Much of the financial industry is sound, but pension plan solvency remains a concern, says Nick Le Pan, Superintendent at the Office of the Superintendent of Financial Institutions.

Speaking at the Empire Club of Canada in Toronto today,
Le Pan also called for more rational market regulation.

He noted that the credit quality of banks has been excellent and they are well capitalized. Capital ratios for the life insurance industry remain well above minimum regulatory requirements, he added. “Overall, we see a stable outlook, with improvements in profitability, asset quality and capital levels.”

That said, he noted that, “inherent operational risk for banks and insurers is still increasing, though so is the capability to manage it. Reputation risk issues, including anti-money laundering and counter-terrorist financing, deserve ongoing heightened attention. Our message is also that expense control should not undercut high quality compliance and risk management.”

“Parts of the banking and insurance industries have experienced material compliance lapses,” Le Pan allowed. “But these have not been systemic in Canada in my judgment. The response by industry in tightening oversight and governance from OSFI’s perspective has been impressive.”

“In contrast, the defined benefit pension plans that OSFI regulates continue to show significant challenges to their long-term health and viability,” he cautioned. “Our estimates show that some three-quarters of defined benefit pension plans have a solvency ratio of less than one and the number of plans on our watch list is rising and we expect it to rise further.” Le Pan indicated that while the situation for defined benefit pension plans continues to be challenging, “I believe it is manageable.”

Le Pan went on to criticize the volume of market conduct regulation, “On the market conduct side of financial institutions regulation, we have a bewildering array of actors, both federally and provincially, risk-based approaches to regulation are just starting to be talked about, a range of products that are economically similar are treated differently, and my sense is that compliance costs are rising rapidly.”

He suggested that we’ve reached “new rule overload”, citing new accounting rules, Sarbanes Oxley 404, new international rules in banking and insurance, and new market conduct rules.

“More and more rules, and more detailed rules, risk becoming a checklist, at which point their benefit is greatly reduced,” he said. “The rules themselves become a risk. At worst, a financial institution or a regulator administering a plethora of rules may take their eye off the things that really matter.”

On the subject of pension funding rules, Le Pan suggested that OSFI would support flexibility in the regulations, perhaps temporarily, for plans to deal with increased deficits.