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The purpose of this glossary is to explain how BC Financial Services Authority (“BCFSA”) interprets the terms used in the Assessment Criteria. Explanations should be read in conjunction with the Supervisory Framework and the Assessment Criteria.
|Adequacy of, appropriateness of, and extent to which
|These terms allow supervisors to scale the Assessment Criteria to the nature, scope, complexity, and risk profile of each provincially regulated financial institution (“PRFI”). Supervisors must use sound and informed judgement in applying the criteria to the unique circumstances of the PRFI. This approach is necessary because the Assessment Criteria, like the Supervisory Framework, are designed to apply to all types and sizes of PRFIs supervised by BCFSA.
|Adverse business, or economic conditions
|Most Supervisory Framework assessments are qualitative assessments based on informed judgement by supervisors. These assessments consider the economic environment, conditions in the local economy, and the specific context of a PRFI. Adverse implies unusual, i.e., what is unexpected.
|With reference to the overall net risk, this is consistent with what would be expected, on average, at a well-managed PRFI. This is not a quantitative measure but a supervisor’s assessment of the likelihood of a material adverse impact, derived from an understanding of the PRFI and its industry.
|A centralized or enterprise-wide activity that is not a line of business. For example, an activity related to the IT platform, banking book, or investments management which encompasses the aggregate positions or support across the organization. Generally, centralized activities are discrete activities that operate and are managed independently from the business activities they support. As discrete activities, they have their own unique inherent risks, and controls.
|Generally accepted industry practices
|This term is not a reference to codified standards, but to practices observed by BCFSA to be in use at PRFIs. BCFSA focuses on practices in its regulated sectors but may also consider those practices in the wider industry in Canada.
|Refers to the state in which a PRFI is subject to effective, corporate governance; is operating within an appropriate control environment with effective strategic and risk management processes; and has demonstrated the capability and willingness to identify and effectively resolve significant control weaknesses in a timely basis.
|The function is not subject to the undue influence of operations management in the areas it oversees, nor is it directly involved in the management or execution of the activities in those areas. To be effective, an oversight function needs to be independent of the department, process, or activity it is mandated to oversee.
|Periodic reviews of risk management control (“oversight”) functions by a person or group independent of that function. The need for and frequency of these reviews will depend on the size and complexity of a PRFI and is at its discretion. The practice is not usually found in smaller PRFIs because senior management and the board are normally sufficiently informed to make an independent review unnecessary. Reviews may be carried out internally (e.g., by internal audit, or by an outside consultant) depending on the objectives of the review and the availability of required expertise and resources.
|Benchmarks normally used by PRFIs and BCFSA to measure operating performance. They include such measures as ROE, ROA, ROI, delinquency ratios, expense or efficiency ratios, and production and member retention ratios.
|Line of business
|A revenue-generating activity through which an institution executes its strategy.
|Lines of Defence (first, second, and third)
|The Supervisory Framework characterizes the institution’s risk management under a “Three Lines of Defence” model. The first line is made up of the risk-takers who make the decision to take on the risks and manage the risks they generate. The second line is an independent staff within the institution that sets risk-taking limits and ensures that all risks are being appropriately managed. The third line audits and verifies the efforts of the other two to ensure that nothing falls through the cracks. The Board of Directors and Senior Management are responsible for overseeing these lines of defence.
|Based on a reasonable expectation that the PRFI will be able to continue to operate, bring value to its members, adapt to change, and mitigate future risks over a long period of time.
|Measures the relative significance of a PRFI’s activities to the attainment of its business objectives. It is multi-dimensional, prospective and considers both qualitative and quantitative factors. Sound and informed judgement is critical in the determination of materiality.
|Normal business or economic conditions
|Most Supervisory Framework assessments are qualitative assessments based on informed judgement by supervisors. These assessments consider the economic environment, conditions in the local economy, and the specific context of a PRFI. Normal implies usual, i.e., what is expected or forecasted.
|Responsible for planning, directing, and controlling the day-to-day operations of a significant activity of a PRFI. Operational management is the first line of defence in a “Three Lines of Defence” model.
|A person, unit, or department that has a responsibility in a PRFI to provide objective assessment, reporting, and/or assurance; this includes the risk management, compliance, and internal audit functions. The oversight functions are independent from the frontline staff and are considered the second and third lines of defence in the “Three Lines of Defence” model.
|Refers to the guiding principles by which a PRFI conducts its activities. A PRFI’s regular or usual practices are a manifestation of these principles, whether written or unwritten.
|Includes those individuals responsible for overseeing the effective management of the PRFI’s operations. They frequently have policy-making responsibilities. As the Supervisory Framework and Assessment Criteria are applicable to all PRFIs, the number and titles of senior management will vary based on the size and complexity of a PRFI and how it is organized.
|Activities that are material to a PRFI’s operations and/or strategies, and can be lines of business, business units, or centralized processes. BCFSA will generally group a PRFI’s activities in a manner that is consistent with the way in which the PRFI is structured and managed.
|Used in the definition of overall net risk to signal that a PRFI’s risk management is sufficiently effective, and that the probability of a material adverse impact on its liquidity, capital, and earnings is expected to be lower than average.
|Refers to BCFSA’s and the PRFI’s expected level of capital for the PRFI risk profile.
|Excessive or exceeds what is appropriate or normal.
|What is considered necessary
|Assessed in relation to each PRFI’s risk profile in the context of its safety, stability, and conduct.