Public Accounts Committee on April 30th, 2019

[The Chair, Conservative, Kevin Sorenson]

Good morning, colleagues. We will call the meeting back to order.

In the first half-hour we were fortunate enough to have met our new interim Auditor General of Canada in camera. Now we're being televised. If you have a cellphone or any kind of a device that may interrupt the proceedings, I would encourage you all to please set it to mute or silent. That would be great.

We are now reconvened to consider the special examination report, “Report of the Joint Auditors to the Board of Directors of Canada Mortgage and Housing Corporation”, of the 2018 fall reports of the Auditor General of Canada.

We have with us this morning from the Office of the Auditor General, Lissa Lamarche, assistant auditor general; and Clyde MacLellan, also assistant auditor general. From Ernst and Young, we have Michel Bergeron, managing partner. From Canada Mortgage and Housing Corporation, we have Derek Ballantyne, chairman of the board, and Evan Siddall, president and chief executive officer.

We welcome you all here. We will turn to the Auditor General's office first.

Mr. MacLellan.

[Clyde MacLellan, Assistant Auditor General, Office of the Auditor General]

Mr. Chair, thank you for this opportunity to discuss our special examination report on the Canada Mortgage and Housing Corporation, or CMHC.

As you mentioned, I am accompanied today by Lissa Lamarche, assistant auditor general, who was the principal responsible for this audit at the time of the report. Because this audit was done jointly with Ernst & Young, we are also accompanied by Michel Bergeron, a partner with the firm.

As you know, in a special examination, we seek to determine whether the crown corporation's systems and practices provide reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively.

Our examination covered the period from March to December 2017.

Overall, we found that the corporation had in place good corporate management practices. However, we identified a significant deficiency in the board of directors' complement and the related impact on board oversight. Specifically, we found that four of the 12 positions were vacant, which left gaps in the competencies and diversity of the board and hindered the effectiveness of its oversight.

This deficiency matters because an incomplete board of directors with competency gaps could compromise the board's ability to effectively oversee the corporation. Given the complexity of multiple transformation initiatives under way and their significance to the corporation's operations, adequate oversight and competencies were critical. In December 2017, a number of appointments to the board were announced.

We also found good strategic planning, performance measurement and risk management practices, but there was room for improvement in the corporation's capital management and stress testing practices. We noted that the corporation did not quantify the impacts of all material risks to ensure that sufficient capital was earmarked for these risks, and that it did not perform ad hoc stress testing to further explore its vulnerabilities.

These weaknesses matter, because determining the level of capital the corporation needs to address all significant risks helps mitigate financial risks to the Government of Canada and to the Canadian taxpayer. Furthermore, without the additional ad hoc stress testing, the corporation could not explore its hidden vulnerabilities and inform senior management and the board about potentially harmful scenarios.

We found that the corporation had in place good practices for its mortgage loan insurance, securitization and assisted housing activities. Specifically, the corporation planned these activities, implemented them effectively, and monitored and reported on them.

However, we noted weaknesses that were related to the significant organizational transformation initiatives under way, particularly in the integrated management of the technological and non-technological transformation initiatives, and in the identification and monitoring of performance metrics at the individual project level.

These weaknesses matter because for a large-scale, complex transformation program, managing all transformation initiatives together ensures proper integration of project interdependencies and facilitates change management and risk management.

In addition, without clearly defining and documenting objectives, outcomes, performance metrics and expected benefits, the corporation may not have been able to assess whether expected benefits were achieved once the projects were completed.

The corporation agreed with all of our recommendations and prepared an action plan in response to our concerns. However, because our audit work was completed in December 2017, I cannot comment on any measures the corporation has taken since then. The committee may wish to ask the corporation's officials to clarify what measures it has taken in response to our recommendations.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions the committee may have.

Thank you.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. MacLellan.

Now we will move to CMHC with Mr. Ballantyne, please.

[Derek Ballantyne, Chairman of the Board, Canada Mortgage and Housing Corporation]

Thank you, Mr. Chair.

It's a pleasure to be here. I am joined today by the president and CEO of CMHC, Evan Siddall.

By way of opening, I would like to say that we welcome the committee's interest in the most recent special examination of CMHC's operations conducted by the Auditor General of Canada and Ernst & Young.

The Financial Administration Act requires that all crown corporations undergo a special examination at least once every ten years. The special examination we are discussing today covered the period between March 1 and December 31, 2017.

For the most part, the audit concluded that CMHC maintained good corporate management practices during this period, in a manner that provided the reasonable assurance required under the Financial Administration Act.

However, as you have also heard this morning, auditors identified a significant deficiency in corporate governance related to board appointments and oversight and competencies. I will limit my remarks to measures taken to correct these issues.

Most notably, during the period covered by the audit, four of the 12 positions on CMHC's board of directors were vacant. This resulted in gaps in the competencies and diversity of the board, which the auditors concluded hindered the effectiveness of its oversight.

CMHC and the board itself have limited involvement in the selection of board members; these are Governor in Council appointments. However, I am pleased to say that the government appointed six new members—including me—to the board in December 2017, just as the special examination was wrapping up.

These appointments filled the four vacant positions as well as two that were about to expire. Importantly, they also helped to address the competency and experience gaps identified by the auditors.

Since then, the government has appointed two additional members to replace individuals whose terms had expired. Together, the eight new members have brought diverse perspectives and a wide range of skills to the board, including in areas related to affordable housing, information technology and chartered accountancy.

My own background, for example, is managing large and mid-sized housing organizations, which includes extensive work with the non-profit, charitable, social entrepreneurship, co-operative and foundation sectors.

I believe Evan would agree that the reconstituted board's knowledge and expertise have been of significant value in helping CMHC lead the national housing strategy, which was announced post-audit, as well as ensuring that Canadians benefit from stable and secure housing markets.

Also, in response to the auditor's recommendations, CMHC has introduced new practices to improve the capacity of board members to oversee the company's operations. For example, it has strengthened the annual review of board competencies to identify gaps. My board colleagues and I have received training in specific areas of corporate governance. A menu of relevant courses and training for board members is updated quarterly and the company will be presenting a list of suggested deep-dive topics for the board and its committees on an annual basis.

The board created a new oversight board committee, the housing and capital projects committee, which will replace the affordable housing committee. This committee will oversee the national housing strategy, capital spending, future of work projects and any other projects with an expected cost in excess of $10 million. The housing and capital projects committee will meet for the first time in May 2019. These include measures under the national housing strategy as well as CMHC's new housing affordability strategy, which aims to ensure that “By 2030, everyone in Canada has a home that they can afford and that meets their needs.”

CMHC is supporting this new committee's work by providing regular updates on assisted housing activities. The company also provides information through its quarterly “Assisted Housing Business Supplement”.

Thank you again for the opportunity to be here to answer your questions.

I will turn things over to Evan now, who will complete our presentation.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Derek.

Mr. Siddall.

[Evan Siddall, President and Chief Executive Officer, Canada Mortgage and Housing Corporation]

Thank you, Derek.

Thank you, Mr. Chair and members of the committee, and thank you all for the opportunity to be here today.

Let me begin by reiterating CMHC's commitment to the aim of special examinations required by the Financial Administration Act.

These audits provide the government, parliamentarians and Canadians in general with independent assurance that CMHC has the necessary systems and practices in place to safeguard our assets, that we efficiently and economically manage our resources, and effectively carry out our operations.

They also help build trust in CMHC, a systematically important financial institution with a legislative mandate to contribute to Canada's financial stability and facilitate access to housing.

They make CMHC a stronger company by identifying management deficiencies that we need to address.

I'd like to respond to a few areas. In addition to the corporate management practices that Derek has spoken about, the most recent audit also focused on two other key areas—on the one hand, management of our mortgage loan insurance, securitization and assisted housing lines, and on the other hand, management of organizational transformation initiatives. The Office of the Auditor General recommended, for example, that we enhance our assessment and documentation of the capital required to cover all material risks faced by CMHC, including reputational and strategic risks. I'm pleased to report that an assessment of these capital requirements was recently completed.

Stress testing is a crucial discipline as we continue to improve our work at CMHC. We've identified additional ad hoc stress tests, again in response to a recommendation from the OAG, to ensure that we better understand and are able to respond to vulnerabilities in the event of extreme crises. Notably, I should emphasize to committee members that we are the only Canadian financial institution to publish our stress testing results publicly, every year, as part of our commitment to transparency.

As you may also be aware, CMHC is a much-transformed institution. We are a proudly innovative and client-oriented vehicle for housing policy and housing affordability throughout the economic cycle. In 2015 we began a multi-year initiative to modernize and transform our technology and business practices. The special examination auditors made a number of recommendations related to this work. We're in the process of responding to each of them in accordance with our action plans. For example, we have established a new division to oversee project and change management initiatives and to facilitate reporting to senior management and the board on these initiatives. We've clearly defined the objectives, outcomes, performance measures and expected benefits of our transformation projects. We advise the board of key achievements on a regular basis.

The OAG also recommended that the board of directors should play a more active role in setting CMHC's strategic direction. Again, we had already taken this recommendation into account by the conclusion of the examination. As a matter of fact, last year we engaged in a thorough review of our strategy. It was discussed at three separate board meetings, including a session dedicated completely to this topic. The review also absorbed a lot of our time at the executive committee. This is not to mention the work of a dedicated strategic advisory group that met multiple times. We established a strategic function at CMHC with a series of full-time colleagues.

In short, the board played a key role in the development of our new housing affordability strategy, which housing stakeholders have endorsed across the country. As Derek noted, our strategy sets out the bold aspiration that by 2030, everyone in Canada will have a home that they can afford and that meets their needs. Clearly, this is an ambitious goal and one that exceeds the targets inherent in the national housing strategy of removing 500,000 households from housing need and reducing homelessness by half from 2018 levels. Nonetheless, achieving housing affordability is vital to all for Canada's future economic health, social stability and inclusion. We recognize this, as do housing providers and our many partners across the country. Indeed, we believe CMHC exists for this single purpose, and we recently restructured our company to deliver results for Canadians and ultimately to achieve our aspiration.

I am sure Derek agrees with me that we are particularly proud of our employees' resilience and commitment throughout this process. As a result of the restructuring, 215 employees changed roles. Two out of three employees are now reporting to a new leader. Despite all of these changes—the third significant reorganization in five years—we continued to provide uninterrupted service to Canadians. Our project portfolio remains largely on track.

Supported by this team of dedicated employees, the initiatives included in the national housing strategy and new measures proposed in budget 2019 provide a solid base for our new affordability strategy. Nevertheless, we realize that we will need to go further and faster to reach our goal.

At the same time, as a crown corporation with the “sacred trust” of managing public resources, we are committed to being a leader in housing risk management and an accountable, transparent, efficient and innovative organization that is admired and trusted by Canadians from coast to coast to coast.

That concludes my remarks. Thank you again for inviting us to be here. We look forward to the committee's questions.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Siddall.

We'll now go to the first round of questioning. That is a seven-minute round.

Mr. Sarai, you have the floor.

[Randeep Sarai, Liberal, Surrey Centre, BC]

I want to thank you all. First of all, it's always good when you come after the report was done in 2017 and it's about 15 months later and most of the kinks in the system seem to be resolved, but I still have a few questions.

For the Auditor General, you used to talk about reputational harm. Is that referring to lack of business defaults? How do you calculate reputational harm for an organization? I know banks use the default rates. You need to have reserves of a certain percentage based on default, but how do you calculate or prepare for reputational harm? Also, what does that entail? Does that mean business slowdowns? Does that mean CMHC has a scandal inside, internal to their board? What would reputational harm mean for them?

[Clyde MacLellan]

When we talk about reputational risk, we usually refer to that as an illustration of operational risks that can be faced in an institution that are not financial. It's not something that we attempt to see organizations measure as a financial metric or a series of numbers. What we look to see is how the organization contemplates the types of risks that can affect its reputation. You referred to something just an an illustration, perhaps a scandal, and what that would mean to the ability of the organization to continue its business model, to respond to the perceptions in the public of those particular types of issues. We don't attempt to quantify those but we look to see how the organization would respond and whether, in this particular case, some capital would be necessary to assist in reserve for that type of situation.

[Randeep Sarai, Liberal, Surrey Centre, BC]

Interesting. My next question is in regard to stress testing. Because of my constituents I have a big interest in the OSFI stress test. I'm wondering if the CMHC is stress-tested against the OSFI stress test, the B-20 stress test, and how it would affect their business line and has it affected that and has that been done?

Maybe Mr. Siddall can answer that.

[Evan Siddall]

Let's just distinguish between the two types of stress testing of course.

[Randeep Sarai, Liberal, Surrey Centre, BC]

Yes.

[Evan Siddall]

Stress testing of our capital is something that we do with a range of scenarios of economic downturns. For example, we would model the U.S. financial crisis as if it were to happen here. We do that as part of our annual work and that's what we publish.

Somewhat confusingly the stress test I think you are referring to is the stress test associated with underwriting new mortgages, where we add approximately 2% to the prevailing rate in order to make sure that people have the ability to withstand interest rate shocks. We actually do stress test that in a different way. We looked at the impact on our business. In fact, there was a rough decline in activity. There are two parts to this. The stress test for five-year mortgages was imposed with respect to insured mortgages by the Minister of Finance in October 2016 and extended to uninsured mortgages by OSFI at the beginning of this year, so it's somewhat different.

[Randeep Sarai, Liberal, Surrey Centre, BC]

Yes.

[Evan Siddall]

The second category doesn't pertain to our business. The first does. We witnessed in 2017 and throughout 2018 declines in our volumes of insured activities of 15% to 20%. I should tell the member that was roughly as expected. We estimated it could be 20% to 25% but we thought behavioural factors, for example, people buying smaller homes, might alleviate some of that pressure. That's what we have observed and it has persisted since then.

[Randeep Sarai, Liberal, Surrey Centre, BC]

You did a stress test against the OSFI. That's what I was asking.

[Evan Siddall]

Not—

[Randeep Sarai, Liberal, Surrey Centre, BC]

You have used measures internally to understand how those would affect your bottom line and your actual volume amounts.

[Evan Siddall]

Yes, we have.

[Randeep Sarai, Liberal, Surrey Centre, BC]

I can see how it works for home mortgages, etc., in terms of IT transformation and I notice that you guys have implemented new technologies. I have been speaking to some of your staffers in British Columbia in terms of the new housing strategy and they have told me about new portals, etc. I'm just a little cautious and worried, when you have a portal that is calculating everything in terms of large projects and there is no human touch. Is that a factor?

I can understand on a normal home that's CHMC mortgage-insured there is probably a formula that plugs it in and calculates to see if you qualify based on your T4, etc., but when it comes to large projects, particularly, say, an example would be the affordable housing initiative, would that be all done by an IT algorithm or would it be done with a human touch? Otherwise, there will be hesitancy among people to actually submit applications or there may be biases created when people figure out what the algorithm is to approve their projects.

[Evan Siddall]

You'll be gratified by the answer.

First of all, we do use machines to manage workflow in our homeowner transactional business. It's a piece of software called emili, which we're updating. It's effectively a rules engine that something is either automatically approved—an insured mortgage application—or it's referred to somebody for intervention if it's more complicated.

In the case of multis, which are anything more than four homes in a unit, like apartment buildings, condos, etc., those are adjudicated differently and all, at this point, are largely manual. We're putting in a new technology system that will give people the tools to do that, but they're always complicated. They always involve different financing structures and different corporate structures. While we want to automate the rote part of that activity to make it more efficient, there is always human intervention. There is always an underwriter involved.

[Randeep Sarai, Liberal, Surrey Centre, BC]

This question may be for the Auditor General's office, or it may be for Mr. Ballantyne.

What I see in this report is that, prior to December 2017, the board was not informed well on all business lines and other practices. It seems to me that there was a disconnect. Was this because the deputy ministers who sat on that board were facilitating that gap and not making members aware, just using them more as figureheads? Was that the gap that we see in there? It seems like there was a lack of information flowing to the board itself prior to December 2017. If that was the case, has it been resolved now?

[Lissa Lamarche, Assistant Auditor General, Office of the Auditor General]

I believe the lack of information flow that you're referring to may be in terms of consolidation of the project initiatives that were under way. One of the observations we had was that there was no consolidated reporting on technological and non-technological initiatives to give the board an idea of how all of these came together and where the pressure points were in terms of efforts and costs.

I think that is not so much due to the board membership as it is to the information that was being accumulated on the various initiatives. The rest of the observation relates more to the different competencies and whether the board was able to play the oversight role that they were expected to play, given that there were certain competencies that weren't actually present on the board. An example of that would be IT. When you have significant IT initiatives under way and there is no IT competency or strength on the board, it limits the board's ability to effectively challenge and oversee the project that's under way. I think that—

[The Chair, Conservative, Kevin Sorenson]

Thank you.

We're a minute over already, Mr. Sarai. Those were very good questions.

[Randeep Sarai, Liberal, Surrey Centre, BC]

Thank you.