Building off of the Office of the Superintendent of Financial Institution's (OSFI's) Culture Risk Management Letter published on March 15, 2022 and the ensuing feedback, OSFI has published a draft Culture and Behaviour Risk Guideline (Proposed Guideline) for consultation on February 28, 2023. The Proposed Guideline is intended to complement OSFI's existing guidance for Corporate Governance, Operational Risk Management, and Regulatory Compliance Management. The Proposed Guideline would apply to all federally regulated financial institutions (FRFIs).
OSFI recognizes that organizational culture poses risks that can have a material impact on the health of a financial institution, and on the broader financial system. OSFI defines culture risk as the widespread behaviours and mindsets that can threaten sound decision making, prudent risk-taking, and effective risk management, which can lead to a weakening of an institution's financial and operational resilience. With this in mind, OSFI is enhancing their assessment of culture risks to include items beyond corporate governance for a more comprehensive assessment of the adequacy and effectiveness of FRFIs in managing organizational culture risk. The Proposed Guideline supports OSFI's mandate to contribute to public confidence in the Canadian financial system.
The Proposed Guideline sets outcomes and principles-based expectations for FRFIs to oversee their culture and assess the impact of behaviour patterns to effectively manage the associated risks. The guideline details the following outcomes and principles:
| Outcome 1: | Culture and behaviour are designed and governed through clear accountabilities and oversight |
| Principle 1: | Desired culture and expected behaviours are designed to align with the purpose and strategy of the FRFI and governed through appropriate structures and frameworks |
| Outcome 2: | Desired culture and expected behaviour are proactively promoted and reinforced |
| Principle 2: | Leaders, at all levels, consistently promote and reinforce the desired culture and expected behaviours through their words, actions, and decisions |
| Principle 3: | Talent and performance management strategies and practices promote and reinforce the desired culture and expected behaviours |
| Principle 4: | Compensation, incentives, and rewards promote and reinforce the desired culture and expected behaviours |
| Outcome 3: |
Risks emerging from behaviour patterns are identified and proactively managed |
| Principle 5: | FRFIs proactively monitor for, assess, and act to address risks related to culture and behaviour that may influence their resilience |
OSFI expects FRFIs to design, govern and manage culture and behaviour in accordance with the FRFI's size, nature, scope, complexity of operations, strategy, and risk profile. Senior management will be held accountable for the design, implementation, and monitoring of FRFI culture, and robust governance structures that address and embed the desired culture across the institution. OSFI suggests that FRFIs take a 'tone from the top,' supported by middle management and an 'echo from the bottom' approach to managing cultural and behaviour risk.
At a minimum, OSFI expects FRFIs to use leadership, talent and performance management practices, and compensation and incentive plans to promote and/or reinforce their desired culture and expected behaviours. On the management side, OSFI expects FRFIs to implement strategies to monitor, identify, assess, and manage risks arising from behaviour patterns that do not align with the desired culture and expected behaviour - such as complacency, excessive risk taking, poor communication, or lack of speaking up or raising concerns.
The consultation period runs until March 31, 2023. Industry and stakeholders can comment on the draft Culture and Behavior Risk Guideline by contacting culture@osfi-bsif.gc.ca. The final guideline is expected by the end of 2023, along with a self-assessment tool to help FRFIs review the design and effectiveness of their practices and support compliance with the Proposed Guideline.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.