Financial assessment methodology
Purpose
The Financial Consumer Agency of Canada (FCAC or Agency) is mandated to supervise federally regulated financial entities to protect financial consumers, and to strengthen the financial literacy of Canadians. The Agency was established by the Financial Consumer Agency of Canada Act (Act) on October 24, 2001 and is listed in Schedule I.1 of the Financial Administration Act. The Commissioner is the head of the Agency and reports to Parliament through the federal Minister of Finance.
FCAC supervises different types of entities, including financial institutions, external complaints bodies and payment card network operators, which are collectively identified as Regulated Entities.
The Agency’s objects are set out in subsections 3(2) and (3) of the Act. Section 3(2) includes: the supervision of financial institutions and external complaints bodies for compliance with legislative obligations, codes of conduct and public commitments; the promotion of consumer awareness about the financial institutions and external complaints bodies’ obligations; the monitoring and evaluation of trends and emerging issues that may impact financial consumers; and the strengthening of the financial literacy of Canadians. Section 3(3) includes: the supervision of payment card network operators for compliance with the Payment Card Network Act, regulations, policies, and procedures; the monitoring of codes of conduct; and promoting public awareness of the obligations of payment card network operators.
FCAC operates on a cost recovery basis and is funded mainly through assessments from the Regulated Entities it supervises. In addition to funding from assessments, FCAC receives an annual funding allocation of $5,000,000 from the government of Canada to support the financial literacy of Canadians as authorized under subsection 13(3) of the Act.
FCAC charges Regulated Entities an annual assessment in accordance with this FCAC Financial Assessment Methodology.
Definitions
The following definitions apply to this assessment methodology:
Agency means the Financial Consumer Agency of Canada established under section 3 of the Financial Consumer Agency of Canada Act.
Assessment means an assessment for the purposes of section 18 of the Financial Consumer Agency of Canada Act.
Assessment Period means the fiscal year starting April 1st and ending March 31st.
Commissioner means the Commissioner of the Agency appointed under section 4 of the Financial Consumer Agency of Canada Act.
External Complaints Body has the same meaning as in section 2 of the Bank Act.
Financial Institution means
- a bank as defined in section 2 of the Bank Act;
- an authorized foreign bank as defined in section 2 of the Bank Act;
- a company to which the Trust and Loan Companies Act applies;
- a retail association as defined in section 2 of the Cooperative Credit Associations Act;
- a company or foreign company to which the Insurance Companies Act applies; and
- Green Shield Canada.
Minister means the Minister of Finance.
Payment Card Network Operator means an entity, as defined in section 3 of the Payment Card Networks Act, that operates or manages a payment card network, as defined in that section, including by establishing standards and procedures for the acceptance, transmission or processing of payment transactions and by facilitating the electronic transfer of information and funds.
Guiding principles
FCAC has identified the following guiding principles to develop the assessment methodology. Underpinning these guiding principles is FCAC’s recognition of its stewardship responsibilities to the resources of the financial institutions, external complaints bodies and payment card network operators that we regulate. The assessment methodology will be:
- Transparent – FCAC will clearly identify the expenses and industry allocations each year in accordance with the FCAC Act. Annual expenses are identified in the annual FCAC business plan, which is submitted to the Minister for approval at least 30 days before the end of each fiscal year.
- Fair – FCAC expenses will be allocated across all industry sectors and Regulated Entities according to the FCAC Act and in a manner that is proportionate to the costs attributable to each activity, industry sector and Regulated Entity, to the extent possible.
- Consistent – Assessments will be applied in a consistent manner and result in relative predictability year-over-year.
- Simple – The assessment methodology will be easy to understand and calculate and result in a low administrative burden to both Regulated Entities and FCAC.
Financial assessment methodology
Assessments are charged to Regulated Entities to recover FCAC’s costs of operations net of any annual statutory funding. Assessments are billed annually based on an estimate of the current fiscal year’s cost of operations together with an adjustment for any differences between the previous year’s assessed costs and actual expenses.
The assessment methodology allocates expenses to Regulated Entities in three steps. The first step is to identify the total expenses for allocation (i.e., net of any annual statutory funding). The second step is to allocate the total expenses to each industry sector. The final step is to allocate the expenses of each industry sector to the Regulated Entities comprising that sector.
Step 1 - Determination of total expenses for allocation
As an example, Table 1 illustrates how the 2021-22 assessment is calculated based on forecasted expenses identified in the FCAC Business Plan.
| Total expenses from Business Plan, less financial literacy expenses | $27,987,034 | |
|---|---|---|
| Program cost for financial literacy | $17,945,010 | |
| Less statutory funding for financial literacy | ($5,000,000) | |
| Net program cost for financial literacy | $12,945,010 | $12,945,010 |
| Total expenses allocated to be allocated to Industry Sectors | $40,932,044 |
Step 2 - Allocation of expenses to industry sectorsFootnote 1
Expenses are allocated to each industry sector using the proportion of FCAC direct salary expenses that are attributed to each industry sector. The use of direct salary data reflects the level of effort to support each industry sector, including supervisory, enforcement and policy, and reflects a reasonable proxy for indirect costs. The direct salary data are objectively determined and will be validated annually through the business planning process.
Step 2 includes three calculations to determine the distribution of the assessment by industry sector. Using the 2021-22 example identified above, calculation 1 allocates the forecasted expenses net of financial literacy program costsFootnote 2 based on the relative percentage of FCAC direct salary expense associated with each sector.
| Industry Sector | Allocation by direct salary expense | Total forcasted expenses |
|---|---|---|
| Banks | 90.2% | $25,238,430 |
| Trust and Loan Companies | 1.2% | $335,044 |
| Life Insurance Companies | 0.1% | $41,880 |
| Property & Casualty Insurance Companies | 0.5% | $129,874 |
| External Complaint Bodies | 0.6% | $170,598 |
| Payment Card Network Operators | 7.4% | $2,071,208 |
| Total | 100.0% | $27,987,034 |
Calculation 2 allocates the net program costs for financial literacy to financial institutions only (excluding external complaints bodies and payment card network operators).
| Industry Sector | Allocation by direct salary expense | Total forecasted expenses |
|---|---|---|
| Banks | 98.0% | $12,690,186 |
| Trust and Loan Companies | 1.3% | $168,464 |
| Life Insurance Companies | 0.2% | $21,058 |
| Property & Casualty Insurance Companies | 0.5% | $65,302 |
| External Complaint Bodies | 0.0% | $0 |
| Payment Card Network Operators | 0.0% | $0 |
| Total | 100.0% | $12,945,010 |
The final calculation is the sum of the allocations identified in calculations 1 and 2.
| Industry Sector | Allocation by direct salary expense | Total forecasted expenses |
|---|---|---|
| Banks | 92.7% | $37,928,616 |
| Trust and Loan Companies | 1.2% | $503,508 |
| Life Insurance Companies | 0.2% | $62,937 |
| Property & Casualty Insurance Companies | 0.5% | $195,176 |
| External Complaint Bodies | 0.4% | $170,598 |
| Payment Card Network Operators | 5.1% | $2,071,208 |
| Total | 100.0% | $40,932,044 |
Step 3 – Allocation of industry sector expenses to the regulated entities comprising that sector
The industry sector allocations are charged to each financial institution in accordance with the Financial Consumer Agency of Canada Assessment of Financial Institutions Regulations.
The Regulations (SOR/2001-474) prescribes the methodology to determine the assessment for: Banks and Authorized Foreign Banks (Section 4); Trust and Loan Companies (Section 5); Retail Associations (Section 6); Insurance Companies (Section 7); and Green Shied Canada (Section 8).
The industry sector allocations are charged to each external complaints bodies and payment card network operators based on the methodology described below.
The distribution of industry sector expenses to Regulated Entities within the sector as follows:
- Banks – Distributed based on the average total assets in Canada of the financial institution.
- Trust and Loan Companies – Distributed based on the average total assets in Canada of the trust and loan companies.
- Insurance Companies – Distributed based on the total amount of net premiums received in Canada by the financial institution.
- External Complaints Bodies – Distributed equally between the approved entities.
- Payment Card Network Operators – distributed between network operators based on the total number of annual transactions.
Effective date
The FCAC Financial Assessment Methodology was developed through consultation with industry experts. It is based on direct FCAC salary costs which fairly reflects the level of effort to support each industry sector and is a reasonable proxy for the allocation of indirect costs. This methodology came into force on April 1, 2022, for the FY 2022–23 assessments.
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