The Office of the Superintendent of Financial Institutions has published its proposal to levy surcharges on “problematic financial institutions” for the added cost of their regulation. The proposal appears in the latest issue of the Canada Gazette. OSFI is currently funded mainly through assessments on the industry and a user-fee program for selected services.

The Assessment of Financial Institutions Regulations 2001 will replace the existing regulations and introduce a new regime to allocate OSFI’s annual operating costs to institutions within each sector. The regulations will also implement a user-pay program to more fairly distribute OSFI’s costs. Phase 1, which was completed on Jan. 1, 1999, introduced user fees for significant activities that OSFI undertakes for specific institutions and third parties. Phase 2 includes a full review of the current assessment methodology for each industry sector as well as a review of the feasibility of introducing a surcharge for “problem institutions”.

The main change to the regulations is the introduction of assessment surcharges for “problem institutions”. The introduction of a surcharge is intended to recognize the additional resources required to supervise and monitor these institutions, reallocating costs on a more equitable basis. A surcharge will also apply to FRFI affiliates of a “problem institution” to reflect the increased cost of supervising the group.

Further, a number of amendments are being made to the assessment methodology for the insurance sector in order to address some of the inequities and certain other issues arising out of the current approach.

The new regulations include 25% of foreign premiums in the assessment bases for the insurance sector. The assessment base for insurers is also amended to include a 25% reduction for the portion of the company’s premium base that exceeds $100 million to reflect the efficiencies in supervising large companies. As well, the assessment formula is amended to provide for a more gradual increase in the assessments for small companies as they move above the minimum threshold.

In order to allow FRFIs time to adjust to the new regulations, a transitional rule will have the effect of phasing-in the surcharges and the inclusion of foreign premiums over a two-year period.