Canada’s banking regulator to probe foreign interference at lenders

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Canada’s banking regulator is expanding its mandate to begin probing issues of foreign interference and national-security issues at the country’s largest banks and insurers by early next year.

Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), said Tuesday that the regulator will add new oversight of non-financial risks as geopolitical tensions escalate. OSFI plans to monitor ways that foreign actors could “infiltrate Canadian financial institutions’ networks to steal sensitive financial data” and banks “could become conduits for foreign funds used in illegal activities.”

“Over the two years that I’ve been Superintendent, geopolitical risk and its offshoots have increased in significance, and what we’re doing is a response to that risk,” Mr. Routledge told reporters at a media roundtable during a conference hosted by the Global Risk Institute in Toronto. “There’s a possibility that that intensity metastasizes over into the financial system, and we want our institutions ready to adapt to that.”

In March, Ottawa unveiled the enhanced mandate in the federal budget, proposing that OSFI be given the authority to determine whether financial institutions have sufficient protection against security threats such as foreign interference. This could include expanding the range of circumstances in which the regulator can take control of a federally regulated institution, including national-security risks.

Concerns over foreign inference have been thrust into the spotlight amid Russia’s continuing war in Ukraine and involvement by China and other hostile states in Canadian elections. Finance Minister Chrystia Freeland has also ordered Wealth One Bank of Canada to comply with extraordinary national-security conditions aimed at guarding its operations against investors who have faced federal scrutiny over alleged links to the Chinese government.

As the federal government grapples with how to address national-security concerns, OSFI provided the first glimpse into the changes to its scope as it works toward finalizing the guidelines by January, 2024. Among its new responsibilities, the regulator is also charged with reporting its findings to the minister at least annually.

Mr. Routledge said that the guidelines will not add new or previously unrecognized risks for banks to monitor but instead provide the regulator with the runway to assess whether the lenders have sufficient measures to identify and prevent these issues. OSFI plans to monitor procedures around cybersecurity, money laundering and terrorist financing, and ownership and control of Canadian financial institutions.

“What will feel different is that we are going to proactively and assertively go out to the institutions next year and have them answer questions and work with us so that we can confirm that they do have – in our judgment – the protections in place that we think are necessary for enhancing their integrity and their security,” Mr. Routledge said in response to a question from The Globe and Mail. “Is that going to feel like new things to do? It’s going to feel like a bit more scrutiny and intensity around non-financial risks.”

The guidelines are not meant to change the criteria lenders follow when assessing the risk of a loan. Instead, OSFI’s oversight will grow to ensure that they are properly documenting and following those rules.

“Is it going to change fundamentally how they think about lending? No, but it will shine a little bit more light on that practice and we’ll see what the banks think about that,” Mr. Routledge said.

OSFI is not the only federal agency that monitors anti-money laundering practices at the banks. Canada’s financial intelligence unit, the Financial Transactions and Reports Analysis Centre of Canada, is responsible for collecting and analyzing information about anti-money-laundering threats and communicating its assessments to law enforcement.

Mr. Routledge said that the two agencies are ironing out the details on how they will work together in monitoring anti-money-laundering issues. He added that the regulator does not have any plans to work with other regulators and agencies that oversee global financial institutions.

OSFI has also been raising capital requirements, prompting banks to set aside billions of dollars that would provide a cushion during an economic downturn. Critics have argued that the higher bar restricts the ability of banks to deploy capital for acquisitions, return funds to their investors through share buybacks and dividend increases, or to invest back into their business segments.

“We don’t actively seek to cripple an institution’s ability to compete and take reasonable risks,” Mr. Routledge said. “Where a constituent that we regulate comes to us and says, ‘Wow, you guys are really making it hard for us,’ our job is to listen and react constructively. The constraints imposed on us by Parliament are to make sure the financial system is safe, and make sure the financial system is available to Canadians every day in hard times as well as in good times.”