Since it launched in 2019, FSRA has identified itself as a principles-based financial services regulator. FSRA’s focus on using principles-based regulation to deliver on its mandate makes it unique amongst Canadian financial services conduct regulators. Five years of experience, which has included consistent engagement with the Consumer Advisory Panel about FSRA’s approach to principles-based regulation both generally and in regard specific initiatives, makes this an opportune time to reflect on opportunities to adapt principles-based regulation in ways that strengthen consumer protection in Ontario.

This note reviews the benefits associated with principles-based regulation and identifies several opportunities that the CAP believes will allow this approach to achieve better and more consistent consumer outcomes. The CAP is able to identify these opportunities by virtue of its responsibility to evaluate regulations through the prism of consumer knowledge and experience. We encourage FSRA, when promulgating and overseeing principle-based regulations, to regularly consider this consumer perspective. Specifically, the Panel recommends that FSRA focus on:

  • enhancing consumer awareness
  • establishing clear and transparent disclosure requirements
  • putting in place consumer feedback mechanisms
  • intensifying market conduct supervision
  • leveraging data analytics and insights
  • promoting fair treatment principles
  • engaging a wide range of stakeholders
  • committing to continuous review and improvement

By implementing these initiatives, FSRA can strengthen its regulatory framework and better ensure that it produces fair, suitable, and beneficial outcomes for consumers in the financial services sector. These efforts contribute to building trust and confidence in the financial system and promoting the financial well-being of all consumers.

Reflecting on principles-based regulation

FSRA’s use of principles-based regulation means that it governs the conduct and operations of financial institutions, markets, and intermediaries based on a set of guiding principles rather than specific, prescriptive rules or regulations. This approach to regulations has many benefits including:

Fostering Trust and Confidence: Financial institutions that operate with integrity and demonstrate a commitment to regulatory principles are more likely to earn the trust of customers, investors, and regulators.

Global Consistency: Principles-based regulation promotes consistency and harmonization across different jurisdictions, facilitating cross-border operations and reducing regulatory fragmentation.

Responsiveness to Market Dynamics: Principles-based regulation is inherently more adaptable to changes in market dynamics, technological advancements, and evolving business practices.

Flexibility and Innovation: By focusing on broad principles rather than specific rules, regulations, or standards, principles-based regulation allows firms to adapt to changing market conditions and customer needs more easily.

Cost Efficiency: With principles-based regulation, firms have more discretion in how they achieve regulatory objectives, potentially reducing compliance costs.

Reduced Compliance Burden: Firms have more autonomy in designing their compliance programs and risk management frameworks, which can streamline processes and reduce administrative overhead.

Enhanced Risk Management: Rather than focusing solely on meeting specific regulatory requirements, firms are incentivized to adopt robust risk management practices and internal controls to achieve broader regulatory objectives and mitigate risks effectively.

This is an impressive list of benefits that principles-based regulation offers the financial industry, the regulator, and consumers. Unfortunately, if poorly articulated or inadequately enforced, some of these benefits can become disadvantages for everyday consumers. It is true that some of these disadvantages could arise in a rule-based approach to regulation, but it is particularly important that FSRA work hard to eliminate or at least mitigate these disadvantages as part of its continued commitment to a principles-based approach. These potential disadvantages include:

Complexity and Lack of Clarity: Principles-based regulation may lack specificity, making it difficult for consumers to understand their rights and obligations. Without clear, actionable guidance, consumers may struggle to navigate the financial services landscape and make informed decisions about products and services.

Difficulty in Comparing Products and Services: The lack of standardized rules or clear benchmarks makes it difficult for consumers to assess the quality, cost, and suitability of various options available to them.

Inconsistent Consumer Protections: Regulators and/or market participants may interpret principles differently, leading to variations in consumer outcomes and protections across different contexts, which may result in inconsistent enforcement. Enforcement relies on regulators’ discretion and judgment in enforcing regulatory principles, which may vary in rigor and effectiveness and thereby undermine trust and confidence in the financial system.

Limited Consumer Engagement: Regulators often prioritizes engagement with industry stakeholders over direct consumer involvement in the early stages of the regulatory decision-making processes.

Limited Redress Mechanisms: Without specific rules or standards to guide regulatory actions, consumers may face challenges in holding financial institutions accountable for unfair or deceptive practices.

Information Asymmetry: Consumers generally face information asymmetry when dealing with financial products and services. Regulators may not adequately address this information imbalance, leaving consumers vulnerable to misleading or deceptive practices by financial institutions.

Risk of Regulatory Capture: Principles-based regulation may be susceptible to regulatory capture, where industry interests exert undue influence on regulatory decision-making processes and result in outcomes that favor the interests of financial institutions.

CAP recommendations to FSRA

Overall, while principles-based regulation offers flexibility, adaptability, and burden reduction, it also introduces challenges in terms of complexity, transparency, and accountability, that can undermine consumer trust and protections. FSRA needs to be mindful of these competing realities and must always try to ensure that its application of principles-based regulation supports and aligns with consumer interests. Some of the initiatives that CAP would encourage FSRA to pursue include:

Enhanced Consumer Awareness: Investment in consumer empowerment initiatives to improve financial literacy and awareness among consumers; including, educational resources, workshops, and online tools to help consumers make informed financial decisions and understand their rights and obligations.

Transparent Disclosure Requirements: Establish clear and transparent disclosure requirements for financial products and services to ensure that consumers have timely access to relevant information needed to make informed decisions. This may involve mandating standardized disclosure formats and requiring disclosure of key terms, fees, and risks associated with financial products.

Consumer Feedback Mechanisms: Put in place consumer feedback mechanisms, such as hotlines, online portals, or complaint resolution processes, to gather input from consumers about their experiences with financial products and services. This feedback loop can inform regulatory priorities, identify emerging issues, and guide policy decisions aimed at improving consumer outcomes.

Market Conduct Supervision: Intensify market conduct supervision activities to proactively monitor and assess the behavior of financial institutions and intermediaries; including targeted examinations, mystery shopping exercises, and thematic reviews to identify and address potential consumer harms or unfair practices.

Data-Driven Insights and Analysis: Leverage data analytics and insights to monitor consumer outcomes, identify trends, and assess the effectiveness of regulatory interventions. By analyzing data on consumer complaints, market conduct violations, and product performance, FSRA can identify areas of concern and take targeted actions to address consumer harms.

Promotion of Fair Treatment Principles: Promote fair treatment principles within the financial services industry by issuing guidance, conducting outreach activities, and collaborating with stakeholders to develop best practices for fair and equitable treatment of consumers. This may include addressing issues such as pricing transparency, product suitability, and handling of consumer complaints.

Stakeholder Engagement and Collaboration: Engage with a wide range of stakeholders, including consumer advocacy groups, industry associations and academics, and government agencies, to develop more effective regulatory approaches that prioritize consumer interests and promote positive outcomes.

Continuous Review and Improvement: Commit to continuous review and improvement to adapt to evolving market dynamics and consumer needs. This involves conducting periodic reviews, soliciting feedback, and incorporating lessons learned from regulatory enforcement actions and consumer complaints to refine regulatory policies and practices.