Government of Canada retail debt program memorandum of understanding between the department of Finance (“Finance”), And the bank of Canada (the “Bank”)

Effective 24 May 2012



1. Introduction

1.1 Purpose of the Memorandum of Understanding

This Memorandum of Understanding (MOU) establishes how Finance and the Bank will work together to carry out the Government of Canada’s Retail Debt Program (RDP).

It sets out the mandate of the RDP, the program governance, the roles and responsibilities of Finance and the Bank, the planning and budgeting process, and the reporting requirements.

This MOU is aligned with the Government’s annual Debt Management Strategy and the Treasury Management Governance Framework jointly developed by the Department of Finance and Bank of Canada.

1.2 Definition of the Retail Debt Program

The RDP, for the purposes of this MOU, includes all product management, marketing, sales, systems and operations, as well as all financial aspects of Canada Savings Bonds and Canada Premium Bonds whether held within a non-registered or registered plan (e.g. RRSP, RRIF).

2. Mandate of the Retail Debt Program

3. Program Governance

3.1 Division of responsibilities

The Minister of Finance is responsible for the RDP. The Department of Finance is responsible for providing advice to the Minister on the strategic objectives of the RDP and the overall strategy for achieving those objectives, as well as on decisions relating to the structure of the program and product pricing.

The Bank of Canada, as the Government’s fiscal agent, is responsible for implementation and administration of the RDP. The Bank also provides related advice on planning, policy, pricing and marketing strategy. The Bank is accountable for decisions relating to the execution of the RDP in order to achieve the Mandate approved by the Minister. While the Bank is independently accountable to its Board of Directors, it acknowledges its responsibilities under this MOU to administer the RDP.

3.2 Working relationship

Finance and the Bank commit to work together in a cooperative manner, with each party living up to its responsibilities and accountabilities. The relationship is based on open and frank communications, mutual trust and respect.

3.3. Governance framework

Governance of the RDP is integrated into the Treasury Management Governance Framework, which addresses the governance of all funds management responsibilities carried out by Finance and the Bank (cash balances, foreign reserves, wholesale debt, and retail debt) as well as risk management. Three inter-agency policy advisory committees support the RDP: the Funds Management Committee, the Retail Debt Committee, and the Retail Debt Working Group.

3.3.1. Funds Management Committee

The Funds Management Committee (FMC) is a senior management committee, consisting of (Senior) Associate Deputy Minister of Finance (as delegated by the Deputy Minister), Assistant Deputy Minister of Finance (Financial Sector Policy Branch) and Chief of Funds Management and Banking, Bank of Canada.

The FMC oversees all treasury management activities. With respect to Retail Debt, the FMC approves the program objectives and the three-year strategic plan. The FMC also approves policy recommendations and the marketing strategy to be brought forward to the Minister. The FMC generally meets three times a year.

3.3.2. Retail Debt Committee

The Retail Debt Committee (RDC) is a middle management committee, consisting of two Finance officials (Director - Financial Markets Division and Chief - Debt Management Policy Section- Financial Markets Division, and two Bank officials (Deputy Chief - Funds Management and Banking Department, and the Assistant Director of Retail Debt - Funds Management and Banking Department).

The RDC makes recommendations to the FMC on retail debt objectives, the three-year strategic plan, and the campaign marketing strategy. It coordinates program initiatives, and oversees campaign and pricing issues. The RDC meets regularly (typically every month) or as needed.

3.3.3. Retail Debt Working Group

The Retail Debt Working Group (RDWG) is comprised of day-to-day management and staff from both Finance and the Bank. It is co-chaired by the Chief of Debt Management Policy Section- Financial Markets Division from Finance and the Assistant Director of Retail Debt - Funds Management and Banking Department from the Bank.

The RDWG develops the three-year strategic plan for review by the RDC. It undertakes analysis and makes recommendations to the RDC specific to program initiatives such as product development. The RDWG meets monthly or more frequently if needed.

4. Roles and Responsibilities

The governance framework (Section 3) facilitates the coordination of activities between Finance and the Bank, and provides a channel for both parties to provide input and advice on the RDP. Within that governance framework, there is a clear delineation of the roles and responsibilities of Finance and the Bank, consistent with the division of responsibilitiesstated in 3.1. These roles and responsibilities are summarized in Annex I. This Annex may be revised with the written consent of both parties.

In carrying out their respective responsibilities, Finance and the Bank agree on the following:

4.1. Third Party Contracts

From time to time, third party contracts may be used to facilitate the administration of the program. All procurement activities related to the Bank’s administration of the program will be in accordance with the Bank’s procurement policy and procedures.

4.2. Marketing & Communications

The Bank develops the campaign marketing strategy in line with the strategic direction for the RDP. This marketing strategy is subject to the approval of the Minister of Finance.

The Bank will be responsible for the implementation of the strategy including managing the procurement and administration of any advertising contracts as well as overseeing the work of the selected advertising firm(s) as marketing content is developed within the context of the approved marketing strategy.

The Bank will provide Finance with an update of creative concepts for any major project in order to demonstrate the alignment of the recommended concept with the approved strategy. Finance will be responsible for obtaining any necessary approvals and the Bank will work closely with Finance to outline timelines, provide any necessary information and respond to requests. Under normal circumstances, the recommended creative will be available for the Minister’s approval one month prior to the deadline for public release.

The Bank will also be responsible for fielding public and media inquiries and requests about the RDP that fall within the scope of the Bank’s responsibilities. For media requests specifically, details of the request are to be communicated by email to the key RDP contacts at both the Bank and Finance on a timely basis. The Bank and Finance will coordinate an appropriate response and action plan. A summary of the response or de-brief of the interview will be circulated to the same participants after the request has been answered.

4.3. Sales Agents and Payroll Representatives

For sales of retail debt products through financial institutions and dealers, the Bank will establish contractual relationships and sales commission rates, and remunerate Authorized Retail Debt Sales Agents. Commissions are considered as part of the debt servicing costs, and therefore are subject to the final approval of Finance.

For the Payroll Savings Program, the Bank will contract, manage and remunerate the Field Service Coordinators. The Bank will also manage the agreements with the employers enrolled in the Program and will maintain the supporting systems and other resources required to administrate the Payroll Savings Program.

4.4. Interest Rates

Finance will set the interest rates for Retail Debt Products, based on a number of inputs. The Bank will provide an estimate of the following: Applicable Government of Canada zero coupon wholesale bond and Treasury bill rates, RDP gross administrative costs (Bank and Finance) including commission costs, and retail debt option values. The Bank will also be responsible for monitoring the rates on other retail products.

Finance will be responsible for positioning the price of Retail Debt Products relative to comparable retail market instruments.

4.5. Third Party Complaints/Enquiries

The Bank will respond directly to all third party complaints/enquiries that are operational in nature. Operational complaints/enquiries received directly at Finance should be acknowledged by Finance to the third party indicating that the complaint/enquiry has been forwarded to the Bank for action.

The third party complaints/enquiries that are policy related shall be answered directly by Finance. Policy related complaints/enquiries received directly at the Bank will be acknowledged by the Bank to the third party indicating that the complaint/enquiry has been forwarded to Finance for action.

5. Planning and Budgeting

5.1. Planning process

Each year, the RDWG will develop a three-year strategic plan for the program based on the overall debt management strategy and the strategic objectives of the RDP. The RDWG will submit the three-year strategic plan to the RDC for review and recommendation to the FMC. The three-year strategic plan is approved by the FMC.

The three-year strategic plan is a rolling plan and as such, will be approved annually at the September FMC meeting. The RDWG will track progress of the three-year strategic plan and report any significant variances to the RDC in a timely manner.

5.2. Budgeting process

In parallel with the planning process, the Bank of Canada will determine the financial requirements[1] associated with the RDP three-year planning horizon.

The first-year requirements will be incorporated into the Bank’s proposed annual budget in September, for submission to the Bank’s Board of Directors for approval. Second and third-year requirements will be incorporated into the Bank’s medium-term planning process, for approval by the Bank’s Board of Directors. Normally the Bank’s Board of Directors would approve the annual budget by the end of December, prior to the start of the budget year.

Beginning 1 January 2008, all Bank of Canada costs associated with the RDP and previously recovered from the Minister of Finance will no longer be reimbursed. Commissions are considered part of the debt servicing costs, along with interest payments, and will continue to be paid directly by the Government.

5.3. Modifications to approved plans and budgets

Any major recommended changes to the approved strategic plan will be brought to the RDC for review and to the FMC for approval. Should a significant change be deemed necessary, Finance and the Bank will first consider reprioritizing the approved work plan and budget allocation so that the change may be accommodated without necessitating additional resources.

6. Reporting and Records Keeping

The record keeping associated with sales, redemptions and the outstanding stock will be maintained by the Bank on the government’s behalf.

The following documents are distributed within the Department of Finance and the Bank of Canada and filed in registries on a periodic basis for the purposes of informing senior officials and accountability.

7. Audits

RDP expenses incurred by the Bank and reported within the Bank's expenditures will be audited by the Bank's external auditors as part of the established annual financial statement audit processes. The internal controls over financial reporting of RDP expenses shall be audited by the Bank's internal auditors as part of the regular internal control over financial reporting audits.

Sales, redemptions, and outstanding stock reported through "The Statement of Government Debt Outstanding" shall be audited by the Bank's external auditors as part of the established annual financial information audit. The internal controls over financial reporting of this information shall be audited by the Bank's internal auditors as part of the regular internal control over financial reporting audits.

8. MOU Reviews

The RDC will undertake annually a qualitative assessment of the utility of this MOU and the effectiveness of the working relationship between the parties. As appropriate, revisions to the MOU will be made.

9. Confidentiality

Both Finance and the Bank will maintain a level of confidentiality over information relayed from one party to the other in all matters related to the RDP that is consistent with applicable legislation and commercial standards of business protection. Thus, the Bank will not publish any documents related to the RDP without consulting with Finance and vice versa.

10. Term of Memorandum of Understanding

This MOU is effective 24th May 2012, and replaces any earlier MOUs between Finance and the Bank with respect to the RDP. This MOU shall remain in effect unless replaced with an amended MOU or terminated. This MOU may be terminated with one-year notice.

11. Approval of the Memorandum of Understanding

This MOU is entered into bythe Bank of Canada, and Financial Sector Policy Branch of the Department of Finance, Government of Canada on this 24th day of May 2012.

By:

Ron Morrow
Chief,
Funds Management and Banking
Bank of Canada

By:

Jeremy Rudin
Assistant Deputy Minister,
Financial Sector Policy Branch
Department of Finance

 

Annex I
Roles and Responsibilities

Broadly speaking, the accountabilities of Finance and the Bank for the RDP are as follows:

Within this framework, it is desirable to clarify the division of responsibility between Finance and the Bank as they carry out the activities related to the RDP. This annex provides a summary of the division of responsibilities for certain key activities. It is not an exhaustive or definitive list but, rather, is intended to provide guidance to Finance and the Bank as they work together to carry out the RDP. This annex is subject to change with the consent of both parties.

Codes:
For activities where Finance and the Bank have shared responsibility:
L = Lead = Lead/initiate a process/analysis
P = Participate = Participate/contribute/assist in a process/analysis

For activities where one party has sole responsibility:
D = Do = responsible for implementing, or overseeing the implementation
A = Advise = responsible for providing input or advice only

I. Business Planning and Evaluation
  Bank Finance
Develop three-year strategic plan L P
Develop budget D A
Obtain FMC approval for annual strategic plan P L
Obtain Bank of Canada Board approval for budget D -
Treasury Evaluation Program inclusion P L

 

II. Product Analysis / Development
  Bank Finance
Propose modifications to products/channels L P
Evaluate policy fit of modifications P L
Prepare business case to assess modifications L P
Obtain approval for modifications P D

 

III. Product Marketing & Communications (Customer& Media)
  Bank Finance
Conduct market research
(customer needs/wants/habits)
D A
Recommend a Campaign Marketing Strategy
(brand & product promotion, customer messaging, media messaging)
L P
Obtain Ministerial approval for Campaign Marketing Strategy P L
Develop marketing creative D A
Obtain Ministerial sign-off of creative A D
Execute the Marketing Plan D -
Rates announcement: beginning of the sales period    
Rates announcement: pricing/repricing exercises D -
Manage media relations activities L P
Manage the Canada Saving Bonds Web Site D -

 

IV. Product Pricing
  Bank
(including Financial Markets Department)
Finance
Initiate process for pricing and re-pricing A D
Provide inputs for pricing decision    
  • Government of Canada zero coupon wholesale bond
      and Treasury bill rates
D -
  • Gross administrative costs D -
      • including commission costs    
      • including HST charges applicable to the Bank    
  • Suggested option valuations D -
  • Gross administrative costs Finance - D
Monitor prices of other retail products D -
Recommend pricing to Minister for approval A D

 

V. Product Delivery
  Bank Finance
Recommend cash/payroll product terms & conditions L P
Approve cash/payroll product terms & conditions - D
Define customer forms/reporting D -
Define customer service strategy L P
Define systems technology strategy and priorities D -
Build supporting systems & business processes D -
Manage operational change process D -

 

VI. Product Distribution
  Bank Finance
Negotiate agreements with sales force, cash & payroll (subject to commission approval by Finance) D A
Approve commission structure A D
Maintain payroll and cash channels D Finance will be consulted
only in the case
of any significant issues
Maintain channel relationships D
Provide channel materials/training D
Initiate payment of sales agent compensation D

 

VII. Process Customer Transactions
  Bank Finance
Define service standards D A
Process customer transactions (enrollments, financial transactions, non-financial transactions, correction) D Finance will be consulted
only in the case of any significant issues
Process customer reporting D
Process regulatory reporting D

 

VIII. Service Client
  Bank Finance
Respond to operational-related customer inquiries sent to the Minister
(such inquiries are to be redirected to the Bank)
D
(Inform Finance of response)
-
Respond to customer requests
  • received via letter, phone, web, fax, etc.
  • regarding product features, general information, operational policies, forms, direct purchase forms, etc as well as personal holdings
D Finance will be consulted
only in the case
of any significant issues
or when program
policy issues are raised.

 

IX. RDP Records Keeping & Reporting
  Bank Finance
Record keeping
  • sales, redemptions and outstanding stock
  • RDP expenses
D
(part of the Bank’s
internal control audit)
-
Reporting
  • Report the expenses associated with the Retail debt services within the Funds Management section of the BoC Annual Report
  • Quarterly financial reports (as per Annex II)
  • Prepare and provide to Finance the monthly outstanding debt report 
  • Prepare and provide to Finance the monthly sales commission
  • Prepare and provide the annual draft audited statement of Government of Canada Debt Outstanding (date to be determine annually)
   
Record of all transactions related to redemption, sales, commission and interest for the trial balance and Public Accounts D
(the Bank’s Debt Accounting Group)
-

Annex II
Retail Debt Program – Quarterly Financial Reporting 

As part of this agreement, the Bank will prepare on a quarterly basis a summary report of financial results for the RDP. The report will compare year-to-date actual operating expenses to year-to-date budget for the RDP. The report will provide explanations for variances to budget that are deemed significant to the Bank.

Where the program would incur capital expenditures, the report would include a separate section for those expenditures.

The report will be prepared using the Bank’s internal financial management reporting structures and category of expenses. The following cost categories are shown in the report:

Operating expenses

Bank of Canada – Bank Internal Operations
This category includes Bank of Canada internal costs incurred to manage RDP - activities such as planning, budgeting and forecasting, relationship management, product analysis, contract management, marketing research/analysis, management of sales force, etc.

It also includes indirect operating costs incurred and required to manage the RDP – expenses such as a portion of Bank management as well as a portion of infrastructure and support functions like Financial Services, Legal Services, Human Resources, Information Technology, Facilities and Security, etc.

Bank internal operations costs related to the RDP are treated as a fixed cost category as per agreement with the Department of Finance. Annual increases to the value of this fixed cost category reflect annual general cost increases in the underlying activities listed above.

Third Party (Operations)
This section includes the total of all third party contract expenses related to baseline operations, and innovations, under the categories “Back Office Operations” and “Back Office Change Management”.

Third Party (Marketing & Communications)
This section includes the total of all third party contract expenses related to advertising, marketing research, design, sales force, warehousing, web hosting, printing, distribution, under the categories “Media Buy/Creative Development” and “Marketing Print and Distribution”.


1 Financial requirements for the Retail Debt Program are defined to include both the direct and indirect operating and capital expenditures required by the Bank to administer the Retail Debt Program. These expenditures include salaries and staff-related expenses, third party contracts, a portion of Bank management as well as a portion of infrastructure and support expenditures such as Financial Services, Legal Services, Human Resources, Information Technology, Facilities and Security, etc.