4 Audit of the Office of the Superintendent of Financial Institutions

Table of Contents

Table of contents

Summary

4.1 The Office of the Superintendent of Financial Institutions (OSFI) was established in 1987 by the Office of the Superintendent of Financial Institutions Act. The OSFI is responsible for the regulation and supervision of all federally chartered, licensed or registered banks, insurance companies, trust and loan companies, co-operative credit associations and fraternal benefit societies. While the OSFI is a separate agency, its employees are appointed in accordance with the Public Service Employment Act (PSEA). In 2009-2010, the OSFI had a budget of about $90.8 million and 535 full-time equivalents.

4.2 The objectives of the audit were to determine whether the OSFI had an appropriate framework, systems and practices in place to manage its appointment activities and whether appointments and appointment processes complied with the PSEA, the Public Service Employment Regulations (PSER), the Public Service Commission (PSC) Appointment Framework and other governing authorities.

4.3 Our audit of the OSFI indicated that some aspects of the Appointment Framework were in place and others needed improvement. We found that the OSFI's planning activities did link its current and future human resources (HR) needs with its business priorities and provided staffing strategies. However, we noted that the OSFI had not completed any variance analysis to identify what staffing activities had been conducted during the period versus what had been planned, and whether any adjustments to the HR plan or strategies would be required.

4.4 Our audit found that the OSFI had put in place the mandatory appointment policies and criteria. We also found that the OSFI had developed a checklist to assist HR advisors and sub-delegated managers in documenting their files for advertised processes.

4.5 We noted, however, that no effective control mechanisms had been developed to monitor the compliance of appointments and the accuracy of the documentation, such as comprehensive assessments and appropriate written rationales to support appointment decisions. This resulted in situations where supporting documentation did not always substantiate that merit was met and that the guiding values were respected throughout the appointment process.

4.6 Our review of the OSFI's appointment files indicated that the compliance of the OSFI's appointments and appointment processes with the PSEA, the PSER and the PSC Appointment Framework requires improvement. We found that merit was met in just less than half of the appointments we audited. However, in almost half of the appointments we reviewed, we found that merit was not demonstrated and, in a few appointments, merit was not met.

4.7 In a few of the appointment processes reviewed, we found indicators of either error, omission or improper conduct. Such conduct could jeopardize the guiding values, particularly the value of fairness. Also, most of the rationales for the non-advertised appointment processes we audited did not comply with the PSC Appointment Framework, as they failed to address all of the guiding values. In addition, we found situations where priority persons did not receive appropriate consideration.

4.8 The OSFI accepted the audit findings and elaborated an action plan to address the issues raised in the audit report.

4.9 The PSC will monitor OSFI follow-up action to the audit recommendations through its regular monitoring activities, including the annual Departmental Staffing Accountability Report; as a result, the PSC has decided not to amend the existing delegation agreement with the deputy head of Office of the Superintendant of Financial Institutions.

Background

Office of the Superintendent of Financial Institutions

4.10 The OSFI was established in 1987 by the Office of the Superintendent of Financial Institutions Act. This legislation created a single regulatory agency responsible for the regulation and supervision of all federally chartered, licensed or registered banks, insurance companies, trust and loan companies, co-operative credit associations and fraternal benefit societies.

4.11 The OSFI's mandate is to:

  • Supervise federally regulated financial institutions and private pension plans to determine whether they are in sound financial condition and meet minimum plan funding requirements, respectively, and comply with their governing law and supervisory requirements;
  • Promptly advise these institutions and these plans in the event that there are material deficiencies and take, or require management, boards or plan administrators to take, necessary corrective measures expeditiously;
  • Advance and administer a regulatory framework that promotes the adoption of policies and procedures designed to control and manage risk; and
  • Monitor and evaluate system-wide or sectoral issues that may have a negative impact on institutions.

4.12 The OSFI is headed by a superintendent and reports to Parliament through the Minister of Finance. It falls under Schedule V of the Financial Administration Act and, as such, is a separate agency; however, employees of the OSFI are appointed in accordance with the PSEA. The OSFI's national headquarters are located in the National Capital Region, with offices in Montréal, Toronto and Vancouver. Human resources (HR) advisors in the Toronto office provide staffing advice to the Vancouver office, and those in Ottawa provide staffing advice to the Montréal office.

4.13 As of March 31, 2010, the population of the OSFI was composed of 503 indeterminate employees, 32 specified term employees and 11 casual employees. For 2009-2010, the OSFI had a budget of about $90.8 million. The OSFI is funded mainly through asset-, premium- or membership-based assessments on the financial services industry, as well as a user-pay program for selected services. A very small portion of the OSFI's financial resources is derived from the Government of Canada.

4.14 Over the last few years, the OSFI has needed to respond to the demands of a major global economic crisis. The OSFI performed 185 staffing activities in 2009-2010, compared to 153 in 2008-2009 and 93 in 2007-2008. According to the OSFI, the recent financial crisis has had an impact on HR. The organization has grown, which has necessitated a high volume of staffing activities. In that context, several external factors, such as challenging economic and market conditions, continuing industry complexity and demand for specialized skills, had a significant influence on the OSFI's business. According to the OSFI, the competition for talent in the financial sector is significant, which has had an effect on its ability to recruit and ensure that it has the right skills at the right time to be able to deliver its business goals.

4.15 The PSC is responsible for the administration of the PSEA. This Act gives the PSC exclusive authority to make appointments to and within the public service. Appointments by the PSC are made on the basis of merit and must be free from political influence. The PSEA further allows the PSC to delegate to organizational deputy heads its authority for making appointments. The PSC signed an Appointment Delegation and Accountability Instrument with the Superintendent of the OSFI. The Superintendent had full delegation authority during the period covered by our audit.

Purpose and methodology of the audit

4.16 This audit covers the OSFI's appointment activities for the period from April 1, 2008, to March 31, 2010. The objectives of the audit were to determine whether the OSFI had an appropriate framework, systems and practices in place to manage its staffing activities and to determine whether appointments and appointment processes complied with the PSEA, the PSER, the PSC Appointment Framework and other governing authorities. For more details about our methodology, refer to the section entitled About the audit at the end of this report.

Observations and recommendations

Observations on the appointment framework

Staffing strategies have been identified

4.17 We expected that the OSFI would have staffing strategies that support organizational staffing priorities. Staffing strategies describe the staffing actions that the organization plans to take to implement the staffing priorities of senior management.

4.18 We found that the OSFI's HR plan for 2009/2010 - 2011/2012 outlines the strategic outcomes and business plan, as well as major HR challenges and the strategies to address these challenges. For instance, the OSFI established a strategy to increase the number of specialists in the capital, reinsurance and actuarial areas to address recruitment challenges within the Regulation sector. The OSFI's HR plan was regularly discussed at Executive Committee meetings.

4.19 The OSFI's HR plan also included a workforce analysis and considered current and future staffing needs. However, we noted that the plan did not clearly state how its staffing strategies would be undertaken, nor did it articulate the expected results and performance indicators of each strategy. We also found that the OSFI had not completed any variance analysis to identify what staffing activities had been conducted during the period versus what had been planned, and whether any adjustments to the HR plan or strategies would be required.

Recommendation 1

The Superintendent of the Office of the Superintendent of Financial Institutions should implement a mechanism to identify what staffing transactions have been conducted and how, compared to what had been planned, to identify whether adjustments to its plan or staffing strategies are required.

Response from the Office of the Superintendant of Financial Institutions:

OSFI is undertaking an in-depth review of its integrated HR and Business planning exercise. To this effect more efficient planning tools are being developed to compare the actual versus planned staffing activities which will allow the organization to adjust its staffing strategies accordingly.

Appointment policies and criteria have been implemented

4.20 We expected the OFSI to have established organizational policies and criteria consistent with the PSEA and the PSC Appointment Framework. The Framework requires that organizations establish mandatory policies with respect to area of selection, corrective action and revocation and criteria for use of non-advertised appointment processes.

4.21 We found that the OSFI had put in place the appointment policies that are mandatory according to the PSC Appointment Framework. The OSFI had also established a staffing policy, which included criteria for non-advertised appointments. However, we found that the OSFI's staffing policy did not reflect the core values of merit and non-partisanship nor the guiding values of fairness, access, transparency and representativeness, as per the PSC Appointment Framework. In early 2011, the OSFI had revised its staffing policy to reflect the core and guiding values.

4.22 The OSFI's policy on area of selection for external appointment processes reflects that all advertised external appointment processes will have a national area of selection, with the exception of positions providing administrative services and student employment programs such as the Federal Student Work Experience Program. This exception is not consistent with the PSC's national area of selection requirement. During our review, we found no situations of non-compliance as a result of this situation. The OSFI revised its policy on area of selection in the spring of 2011 to comply with the PSC's requirements.

Roles and responsibilities are communicated and a sub-delegation framework is in place

4.23 We expected the OSFI to have mechanisms in place to ensure that stakeholders are informed of their roles and responsibilities and have the support to carry out their appointment-related responsibilities. We also expected the OSFI to have established a sub-delegation instrument that is compliant with the PSEA and the PSC Appointment Framework.

4.24 We found that roles and responsibilities for staffing are communicated to HR advisors and sub-delegated managers. We noted that the OSFI had developed HR service standards that identify the responsibilities of sub-delegated managers and HR advisors during appointment processes. We found that the OSFI's sub-delegated managers received training on the PSEA prior to being able to exercise their staffing authorities. We also found that sub-delegated managers had access to an HR advisor whose knowledge had been validated by the PSC.

4.25 Our audit further revealed that the OSFI's appointment policies and key documents were available to sub-delegated managers and HR advisors on the OSFI's intranet. In addition, we found that a variety of staffing tools such as checklists, templates and forms were available to assist sub-delegated managers and HR advisors in conducting their appointment processes.

4.26 We noted that the OSFI had a written sub-delegation instrument which was consistent with the PSC's requirements. However, we found that there were discrepancies in the level of sub-delegation between the OSFI's sub-delegation instrument and its staffing policy. For example, we noted that the level of authority to appoint a person following a non-advertised process was sub-delegated to a lower level in the OSFI's sub-delegation instrument than was provided for in its staffing policy. As a result, we found that, in 76% (22 out of 29) of the non-advertised appointments reviewed, the letters of offer were not signed by the appropriate level of sub-delegated manager, based on the OSFI's sub-delegation instrument. In February 2011, the OSFI had revised its sub-delegation framework to address the situation.

Control mechanisms at the transactional level need improvement

4.27 Monitoring is an ongoing process of gathering and analyzing qualitative and quantitative information on current and past staffing results. This allows organizations to assess staffing management and performance (including risk assessment related to appointments and appointment processes). It also makes it possible to identify early corrective action, to manage and minimize risk and to improve staffing performance.

4.28 We expected the OSFI to have control mechanisms in place to ensure that appointments and appointment processes are monitored and that appropriate actions are taken, as needed.

4.29 We found that, during the period covered by our audit, the OSFI had produced quarterly monitoring reports for both 2008-2009 and 2009-2010. These included statistical data such as the number of non-advertised compared to advertised processes, the number of processes using a national area of selection in external recruitment, the number of non-imperative staffing processes and the number of casuals appointed to term or indeterminate positions through non-advertised processes. In our opinion, the regular review of appointment processes and practices constitutes a good control mechanism. This review may identify patterns and situations requiring remedial attention.

4.30 Although it is not a requirement, we found that the OSFI had implemented a checklist to assist HR advisors and sub-delegated managers in documenting their files for advertised processes, which is consistent with the PSC Appointment Framework. However, we noted that no effective control mechanisms had been developed by the OSFI to monitor the compliance of appointments and the accuracy of the documentation, such as comprehensive assessments and appropriate written rationales to support appointment decisions. This resulted in situations where supporting documentation did not always substantiate that merit was met and that the guiding values were respected throughout the appointment process, as presented in the following section.

Recommendation 2

The Superintendent of the Office of the Superintendent of Financial Institutions should establish and implement a control mechanism at the transactional level to ensure that supporting documentation as it pertains to appointment-related decisions is comprehensive, accurate and compliant with the Public Service Employment Act, the Public Service Employment Regulations, the Public Service Commission Appointment Framework and other governing authorities.

Response from the Office of the Superintendant of Financial Institutions:

We agree with the recommendation that our documentation should clearly support our appointments. To this end we have already reviewed our existing staffing checklist to ensure it is comprehensive, accurate and compliant. Each staffing file is now reviewed in detail against the checklist according to the specific process used and accompanying requirements, then signed by the HR Assistant and the HR Advisor. This will ensure that all documents needed to make appointment decisions are in the staffing file, thereby ensuring that merit can be demonstrated.

Observations on merit

4.31 Section 30 of the PSEA establishes that appointments must be made on the basis of merit. Merit is met when the Commission is satisfied that the person to be appointed meets the essential qualifications for the work to be performed, as established by the deputy head, and, if applicable, any other asset qualifications, operational requirements or organizational needs established by the deputy head.

4.32 We expected the OSFI's appointments and appointment processes to respect the core value of merit. We also expected the OSFI's appointment files to contain sufficient and appropriate documentation to support selection and appointment decisions.

Merit was met in just less than half of the appointments audited

4.33 We found that merit was met in 48% (31 out of 64) of the appointments we audited. We noted that merit was not met in 5% (3 out of 64) of the appointments audited. Table 1 provides a summary of our observations concerning merit.

Table 1: Observations on merit
Observations Number of appointments by process type Total
Advertised Non-advertised
Merit was met Assessment tools or methods evaluated the essential qualifications and other merit criteria identified for the appointment; the person appointed met these requirements. 19 (54%) 12 (41%) 31 (48%)
Merit was not demonstrated Assessment tools or methods did not demonstrate that the person appointed met the identified requirements. 14 (40%) 16 (55%) 30 (47%)
Merit was not met The person appointed failed to meet one or more of the essential qualifications or other applicable merit criteria identified. 2 (6%) 1 (4%) 3 (5%)
Total appointments audited 35 (100%) 29 (100%) 64 (100%)

Source: Audit and Data Services Branch, Public Service Commission

4.34 Exhibit 1 presents an example where merit was not met.

Exhibit 1: Merit was not met

In an external non-advertised appointment process, the person appointed did not meet merit. The assessment material on file indicated that the person appointed failed three of the essential qualifications (knowledge of generally accepted accounting principles, teamwork and co-operation and interpersonal communication) and one asset qualification (knowledge of MS Access and the Free Balance Financial System) used to make the appointment.

Source: Audit and Data Services Branch, Public Service Commission

4.35 We also noted that merit was not demonstrated in 47% (30 out of 64) of the appointments we reviewed, since we were not able to conclude whether the person appointed met all of the essential qualifications. In these appointments, either there was no clear link between the qualifications and the assessment tools used to evaluate them or the assessment did not fully evaluate one or more essential qualifications. The following Exhibit 2 presents one example where merit was not demonstrated.

Exhibit 2: Merit was not demonstrated

In an external advertised appointment process, the screening board report did not demonstrate that all candidates work experience was evaluated at the screening stage and that the applicants were properly screened-in. In addition, one essential qualification (knowledge of asset/liability management) indicated on the statement of merit criteria was never assessed. Consequently, the assessment tools did not demonstrate that the person appointed met all of the identified requirements.

Source: Audit and Data Services Branch, Public Service Commission

Observations on guiding values

Three appointment processes had indicators of either error, omission or improper conduct

4.36 The process of selecting and appointing a person requires that decisions be made objectively and respect the guiding values of fairness, transparency, access and representativeness. The appointment files must demonstrate that these values were respected throughout the appointment process.

4.37 In 5% (3 out of 64) of the appointments we reviewed, we found one or more indicators of either error, omission or improper conduct which could jeopardize the guiding values, particularly the value of fairness. These appointment processes were characterized by the following:

  • The essential qualifications on the statement of merit criteria were established in a way that was to the benefit of the person appointed;
  • Persons entitled to appointment in priority were not considered, or priority clearance was not requested or was obtained after the effective date of appointment;
  • There was a staged evolution whereby the person appointed temporarily occupied a lower-level position to gain the required experience following an external advertised process before the manager conducted an internal non-advertised appointment at a higher level; and
  • The person appointed gained the necessary experience under a temporary status and was then appointed through an external non-advertised process.

4.38 We also found that merit was not demonstrated in two of the appointment processes.

4.39 Exhibit 3 presents an example of an appointment with indicators of either error, omission or improper conduct.

Exhibit 3: Appointment process with indicators of either error, omission or improper conduct

In an external non-advertised appointment process, the essential qualifications established to make the appointment were customized in favour of the person appointed. Also, as per the assessment and rationale, the person appointed met all of the essential qualifications due to their previous casual employment. Furthermore, during our review of the file, we could not determine whether persons with priority entitlements were considered for appointment, since the OSFI was not able to provide us with evidence that a priority clearance from the PSC was requested before making the appointment.

Source: Audit and Data Services Branch, Public Service Commission

Most rationales for non-advertised processes were non-compliant

4.40 We expected that, pursuant to the PSC Choice of Appointment Process Policy, non-advertised appointments would be accompanied by a written rationale demonstrating how the process meets the organization's established criteria and the appointment values.

4.41 In our initial review of 29 non-advertised processes, we found no rationales on the appointment files to demonstrate how the processes met the guiding values. The OSFI subsequently provided the PSC with rationales for these processes, which were prepared during the course of our audit. Our review of these rationales revealed that 24% (7 out of 29) demonstrated how the processes met the guiding values, 76% (22 out of 29) did not demonstrate that representativeness was respected and 72% (21 out of 29) failed to address at least one other guiding value.

Other areas of non-compliance

4.42 The requirement for informal discussion and notifications were not always respected in internal advertised processes: As per section 48 of the PSEA and the PSC policies on notification and informal discussion, we expected candidates to an internal advertised process to be provided with the following:

  • Information, in a timely manner, about the decision to eliminate them from further consideration (informal discussion);
  • A notification of consideration of the persons being considered for appointment; and
  • A notification of the persons being proposed for appointment, or those being appointed.

4.43 We found evidence that, in 7% (2 out of 29) of the appointment processes we reviewed, informal discussion was not offered to candidates who were no longer being considered. Thus, persons eliminated from consideration may have been denied the opportunity to discuss the decision to eliminate them, as soon as possible after that decision was made.

4.44 Notifications provide candidates with an opportunity to have informal discussions and to be informed of their rights and the grounds upon which they may make a complaint to the Public Service Staffing Tribunal. In 38% (11 out of 29) of the internal advertised and non-advertised processes we audited, the OSFI was unable to provide sufficient evidence to conclude that the requirements for notification of consideration and/or notification of appointment or proposed appointment were respected. This could have resulted in denying the candidates their rights to make a complaint to the PSST and in the guiding values of transparency and fairness not being respected.

4.45 As indicated previously, the OSFI has developed no control mechanisms to monitor the compliance of appointments and the accuracy of the documentation, which has resulted in various situations of non-compliance.

4.46 Priority persons did not always receive appropriate consideration: The PSEA and the PSER govern appointments to positions in the public service. Among these provisions are clauses that provide an entitlement, for limited periods, for certain persons who meet specific conditions to be appointed in priority to others. To be appointed, the person must meet the essential qualifications of the position. An organization must take into consideration persons with priority entitlements and must also obtain a priority clearance from the PSC before making an appointment.

4.47 We found that, in 13% (8 out of 64) of appointments audited, a priority clearance request was completed after the appointment was made. As such, persons entitled to appointment in priority were deemed not to have been given proper consideration. We also found that, in 16% (10 out of 64) of appointments audited, the clearance request contained essential qualifications that were different from, or more stringent than, the ones found in the statement of merit criteria used for the appointment.

Recommendation 3

The Superintendent of the Office of the Superintendent of Financial Institutions should ensure that sub-delegated managers give proper consideration for appointments to persons with priority entitlement before making an appointment.

Response from the Office of the Superintendant of Financial Institutions:

We agree with this recommendation. All sub-delegated staffing managers have received the training refresher "Mandatory Training: For directors and Executive Staffing – A Resourcing Tool for Managers". Also as stated earlier, we have improved our staffing checklist and our approach in managing the process at each step. As per phase 2 of the checklist, HR Advisors will ensure that priority clearance has been requested and will notify the manager accordingly. The HR Assistants (Ottawa) and the HR Coordinator (Toronto office) will ensure that a copy of the priority clearance request is placed on file.

Conclusion

4.48 Our audit examined whether the OSFI had an appropriate framework in place to manage its staffing activities. The audit revealed that some aspects of the OSFI's appointment framework were in place, and others needed improvement. The OSFI's planning activities linked current and future HR needs to its business priorities and provided staffing strategies. However, the OSFI had not completed any variance analysis to identify whether adjustments to its HR plan would be required. The OSFI had also put in place the mandatory appointment policies and criteria. We noted that the OSFI had implemented a checklist to assist HR advisors and sub-delegated managers in documenting their files for advertised processes. However, we found that the OSFI had not developed any control mechanisms to monitor the compliance of appointments and the accuracy of the documentation, such as comprehensive assessments and appropriate written rationales to support appointment decisions. This resulted in situations where supporting documentation did not always substantiate that merit was met and that the guiding values were respected throughout the appointment process.

4.49 The audit also examined whether appointments and appointment processes complied with the PSEA, the PSER, the PSC Appointment Framework and other governing authorities. Our audit revealed that the compliance of the OSFI's appointments and appointment processes requires improvement. We found that merit was met in just under half of the appointments we audited. However, in almost half of the appointment processes we reviewed, we found that merit was not demonstrated and, in a few appointments, merit was not met. In addition, a few of the appointment files reviewed had indicators of either error, omission or improper conduct which could put the guiding values at risk. We also found other areas of concern, such as failure to provide notification of appointments considered, made or proposed and failure to respect priority entitlement rights. Furthermore, most rationales for the non-advertised appointment processes we audited did not comply with the PSC Policy on Choice of Appointment Process, as they failed to address all of the guiding values.

Action taken by the Public Service Commission

The PSC will monitor the Office of the Superintendent of Financial Institutions' follow-up action to the audit recommendations through its regular monitoring activities, including the annual Departmental Staffing Accountability Report; as a result, the PSC has decided not to amend the existing delegation agreement with the deputy head of the OSFI.

Overall response from the Office of the Superintendent of Financial Institutions

The Office of the Superintendant of Financial Institutions (OSFI) agrees with the observations and recommendations presented in this audit report. OSFI is committed to improving its Appointment Framework and Mechanisms to ensure it meets the core guiding values of the Public Service Employment Act. We found the overall tone of the report to be appropriate, and we appreciate the acknowledgement by the PSC that OSFI's response to the demands of the major global economic crisis over the last few years has had a major impact on our staffing activities.

We are concerned with the conclusion that merit was not met in 5% of the appointments. As stated earlier, OSFI is committed to meeting the core guiding values for each appointment. To this effect we have reviewed the staffing portion of our Human Resources Sub-Delegation Instrument and our staffing policies. We are also improving our procedures and practices. This commitment is further detailed in the action plan that will follow and that will be communicated to delegated managers and HR employees.

About the audit

Scoping considerations

Our audit covered appointment activities and related decisions within the OSFI for the period from April 1, 2008, to March 31, 2010. This audit had two objectives. First, to determine whether the OSFI had an appropriate framework, systems and practices in place and implemented to manage its appointment activities. Second, to determine whether appointments and appointment processes within the OSFI complied with the PSEA, the PSER, the PSC Appointment Framework and other governing authorities.

For more information regarding our methodology and audit criteria, refer to Overview of Audit Approach at the end of this publication.

Sample selection

We reviewed a sample of the OSFI's appointment processes from April 1, 2008, to March 31, 2010, excluding non-advertised processes for reclassifications, actings, deployments, students, bridgings, roll-overs, Special Assignment Pay Plans, extensions of terms and Career Assignment Programs. Table 2 provides details of the types of appointment processes audited.

Table 2: Appointments audited
Type of process Sample/population
Advertised 35*/193
Non-advertised 29*/78
Total 64*/271

Source: Audit and Data Services Branch, Public Service Commission

Assuming a measured deviation rate of 20% or less, we can expect a confidence interval equal to or less than 10% at a confidence level of 90%. This allows for unqualified reporting of audit findings for cells marked with an asterisk.

Audit team

Vice-President, Audit and Data Services Branch
Elizabeth Murphy-Walsh

Director General, Audit Directorate
Yves Genest

Director
Catherine Gendron

Manager
Romy Bonneau

Auditors
Pierre Bélanger
Julie Guillerm-Therrien
Mélanie Lebrun
Ghyslène Parent
Claudia Pilon

Functional Expert
Paul Pilon

Table of Contents