Annual Report 2016-2017

Table of contents

 

Financial Statements

Financial Services Commission of Ontario

 

Government of Ontario crest

Financial Services Commission of Ontario

 

Chief Executive Officer and Superintendent of Financial Services

5160 Yonge Street
Box 85, 17th Floor
Toronto ON M2N 6L9

Telephone: (416) 590-7000
Facsimile: (416) 590-7078

 

Commission des services financiers de l’Ontario

 

Directeur général et surintendant des services financiers

5160, rue Yonge
boîte 85, 17e étage
Toronto ON M2N 6L9

Téléphone : (416) 590-7000
Télécopieur : (416) 590-7078

 

October 19, 2017

 

Management’s Responsibility for Financial Information

 

The Financial Services Commission of Ontario (Commission) was established under the Financial Services Commission of Ontario Act, 1997. Under the Act the Superintendent is responsible for the financial and administrative affairs of the Commission.

 

Under the direction of the Superintendent, Management of the Commission is responsible for the integrity and fair presentation of all information in the financial statements and notes. The financial statements have been prepared by Management in accordance with Canadian Public Sector Accounting Standards for government not-for-profit organizations. The preparation of financial statements involves the use of management’s judgment and best estimates particularly when transactions affecting the current period cannot be determined with certainty until future periods.

 

Management of the Commission is dedicated to the highest standards of integrity in provision of its services. Management has developed and maintains financial controls, information systems and practices to provide reasonable assurances on the reliability of financial information and safeguarding of its assets.

 

The financial statements have been audited by the Office of the Auditor General. The Auditor General’s responsibility is to express an opinion on whether the financial statements are fairly presented in accordance with Canadian Public Sector Accounting Standards for government not-for-profit organizations. They have been approved by the Commission’s Audit and Risk Committee. The Auditor’s report follows.

 

Signature of Brian Mills, Chief Executive Officer and Superintendent of Financial Services, Financial Services Commission of Ontario

Brian Mills
Chief Executive Officer and Superintendent of Financial Services

Signature of Carolyn Hamilton, Director, Corporate Services Branch


Carolyn Hamilton
Director, Corporate Services Branch

 

 

Office of the Auditor General of Ontario logo 

Office of the Auditor General of Ontario
20 Dundas Street West
Suite 1530
Toronto, Ontario
M5G 2C2
416-327-2381
fax 416-327-9862

tty 416-327-6129

 

Bureau du vérificateur general de l’Ontario
20, rue Dundas ouest
suite 1530
Toronto (Ontario)
M5G 2C2
416-327-2381
télécopieur 416-327-9862

ats 416-327-6129

 

www.auditor.on.ca [New Window]

 

INDEPENDENT AUDITOR'S REPORT

 

To the Financial Services Commission of Ontario and to the Minister of Finance

 

I have audited the accompanying financial statements of the Financial Services Commission of Ontario, which comprise the statement of financial position as at March 31, 2017, and the statements of operations, changes in net assets and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

 

Opinion

 

In my opinion, the financial statements present fairly, in all material respects, the financial position of Financial Services Commission of Ontario as at March 31, 2017 and the results of its operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

 

Toronto, Ontario
October 19, 2017

 

Signature of Bonnie Lysyk, MBA, CPA, CA, LPA, Auditor General

Bonnie Lysyk, MBA, CPA, CA, LPA
Auditor General

 

 

Statement of Financial Position

As at March 31, 2017

  March 31, 2017
($ '000)
March 31, 2016
($ '000)
ASSETS
Current   
  Cash 11
  Accounts receivable 371,532
  Prepaid expenses 1223
 501,556
Due from the Province (Note 7b)37,04939,747
Capital assets, net (Note 3)8,9479,458
 46,04650,761
LIABILITIES AND NET ASSETS
Current  
  Accounts payable and accrued liabilities16,04414,576
 16,04414,576
Employee future benefits obligation (Note 7a)5,0679,244
Deferred revenue (Note 4)15,09316,892
Deferred lease inducements (Note 5)426591
Net assets  
  Invested in capital assets8,9479,458
  Internally restricted (Note 11)469
 46,04650,761

 

Commitment, Significant Contract and Contingencies (Note 9)

 

See accompanying notes to financial statements

 

Approved by:

Signature of Brian Mills, Chief Executive Officer and Superintendent of Financial Services, Financial Services Commission of Ontario

 

Brian Mills

Chief Executive Officer
and Superintendent of Financial Services

Financial Services Commission of Ontario

 

 

Statement of Operations

For the Year Ended March 31, 2017

  March 31, 2017
($ '000)
March 31, 2016
($ '000)
Revenue (Note 6)
Assessments63,38676,878
Fees, licenses, registrations and other15,27216,379
 78,65893,257
Expenses
Salaries and wages32,04037,053
Employee benefits (Note 7a)8,8269,510
Transportation and communication544614
Services41,84247,653
Supplies and equipment331419
Amortization1,6392,872
Bad debt expense13468
 85,35698,189
Less: Recoveries (Note 8)5,0964,025
 80,26094,164
Deficiency of revenue over expenses absorbed by the Province (1,602)(907)
Contribution by the province (Note 7b)2,071907
Excess of revenue over expenses (Note 11)469

 

See accompanying notes to financial statements

 

 

Statement of Cash Flows

For the Year Ended March 31, 2017

  March 31, 2017
($ '000)
March 31, 2016
($ '000)
Net inflow (outflow) of cash related to the
following activities
Cash flows from operating activities
Excess of revenue over expenses469
Items not affecting cash
Amortization of capital assets1,6392,872
Amortization of deferred lease inducements(165)(379)
Employee future benefits (Note 7a)(4,177)(3,846)
Bad debt expense13468
Changes in non-cash working capital
Accounts receivable1,3611,356
Prepaid expenses1116
Accounts payable and accrued liabilities1,4686,376
Due from the Province 2,698(8,207)
Deferred Revenue(1,799)3,792
Deferred Lease Inducement-824
 1,6392,872
Cash flows from capital activity
Purchase of capital assets(1,128)(213)
 (1,128)(213)
Cash flows from financing activity
Investment in capital assets by the Province(511)(2,659)
 (511)(2,659)
Net change in cash position
Cash, beginning of year11
Cash, end of year11

 

See accompanying notes to financial statements

 

 

Statement of Changes in Assets

For the Year Ended March 31, 2017

 

  Invested in
Capital Assets

Internally
Restricted

Unrestricted
Net Assets

March 31, 2017

($ '000)
Total
March 31, 2016

($ '000)
Total
Balance, beginning of year 9,458 9,458 12,117
Excess/(deficiency) of revenues over expenses469(2,071)(1,602)(907)
Contribution by the Province2,0712,071907
Investment in capital assets(511)(511)(2,659)
Balance, end of year 8,947 469 9,416 9,458

 

See accompanying notes to financial statements

 

 

Notes to the Financial Statements

March 31, 2017

 

1. OPERATIONS OF THE COMMISSION

 

The Financial Services Commission of Ontario (Commission) was established under the Financial Services Commission of Ontario Act, 1997. The Commission’s mandate through its regulated activities is to protect the public interest and enhance public confidence in insurance, pensions, credit unions, trust companies, caisses populaires, co-operatives and mortgage brokers, and also to make recommendations to the Minister of Finance on matters affecting the regulated sectors. The Commission administers the following legislation: Insurance Act, Pension Benefits Act, Credit Unions and Caisses Populaires Act, Loan and Trust Corporations Act, Mortgage Brokerages, Lenders and Administrators Act and Co-operative Corporations Act. As a regulatory agency of the Province of Ontario, the Commission is exempt from income taxes.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

The financial statements have been prepared by the management of the Commission in accordance with Public Sector Accounting Standards for government not-for-profit organizations (PSA-GNFPO) as issued by the Public Sector Accounting Board (PSAB). The significant accounting policies used to prepare these statements are summarized below.

 

(a) Capital Assets

Capital assets are recorded at cost less accumulated amortization. Amortization is calculated on a straight-line basis over their estimated useful life. The useful life of the Commission’s capital assets has been estimated as follows:

 

  • Custom developed software: 5-10 years
  • Office furniture and equipment: 5 years
  • Computer hardware: 3-6 years
  • Leasehold improvements: over the term of the lease

 

(b) Revenue Recognition

Assessment revenues from the insurance, pension, credit union, caisses populaires and the loan and trust sectors are recognized when the recoverable costs to administer the various Acts governing these sectors are incurred.

 

Revenues from fees, licenses and registrations are recognized in the year to which they pertain.

 

(c) Financial Instruments

The Commission follows PSA-GNFPO pertaining to financial instruments. Under these standards, all financial instruments are included on the statement of financial position and are measured either at fair value or at cost or amortized cost. The Commission’s Accounts receivable, and the Accounts payable and accrued liabilities are recorded at cost in the financial statements.

 

(d) Use of Estimates

The preparation of financial statements in accordance with PSA-GNFPO requires that management make estimates and assumptions that affect the reported amount of assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual amounts could differ from these estimates. Significant items subject to such estimates and assumptions include the amortization expense, accrued liabilities, employee future benefits and allocation of costs between industry sectors.

 

3. CAPITAL ASSETS

  Cost Accumulated Amortization 2017
Net Book Value
2016
Net Book Value
  ($’000)
Custom developed software15,14110,5064,6365,795
Custom software under development 3,304-3,3043,058
Leasehold improvements7,3527,249103131
Computer hardware3,0192,115904374
Office furniture and equipment2,2092,209-100
                 31,025 22,078                8,947                9,458

 

 

4. DEFERRED REVENUE RELATED TO LICENCES AND REGISTRATION

 

Deferred revenue represents payments received for fees, licences and registrations that cover more than the current fiscal year. The deferred portion is recognized as revenue when the applicable future licence year occurs. The changes in the deferred revenue balances during fiscal 2016-17 are summarized as follows:

 

  Balance, beginning of year Received during year Recognized during year Balance, end of year
  ($’000)
Insurance Agents4,0464,7674,3014,512
Insurance Adjusters2312212124
Mortgage Brokers8,3442,7335,1645,913
Insurance Corporations1,0461,3631,1591,250
Health Service Providers2,6793,9073,4873,099
Other7547071,166295
  16,892 13,599 15,398 15,093

 

 

5. DEFERRED LEASE INDUCEMENTS

 

In April 2008, the Commission’s office accommodation lease was extended from October 31, 2008 to October 31, 2015. The lease extension included a leasehold improvement allowance in the amount of $2.005 million for renovations in the first two years and no base rent payable in the amount of $0.64 million for the first ten months of the lease extension. The Commission has utilized the entire allowance.

 

In July 2014, the Commission’s office accommodation lease was extended from October 31, 2015 to October 31, 2020. The lease extension included no base rent payable in the amount of $0.82 million for the first four months of the lease extension.

 

The deferred lease inducement is made up of the portion of future lease payments attributed to the rent-free period and the leasehold improvements allowance and is recognized as reduced rent expense over the term of the lease on a straight line basis.

  2017 2016
  ($’000) ($’000)
Balance, beginning of year                756                311
Add: New Lease Inducement824
Less: Lease Inducements Amortization(165)(379)
Deferred Lease Inducements591756
Less: current portion(165)(165)
Balance, end of year                426                591

 

 

6. REVENUE

 

Under The Financial Services Commission of Ontario Act, the Commission may recover all of its costs through revenue assessments and fees charged to all entities that form part of the regulated sectors. For the fiscal year, revenue from the following Acts and regulations made under the Acts administered by the Commission are:

  2017 2016
  ($’000) ($’000)
INSURANCE ACT
Insurer assessment47,97560,285
Fees, licenses and other6,273
6,958
Health Service Provider fees and licences3,4803,120
PENSION BENEFITS ACT
Pension plan assessment14,84215,826
Registration fees and other11449
CREDIT UNIONS AND CAISSES POPULAIRES ACT
Credit Union assessment485640
Fees and other102185
LOAN AND TRUST COMPANIES ACT
Loan and Trust assessment84127
Fees, licenses and registrations72
MORTGAGE BROKERAGES, LENDERS AND ADMINISTRATORS ACT
Fees, Licenses, Registrations and other5,2826,052
CO-OPERATIVE CORPORATIONS ACT
Fees and other1413
  78,658 93,257

 

7. RELATED PARTY TRANSACTIONS

 

(a) Employee Benefits

The Commission’s employees are entitled to benefits that have been negotiated centrally for Ontario Public Service employees. The future liability for benefits earned by the Commission’s employees is recognized in the Province’s consolidated financial statements. These benefits are accounted for by the Commission as follows:

 

i. Pension Benefits

The Commission’s full-time employees participate in the Public Service Pension Fund (PSPF) and the Ontario Public Service Employees’ Union Pension Fund (OPSEU-PF), which are defined benefit pension plans for employees of the Province and many provincial agencies. The Province of Ontario, which is the sole sponsor of the PSPF and a joint sponsor of the OPSEU-PF, determines the Commission’s annual payments to the funds. Since the Commission is not a sponsor of these funds, gains and losses arising from statutory actuarial funding valuations are not assets or obligations of the Commission, as the sponsors are responsible for ensuring that the pension funds are financially viable. The Commission’s annual payments of $2.65 million (2016 - $3.22 million) are included in employee benefits in the Statement of Operations.

 

ii. Employee Future Benefits Obligation

Employee future benefits include accrued severance entitlements, unused vacation, additional severance for those employees expected to be declared surplus, and other future compensation entitlements earned. The total costs for the year for all termination benefits amount to $1.23 million (2016 - $1.26 million) and are included in employee benefits and salaries and wages in the Statement of Operations. During the year, the accrued employee future benefits obligation was reduced by $1.35 million (2016 - $1.93 million) due to a curtailment resulting from changes under the Public Service Act of Ontario. Prior to the curtailment, the decrease in the obligation was $2.26 million (2016 – increase of 0.02 million). The total liability for these costs is reflected in the employee future benefits obligation, less any amounts payable within one year, which are included in accounts payable and accrued liabilities, as follows:

  2017 2016
  ($’000)  ($’000)
Total liability for employee future benefits9,04614,301
Less:
Due within one year and included in accounts payable and accrued liabilities
(4,339)(5,057)
Employee benefits obligation 5,067 9,244

 

The legislative severance portion of the employee future benefits obligation was calculated based on the following assumptions: discount rate of 2.55% (2016 - 2.7%); and estimated average years to retirement of 10.4 years (2016 – 10 years). Due to the curtailment of the plan during the year no assumption of wage and salary escalation was used (2016 – 0%). These assumptions are management’s best estimates.

 

iii. Other Non-Pension Post-Employment Benefits

The cost of other non-pension post-retirement benefits is determined and funded on an ongoing basis by the Province and accordingly is not included in these financial statements.

 

(b) Amounts due from the Province

The due from the Province balance reflected in the financial statements is the difference between the cash receipts submitted to the Province and the Commission’s expenses paid, owing or absorbed by the Province.

 

The Commission’s deficit, which is absorbed by the Province, and its surplus for the year by sector are as follows:

 

Deficit by Sector 2017 2016
  ($’000)  ($’000)
Mortgage Brokers sector(1,742)(272)
Co-op sector(329)(318)
Health Service Providers sector(233)
Financial Harship program(84)
  (2,071) (907)

 

Surplus by Sector 2017 2016
  ($’000)  ($’000)
Health Service Providers sector469
  469

 

(c) Other administrative expenses

The Ontario Ministry of Government Services absorbs the costs of certain administrative expenses. The Ministry of Finance has charged for other administrative costs including costs related to information technology and office accommodation, and the Ministry of Attorney General has charged for legal staff provided to the Commission based on the Ministry’s actual costs. Total related party expenses were $15.22 million (2016 - $17.97 million).

 

8. RECOVERIES

 

The Commission provides administrative and other support services to a number of organizations and recovers the costs of providing these services from the organizations in accordance with the memorandum of understanding or agreement signed with the respective organizations. Details of these recoveries are as follows:

  2017 2016
  ($’000)  ($’000)
Motor Vehicle Accident Claims Fund (Related Party)2,5471,767
Pension Benefits Guarantee Fund (Related Party)577597
General Insurance Statistical Agency808821
Canadian Association of Pension Supervisory Authorities288215
Canadian Council of Insurance Regulators542424
Mortgage Broker Regulators' Council of Canada334201
  5,096 4,025

 

 

 

9. COMMITMENTS, SIGNIFICANT CONTRACT AND CONTINGENCIES

 

(a) Office Accommodation Lease

In July 2014, the Commission’s office accommodation lease was extended from October 31, 2015 to October 31, 2020 with two further options to extend the term for five years each and the one time right to terminate up to 40,000 square feet on October 31, 2018. As a result the Commission is committed to minimum lease payments for office space as follows if it does not exercise its termination right:

 

  ($’000)
2017/20185,211
2018/20195,265
2019/20205,341
2020/20213,116
  18,933

 

(b) Dispute Resolution Services Contract

As of April 1, 2016, the Automobile Accident Benefits Service (AABS) at the Safety, Licensing Appeals and Standards Tribunal of Ontario assumed all new applications for Dispute Resolution Services. FSCO no longer accepts applications for mediation, neutral evaluation and arbitration, but continues to be responsible for files remaining open as of March 31, 2016. FSCO continues to wind down its Dispute Resolution System. All mediation files were closed as of July 26, 2016.

 

In August 2012, the Commission entered into a contract with an outside service provider for mediation and arbitration services related to disputes over auto insurance accident benefits. No files were assigned under this contract after May 2014. In June 2014, another contract was signed with the service provider for arbitration services until May 2018. The expenditures for the year for these contracts amount to $23.0 million (2016 - $26.8 million) which are included in services expenses and it is anticipated that annual cost will be $3.3 million in 2017-18. These costs are charged back to the insurance companies that utilize the services.

 

(c) Mandate Review

On March 3, 2015, the government announced an Expert Advisory Panel (“Panel”) to conduct the review of the mandates of the Financial Services Commission of Ontario (FSCO), Financial Services Tribunal and the Deposit Insurance Corporation of Ontario. The Panel conducted a public consultation on the issues being examined and issued a Final Report on March 31, 2016, recommending the establishment of a new financial services regulator in Ontario. In December 2016, the government proclaimed into force legislation that will modernize and strengthen the regulation of financial services and pensions with the creation of the Financial Services Regulatory Authority (FSRA). In June 2017, the government announced the appointment of FSRA’s first board of directors, who will oversee the management of FSRA’s affairs as it builds its operational and regulatory capacity. The implementation of FSRA will be overseen by the Financial Services Regulatory Modernization Secretariat (FSRMS). The government expects to introduce legislative amendments regarding FSRA’s mandate and governance structure by the end of 2017. FSCO is committed to assisting FSRMS and the government with the implementation of FSRA. The impact on the Commission cannot be assessed at this time.

 

(d) Contingencies

The Commission is involved in various legal actions arising out of the ordinary course of business. Settlements paid by the Commission, if any, will be accounted for in the period in which the settlement occurs. The outcome and ultimate disposition of these actions are not determinable at this time.

 

10. FINANCIAL INSTRUMENTS

 

Interest rate risk: 

The Commission’s financial assets and liabilities are not exposed to interest rate risk.

 

Currency risk:

The Commission’s exposure to currency risk is minimal as few transactions are in currencies other than Canadian dollars.

 

Credit risk:

The Commission is exposed to low credit risk in its financial instruments from accounts receivable owing from industry due to high historical collection rates. Over 90% of the accounts receivables are current as they are less than 30 days old.

 

Liquidity risk:

The Commission’s exposure to liquidity risk is minimal as the Commission may recover all of its costs through revenue assessments and fees charged to all entities that form part of the regulated sectors. As well any deficiency of revenue over expenses is absorbed by the Province and is reflected in the Due from the Province on the Statement of Financial Position.

 

11. INTERNALLY RESTRICTED NET ASSETS

 

The Commission internally restricted $0.47 million (2016- nil) surplus derived from the Health service providers sector (Note 7b) to be used in the Health service providers sector in the future.

 

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