The Desjardins Delegated Supervision Model World Bank April 2007.

The Desjardins Delegated Supervision Model

World Bank April 2007

Développement international Desjardins (DID)

A subsidiary of the Desjardins Group created in 1970

Provides technical support and investments for the community finance sector

Aims to improve access to financial services in developing countries

Content

The Desjardins Group

Supervision – basic elements

Desjardins Delegated Supervision Model

Delegated Supervision : Key factors

Is this model applicable to networks in Developing Countries?

The Desjardins Group

A network of financial cooperatives started in 1900 by Alphonse Desjardins6th Financial institution in Canada in assets1st financial institution in QuebecLargest cooperative financial group in Canada:

5.8 million members (Dec. 31, 2006)$135 billion in assets (Dec. 31, 2006)40,000 employees

Organizational Chart 218,578 MEMBERS

IN NEW BRUNSWICK AND MANITOBA

5,375,031 MEMBERS IN QUÉBEC AND ONTARIO

DesjardinsVenture Capital

Société immobilièrePlace Desjardins

PlaceDesjardins

Desjardins General Insurance Group

DesjardinsSecurities

Desjardins General

Insurance *

NEW BRUNSWICKAND MANITOBAFEDERATIONSFédératio

n des caisses

Desjardins du

Québec

552 CAISSES POPULAIRESAND GROUP CAISSES IN QUÉBEC (530) AND ONTARIO (22)

Certas DirectInsurance Company *

The Personal, InsuranceCompany *

The Personal, General

Insurance *

DesjardinsAsset Management

40 CAISSES IN NEW BRUNSWICK (33)

AND MANITOBA (7)

Co

op

erat

ive

Ne

two

rkS

ub

sid

iary

Ne

two

rk

As at June 30, 2006

LP and Desjardinsregional

development funds

1 Venture capital, public fund managed by Desjardins Venture Capital Inc.

Chart does not reflect the legal ownership structure.

DesjardinsGlobalAsset

Management

Fiera Capital *

DesjardinsFinancial Security

SFLManagement

SigmaAssistel

OptiFundsInvestmentsOptiinsurance

Desjardins Capital régional

et coopératif 1

Disnat

47,367 DCU MEMBERS

IN ONTARIO

DESJARDINSCREDIT UNION

ONTARIOFEDERATION

DesjardinsTrust

Caisse centraleDesjardins

Fonds de sécuritéDesjardins

CapitalDesjardins

Desjardins BankDesjardins Commercial

Lending USA, corp.

Ownership link

Auxiliary members

Shared ownership*

Développement international

Desjardins

FondationDesjardins

Société historiqueAlphonse-Desjardins


International

GestionValeurs

mobilières Desjardins

Government of QuebecNational Assembly

Ministry of Finance

Autorité des Marchés Financiers

Advisory Board

Supervision – Basic elements

Prev

entio

n ProtectionSupervision

Prevention:

- Legal framework

Protection:

- Deposit insurance

- Safety fund

Supervision:

- Internal control system- Inspection- External audit

SURVEILLANCESURVEILLANCE

Supervision – Basic elements

InspectionEvaluation of exposure to risks; overall situation of the financial institutionAssess policies, practices Ensure legal requirements are fulfilled

External AuditingStatutory assessment of financial statements

Desjardins delegated supervision

Originates from a Law:An Act respecting financial services cooperatives;

Province of Quebec, 2000

The federation must establish and maintain a service to audit the financial statements of credit unions as well as an inspection service for credit unions (art. 386).

Board of DirectorsDesjardins Group


President and CEODesjardins Group

Bureau de la Surveillance et de la Sécurité Financière

Audit and Inspection Commission

Board of Ethics

Inspection External Auditing

Desjardins Delegated Supervision 218,578 MEMBERS

IN NEW BRUNSWICK AND MANITOBA

5,375,031 MEMBERS IN QUÉBEC AND ONTARIO

DesjardinsVenture Capital

Société immobilièrePlace Desjardins

PlaceDesjardins

Desjardins General Insurance Group


Desjardins General

Insurance *

NEW BRUNSWICKAND MANITOBAFEDERATIONSFédératio

n des caisses

Desjardins du

Québec

530 CAISSES POPULAIRESAND GROUP CAISSES IN QUÉBEC AND 22 IN ONTARIO

Certas DirectInsurance Company *

The Personal, InsuranceCompany *

The Personal, General

Insurance *

DesjardinsAsset Management

40 CAISSES IN NEW BRUNSWICK (33)

AND MANITOBA (7)

Co

op

erat

ive

Ne

two

rkS

ub

sid

iary

Ne

two

rk

As at June 30, 2006

LP and Desjardinsregional

development funds

1 Venture capital, public fund managed by Desjardins Venture Capital Inc.

Chart does not reflect the legal ownership structure.

DesjardinsGlobalAsset

Management

Fiera Capital *

DesjardinsFinancial Security

SFLManagement

SigmaAssistel

OptiFundsInvestmentsOptiinsurance

Desjardins Capital régional

et coopératif 1

Disnat

47,367 DCU MEMBERS

IN ONTARIO

DESJARDINSCREDIT UNION

ONTARIOFEDERATION

DesjardinsTrust

Caisse centraleDesjardins

Fonds de sécuritéDesjardins

CapitalDesjardins

Desjardins BankDesjardins Commercial

Lending USA, corp.

Ownership link

Auxiliary members

Shared ownership*

Développement international

Desjardins

FondationDesjardins

Société historiqueAlphonse-Desjardins


International

GestionValeurs

mobilières Desjardins


The auditor/inspector shall have access to all the books, registers, accounts, other accounting records and vouchers of the financial services cooperative. (art 148; art 396)


The BSSFD shall inform the Authority, the board of directors and the board of audit and ethics of the credit union of the results of the inspection. It shall, in addition, transmit a copy of its report to the Authority (Art 399).


Relies on a very sophisticated approach by the BSSFD: developed over years of experiences drawing on the high level of integration of

the Desjardins network

State-of-the-art supervision instrumentation (eg: alert system of detection of risks)

Supervision in Desjardins: role of AMF

Review Desjardins group’s standards and policies regarding capital, governance, risk management...

Review the quality of the BSSFD inspection and external auditing

Perform an on-site inspection of a financial cooperative, if necessary

Supervision in Desjardins: role of AMF

AMF is the ultimate responsible for the supervision of the Desjardins financial cooperatives

AMF may suspend its delegation to Desjardins if its supervision is not done according to generally recognised practices

Delegated Supervision: A Definition

Supervision performed by an organisation distinct from the incumbent authority

Autonomously

Under the control of the authority

And/or professional corporations (external audit)

Delegated Supervision: Postulates

Authority relies on the tools of the organisation

Authority assumes the final responsibility

Delegated supervision: Key factors

Relevant legal framework

Involvement of local authorities

Effective Internal control system in the primary financial institutions

Competent and independent entity to carry out the supervisory role

Obligatory follow-up to problems detected

Delegated supervision: Key factors

Delegated supervision cannot happen overnight:

Desjardins’ case:1900-1932 : self-supervision

1932-1988: “unofficial” delegated supervision

1988: official delegation of supervision to BSSFD

Delegated supervision: Advantages for Authorities

Reduced costs of supervision

Communications with apex instead of each of the federated entities

Less duplication of efforts

Delegated supervision: Advantages for Desjardins

Reduced costs of supervision Supervision carried out by professionals having strong knowledge of the entities supervisedStandardisation of financial cooperatives’ operations accelerates supervision processEasier follow-up procedure for detected problems

Evolution of costs of supervision in Desjardins

1993 2005

Number of coops 1250 530

Inspectors / Auditors 289 126

Evolution of insp./audit costs per 100$ assets (indexed)

0

1

2

3

4

5

6

7

1990 1992 1994 1996 1998 2000 2002

Inspection

Audit

Is Delegated supervision applicable in developing countries?

If no or very deficient legal framework: Self-supervision

Must be avoided if local authorities shun dealing with the financial entities

Self-discipline is the first step in primaries (internal control system)

Need entity able to exercise control functions and ensure follow-up

www.did.qc.ca

The Desjardins Delegated Supervision Model World Bank April 2007.

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