsibility of the regulated institution to ensure that it achieves the desired outcomes in an effective manner that is most appropriate for the institution. FSRA’s Recovery Planning Guidance and supervision will reflect this principles-based approach. Institutions should reach out to their Relationship Managers with any questions on recovery planning. Relationship Managers will work with credit unions during a transition period in order to promote understanding of the guidance and ensure the development of credible recovery plans.

In addition, FSRA’s Risk-Based Supervisory Framework (currently under development) will lead to accurate and consistent assessments of CU significant activities and risk profiles which can provide opportunities for alignment with CUs’ descriptions in the recovery plans. The Institutional Analysis section of the Guidance notes that a recovery plan should incorporate, by reference, existing materials that exist for other management purposes. The recovery plan is also a good opportunity to provide FSRA with a description of and rationale for the credit union’s organizational structure and business activities.

Under the proposed Guidance, credit unions may take into account potential supply chain weaknesses. Although FSRA does not intend to prescribe a table for this purpose, credit unions may develop their own tools. As outlined in the Guidance, a recovery plan should clearly identify any external stakeholder relationships that may be impacted by the divestiture of non-core businesses or other recovery actions.

The Guidance is not intended to be prescriptive as to triggers and related remedial actions. Rather, individual credit unions would identify such triggers and remedial actions in their recovery plans, which should be tailored to the structure, size, complexity, and risk profile of the individual institution. The Guidance emphasizes that recovery plans should describe the processes to follow upon the breach of a trigger and activation of the recovery plan, including potential escalation to senior management and/ or the credit union’s board.

Although in certain circumstances, a credit union may be able to access support from the regulator in the recovery process, a recovery plan is intended to set out the credit union’s strategy for remaining viable without such support. The plan should set out a wide range of effective recovery options in order to promote institutional resiliency. In the past, Ontario credit unions have shown resilience when faced with adversity due to implementation of effective recovery actions. A recovery plan formalizes these actions and ensures that the credit union sector has a credible recovery framework. Further, credit unions stress testing scenarios should be designed to reveal the circumstances where risks could materialize, upon which senior management and board should be informed through the activation of the recovery plan. Decisions on executions of one or more recovery actions identified will also be made.

“Effective challenge” is demonstrated in the recovery planning process if a credit union’s Board has provided oversight and input on the feasibility of recovery options. The Board is expected to have challenged the reasoning, judged whether the conclusions are supported with adequate data and analysis, questioned whether management commitments are sufficient and credible on the preparation of the recovery plan. Identifying and addressing gaps or apparent credibility issues in the recovery plan before a plan is presented to FSRA will reduce the likelihood of negative consequences of the regulator first identifying gaps and issues.

Regarding implementation, FSRA will include a transition period after the Guidance becomes effective. FSRA will require that credit unions submit credible recovery plans by January 13, 2023. However, in order to provide credit unions with an opportunity to receive feedback before this deadline, FSRA will request that credit unions provide an interim submission detailing the key components of their recovery plans by January 14, 2022. The submission should include the following:

• A description of the categories of key measures and associated triggers that may cause the activation of the recovery plan and escalation to the credit union’s senior management or Board for decision making (please refer to “B. Key measures and associated triggers” in the Approach section of the Guidance)
• Identification of draft recovery options which can be presented in the format as suggested in Appendix B to the guidance. This will lead into the comprehensive analysis to be performed after the interim submission (please refer to “C. Recovery options” in the Approach section of the Guidance)
• A description of the credit union’s stress testing procedures in accordance with FSRA’s Stress Testing Guidance, issued on January 1, 2021, and a brief description of how these scenarios (backdrop) will impact the execution of recovery options identified. This includes an outline of one or more than one type of scenarios that the credit union is planning to consider (please refer to “D. Scenario Analysis” in the Approach section of the Guidance)

FSRA will work with credit unions to ensure they submit credible recovery plans by January 2023. We will also consider proportionality in the application of the requirements of the Guidance, including the structure, size, complexity and risk profile of the credit union, and the potential consequences of the credit union’s failure. Upon implementation of the guidance, FSRA intended to conduct an annual reviews of credit union recovery plans. Once credible recovery plans are in place, the frequency may be adjusted to biennial.

There was appreciation expressed for the principles-based format of the guidance. It was emphasized that open dialogue around incremental improvements to the plan will be critical to its success.

The submission asked for clarity and suggested enhancements in the following areas:

• In order to ensure resources are not moved away from risk mitigation for recovery planning and avoid increases in costs, the requirements should be proportionate and limit duplication.
• In order to create efficiencies, FSRA should consider all current practices, reports, and requirements to ensure overlap will not occur within any new reporting, governance, or ongoing requirements.
• FSRA was requested to highlight (in a principles-based format) an example of how a stress trigger would be utilized as part of a recovery plan review and share a small list of what FSRA believes to be the most important triggers
• An application guide may be useful in helping the sector recognize and understand the outcomes desired by FSRA.
• The guidance note requires the specification of a menu of recovery options, and that each recovery plan include costs, anticipated regulatory approvals, and description how the credit union would look post-recovery. Such recovery options should be principles-based to ensure the sector does not end up chasing unobtainable outcomes.
• For plausible idiosyncratic and system stress scenarios, Libro agrees with stress testing/ scenario planning, but it should be applied in a proportionate way and the requirements should not result in additional resources and time. Further, the impact on capital and liquidity requirements over time should be clarified.
• In terms of implementation, credit unions should be permitted to have draft recovery plans developed in 2022 and be required to have them in place by the end of 2023. Ongoing annual discussions and updates should take place between 2024-27 until plans are in a strong position, after which FSRA could shift to bi-annual reviews with credit unions worth more that $1 billion. (supportive of CCUA’s implementation table)

FSRA has committed to adopting a principles-based supervisory approach, under which it is the responsibility of the regulated institution to ensure that it achieves the desired outcomes in an effective manner that is most appropriate for the institution. FSRA’s Recovery Planning Guidance and supervision will reflect this principles-based approach. Institutions should reach out to their Relationship Managers with any questions on recovery planning. Relationship Managers will work with credit unions during a transition period in order to promote understanding of the guidance and ensure the development of credible recovery plans.

In addition, FSRA’s Risk-Based Supervisory Framework (currently under development) will lead to accurate and consistent assessments of CU significant activities and risk profiles which can provide opportunities for alignment with CUs’ descriptions in the recovery plans. The Institutional Analysis section of the Guidance notes that a recovery plan should incorporate, by reference, existing materials that exist for other management purposes. The recovery plan is also a good opportunity to provide FSRA with a description of and rationale for the credit union’s organizational structure and business activities.

The Guidance is not intended to be prescriptive as to triggers and related remedial actions. Rather, individual credit unions would identify such triggers and remedial actions in their recovery plans, which should be tailored to the structure, size, complexity, and risk profile of the individual institution. The Guidance emphasizes that recovery plans should describe the processes to follow upon the breach of a trigger and activation of the recovery plan, including potential escalation to senior management and/ or the credit union’s board.

For stress testing scenarios, each credit union should be implementing a Board approved stress testing framework, which feeds into and informs recovery planning. FSRA will apply proportionality when it comes to stress testing requirements.

Regarding implementation, FSRA will include a transition period after the guidance becomes effective. FSRA will require that credit unions submit credible recovery plans by January 13, 2023. However, in order to provide credit unions with an opportunity to receive feedback before this deadline, FSRA will request that credit unions provide an interim submission detailing the key components of their recovery plans by January 14, 2022. The submission should include the following:

• A description of the categories of key measures and associated triggers that may cause the activation of the recovery plan and escalation to the credit union’s senior management or Board for decision making (please refer to “B. Key measures and associated triggers” in the Approach section of the Guidance).
• Identification of draft recovery options which can be presented in the format as suggested in Appendix B to the guidance. This will lead into the comprehensive analysis to be performed after the interim submission (please refer to “C. Recovery options” in the Approach section of the Guidance)
• A description of the credit union’s stress testing procedures in accordance with FSRA’s Stress Testing Guidance, issued on January 1, 2021, and a brief description of how these scenarios (backdrop) will impact the execution of recovery options identified. This includes an outline of one or more than one type of scenarios that the credit union is planning to consider (please refer to “D. Scenario Analysis” in the Approach section of the Guidance)

FSRA will work with credit unions to ensure they submit credible recovery plans by January 2023. We will also consider proportionality in the application of the requirements of the guidance, including the structure, size, complexity and risk profile of the credit union, and the potential consequences of the credit union’s failure.

The submission supported FSRA’s effort to enhance crisis preparedness and resiliency of the Ontario credit union system, but wanted to ensure the benefits justify the resources that must be dedicated to developing and maintain recovery plans. It emphasized the importance of the proportionality and timing of implementation.

The submission also raised the following:

• Resources and efforts should still focus on proactive risk management activities, and ensure recovery planning does not draw resources from this.
• The Resilience Assessment component should only be considered in the Overall Risk Rating (ORR) for credit unions that pose higher risk. This would ensure resources are properly allocated.
• The development of a clear framework should be required in 2022, with recovery plans being in place by end of 2023. Annual discussions and updates should take place between 2024-2y until plans are in a strong position and then FSRA should shift to bi-annual reviews for credit unions with assets greater than $1 Billion.
• FSRA should not set a standard higher than would be considered by an insurer adjudicating a potential claim due to an unforeseen event.

FSRA has committed to adopting a principles-based supervisory approach, under which it is the responsibility of the regulated institution to ensure that it achieves the desired outcomes in an effective manner that is most appropriate for the institution. FSRA’s Recovery Planning Guidance and supervision will reflect this principles-based approach. Institutions should reach out to their Relationship Managers with any questions on recovery planning. Relationship Managers will work with credit unions during a transition period in order to promote understanding of the guidance and ensure the development of credible recovery plans.

The Resilience Assessment component within FSRA’s Risk-Based Supervisory Framework (currently under development) would assess non-financial resilience factors that are governance and operational-based and would focus on crisis preparedness. The ability to adapt, take timely action to respond to adverse conditions is important to all CUs in the sector.

Regarding implementation, FSRA will include a transition period after the guidance becomes effective. FSRA will require that credit unions submit credible recovery plans by January 13, 2023. However, in order to provide credit unions with an opportunity to receive feedback before this deadline, FSRA will request that credit unions provide an interim submission detailing the key components of their recovery plans by January 14, 2022. The submission should include the following:

• A description of the categories of key measures and associated triggers that may cause the activation of the recovery plan and escalation to the credit union’s senior management or Board for decision making (please refer to “B. Key measures and associated triggers” in the Approach section of the Guidance)
• Identification of draft recovery options which can be presented in the format as suggested in Appendix B to the guidance. This will lead into the comprehensive analysis to be performed after the interim submission (please refer to “C. Recovery options” in the Approach section of the Guidance)
• A description of the credit union’s stress testing procedures in accordance with FSRA’s Stress Testing Guidance, issued on January 1, 2021, and a brief description of how these scenarios (backdrop) will impact the execution of recovery options identified. This includes an outline of one or more than one type of scenarios that the credit union is planning to consider (please refer to “D. Scenario Analysis” in the Approach section of the Guidance)

FSRA will work with credit unions to ensure they submit credible recovery plans by January 2023. We will also consider proportionality in the application of the requirements of the guidance, including the structure, size, complexity and risk profile of the credit union, and the potential consequences of the credit union’s failure.

Finally, the Interpretation section of the Guidance sets out FSRA’s interpretation of legally binding requirements under the CUCPA and does not set new requirements . In the past, Ontario credit unions have shown resilience when faced with adversity due to implementation of effective recovery actions. A recovery plan formalizes these actions and ensures that the credit union sector has a credible recovery framework.