FSRA’s webinar on Principles-Based Regulation

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0:04

Hello, everyone, and welcome to today's webinar, Principles-Based Regulation Approach Guidance.

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Before we get started, I'd like to go over a few items so you know how to participate in today's event.

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You have the opportunity to submit text questions to today's presenters by typing your questions into the questions pane of the control panel.

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You may send your questions at any time during the presentation.

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We will collect these and address them during the Q &A session at the end of today's presentation.

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Great. Good morning.

0:34

I'm Rishi Hussain, Director of Legal Services and Deputy General Counsel at FISRA.

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Thank you for attending FISRA's webinar on our principles-based regulation approach guidance.

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I'm joined by my colleague, Jordan Solway, Executive Vice President, Legal and Enforcement at FISRA. We will be your hosts for today.

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We will address questions at the end of the presentation.

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If questions are similar, we will group them and answer them once.

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Any questions we can't take today, as well as the recording of today's seminar and the slide deck will be posted to our website. I hope you find today's webinar informative.

1:10

Before we start, it's important to acknowledge the land we are on is the traditional territory of many nations, including the Mississaugas of the Credit, the Anashinaabeg, the Chippewa, the Haudenosaunee and the Wendat people, and is now home to many diverse First Nations, Inuit and Métis people.

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We acknowledge that Toronto is covered by Treaty 13 with the Mississaugas of the Credit and the Williams Treaty signed with multiple Mississaugas and Chippewa bands.

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Let's begin.

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Jordan will take you through our approach to principles-based regulation and the elements of the guidance which we want to highlight with you today. Over to you Jordan.

1:49

Thanks Rishan, good morning everybody.

1:51

We're here today to provide an overview of our approach to supervision and regulation as a principles-based and outcome-focused regulator, and also to highlight the main elements of our PBR approach guidance, which FISRA has published after extensive consultation with our stakeholders.

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I'd ask that you take the time to carefully review the guidance, refer to it regularly.

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It's going to help you to understand our approach, how we supervise our sectors, our expectations of you as regulated entities and persons, and what you can expect FISRA.

2:22

Before we outline the PBR approach, I wanted to share with you or remind you of some background and some context about principles-based regulation. PBR, as we refer to it, is not new.

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It's an approach, it's not an approach that FISRA invented.

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It's a strategy that we adopted that's been used by leading financial service regulators throughout the world and for some time.

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It's the predominant approach that's utilized in the United Kingdom, Australia and New Zealand, and the FTC, pardon me, the FCTC in the United States is also principles-based in its approach.

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Recent guidance from the Office of the Superintendent of Financial Institutions also takes a principles-based approach, and a number of provinces in Canada have also adopted this approach in all or part to their financial services supervision and regulation.

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PBR is also widely used by regulators in areas unrelated to financial services.

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That's because if it's properly implemented by the regulator and the regulated entities, PBR can actually reduce what we refer to as the regulatory burden, but most importantly achieve better outcomes for consumers, pension plan members, and depositors.

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The reason for using this approach by FISRA is probably best stated in the 2016 report of the expert panel which reviewed the mandates of our previous regulators, the Financial Services Commission of Ontario, FISCO, the Financial Services Tribunal, which is the tribunal that supports us, and the Deposit Insurance Corporation of Ontario, or DICO.

3:58

In that report, the expert panel concluded that the regulatory approach by the previous regulators, which was largely rules-based, had proven to be inflexible and insufficient to address both the complex and ever-changing marketplace of financial services, the challenge of protecting consumers, depositors, and pension plan beneficiaries.

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The panel noted that innovation in financial services was both necessary and desirable to drive competition, which in turn could drive further innovation.

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It was this dynamic, together with ever-changing demands from consumers and depositors, that required a more innovative, a more flexible, adaptive, and responsive regulatory environment.

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It's for this reason that the expert panel concluded that significant revision was required to the mandates of the new regulator, its governance, its organizational structure, its regulatory tools, and its overall regulatory approach.

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The expert panel recommended specifically that FISRA's regulatory approach should be grounded in clearly articulated principles, both risk and outcomes based, and it should not be unduly rule-bound or restrictive.

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In essence, what the expert panel had concluded was that for FISRA to be successful, it would need to act in a transparent and principled manner.

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It would have to manage risk and strive for a specific set of positive outcomes.

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In turn, FISRA has responded to its statutory mandate, which reflects the recommendations of the expert panel by adopting an approach which is principles-based, which is outcomes-focused, and also risk-based.

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This approach changes the relationship between the regulator and those we regulate and relies on evidence and data to inform our assessments of outcomes and our proportionate response to those risks.

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The guidance sets out what we identify as our framework principles.

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These are what FSRA has adopted is our highest set of principles and standards that will guide our supervisory and regulatory work.

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These are our core working principles which are relevant where applicable to everything we do as a regulator.

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For example, our framework principles include the aim that FISRA is transparent with you, that we are innovative, and perhaps most importantly and above all that we're consumer-centric in our approach.

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While the framework principles guide all of FISRA, the specific principles which guide supervision and regulation are found in our statutory objects.

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They are in the FISRA Act.

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They form the basis of our expectations and are reflected in how it should be reflected in how you operate your business to achieve the outcomes that we've identified.

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These principles include the objective that you have high standards of business conduct and that you ensure that you treat your consumers fairly.

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Finally, the PBR guidance articulates how PBR impacts you.

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If you're regulated by FISRA, you'll need to understand and engage with this approach.

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And we expect you to work to achieve the outcomes which we set based on our statutory objectives.

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Those outcomes are reflected in other guidance that we publish on specific issues or interpretations of our sector statutes, our regulations, or our FSRA rules.

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Here are our framework principles. We will have regard to them in development of our rules and guidance in conjunction with our guidance framework.

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They'll guide FISRA in identifying our key areas of focus to prioritize our regulatory and our supervisory activities and to more efficiently and effectively allocate our resources in the implementation of our risk-based supervisory frameworks.

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They will also facilitate appropriate outcomes and ensure that our regulatory responses are both reasonable and proportionate.

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The framework principles also set out what you can expect from us as a regulator.

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We'll focus on outcomes, we'll assess risk, and of course, again, we'll be consumer-centric.

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We strive to act in a collaborative, transparent, adaptive, and responsive manner.

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Our responses to risk will be proportionate, and we will support and foster innovation for the financial service sectors that we supervise.

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FISRA adopted PBR because it is the most efficient and effective way to fulfill our statutory mandate and address many of the issues that had been identified by the expert panel that necessitated a change in the regulatory approach in Ontario for financial services.

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It's important to understand that PBR is not a form of self-regulation.

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That's probably perhaps one of the biggest misconceptions of principles-based regulation.

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It also doesn't mean that there aren't hard rules which are imposed. That's another misconception.

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What is fundamental to principles-based regulation to be successful is a shared understanding between us, the regulator, and the regulated persons and entities of the meaning of those principles, and more importantly, the regulatory outcomes or results that we're trying to achieve.

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Regulated entities, though, have a wide latitude as to how best to achieve those outcomes in terms of their own processes and operations.

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In this sense, there is more of a direct relationship that's created between, first, the regulatory outcomes that are supported by those articulated principles, what we call the what, and two, the regulatory requirements or the how.

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Rather than simply relying on regulatory process to achieve desired outcomes, we use those principles to support the outcomes.

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For example, providing a certification that you're in compliance assumes that because there is a tick box approach, or a tick box certification of compliance, the outcomes must We know that this is often not the case.

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The ability of a regulated entity to achieve compliance, whether under a pure rules-based system or principles-based system, is ultimately a function of the culture of the organization informed by its leadership values and its BA rule norms.

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That's been proven time and time again.

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Compliance processes which are not supported by regulated entities' buy-in will, of course, ultimately fail.

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Famously, Hector Tsentz of the UK FSA noted this when in the context of the global financial crisis he commented, you can't regulate by principles alone.

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A principles-based approach doesn't work with individuals who have no principles.

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At the top of the screen you will see a definition of PBR which has been framed by Professor Christy Ford at the Allard School of Law in the University British Columbia. Dr.

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Ford has been a thought leader on PBR both in Canada and internationally.

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She has defined PBR as an inclusive approach to supervision and regulation which requires shared understanding and commitment to achieve outcomes consistent with those identified principles.

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You may find that this is actually a useful statement to help you understand FISRA's PBR approach.

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There are four essential elements.

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First, PBR is considered an inclusive approach.

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It is not command and control regulation.

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We consult, we collaborate, and develop our outcomes in our supervisory and regulatory approaches in the context of the business environment in which financial services operate, with the goal of fulfilling our dual mandate to foster a strong, sustainable, competitive, and innovative financial services sector, while protecting the rights and the interests of consumers.

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We do not act unilaterally, we attempt to build consensus and understanding.

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Second, PBR is a dialogue.

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A shared understanding of the principles and the outcomes is a collaborative endeavor between FSRA and those who we regulate.

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Dialogue is absolutely critical so you can better determine how you will adapt your business practices and policies to give effect to the principles by achieving the outcomes which we have identified.

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Dialogue is also important so that we can together discuss, develop and amend our shared understanding of the principles so we can be effective in an innovative, fast-paced and competitive environment.

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Our role as the regulator is not to restrict business practices with a view to increasing costs or reducing profits, but to ensure that there are high standards of business practices that enable success in a stable, sustainable environment that of course protects the rights and the interests of consumers.

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Third, buy-in.

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You should understand why we set the outcomes we set and you should commit to do the work necessary to achieve those outcomes.

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Buy-in frankly requires work on your part.

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That work is not simply compliance with process requirements but a focus on achieving those outcomes so that you can best adapt your business practices and your policies in a way which is reflective your size, complexity, and your business structure.

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Fourth, outcomes are based on identified principles. We have 16 different statutory objects in the FISRA Act.

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Not all of those apply to every sector and some are in fact are sector specific in application.

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But those objects are our statement of our purpose as a regulator and they contain a number of principles which guide us in our supervisory and auditory approaches, our problem-solving, and even our enforcement.

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The highest goal of a PBR approach is that our regulated entities can demonstrate adherence to outcomes that reflect these principles.

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The goal of the outcomes we set in a PBR approach is to allow us to do more than simply assess whether the process has been followed or there is documentation to support decision making.

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Rather, PBR shifts the focus from being on process requirements to actually seeing verifiable results that matter for sound financial services and for consumer protection.

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I've often referred to the path of FISRA becoming a principles regulator as more of a journey than a destination.

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What I've learned is that you're never really finished because PBR requires constant refinement, constant adjustment, constant communication, and most importantly alignment between the regulator and those we regulate in order to achieve any degree of success.

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Our sectors are subject to constant change and so too must the regulatory approach evolve and adapt to reflect those changes.

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Really at its core regulatory work is about complex problem solving.

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How regulatory issues are identified, prioritized and resolved often involves a multi-disciplinary approach, which in turn requires careful analysis and understanding, collaboration both inside and outside of FISREP, resource efficiency and careful execution.

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PBR is a regulatory approach that uses those broad, high-level principles, as opposed to prescriptive, detailed rules, Where possible, to establish regulatory requirements or goals, and is at FSRA accomplished by an outcomes-focused approach, which means that there's a direct connection between the regulatory goal and the regulatory requirement.

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In other words, and put more simply, we measure compliance and you measure compliance based on the outcome supported by the principle, rather than the process requirements have been complied with.

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The assessment of actual outcomes provides a useful feedback loop and allows us as the regulator to assess what is working, what isn't, with a view to informing our regulatory approach.

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In this sense, on-the-ground implementation is really critical for PDR to work effectively.

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The FISRA Act includes statutory objects such as promoting high standards of business conduct, protecting, of course, the rights and interests of consumers, and fostering strong, sustainable, competitive and innovative financial services sectors.

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These statutory objects articulate the principles which form the basis of the outcomes that we at FISRA are attempting to achieve.

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For example, we set outcomes to fulfill the principle that financial services should have high standards of business conduct.

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We are inclusive with you about what that means, and we are also inclusive about how that principle is not static.

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It evolves with the industry to capture new tech, new products, new opportunities for innovation and growth.

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None of these statutory objects or the principles they espouse should at all be surprising, and they actually work extremely well for an enlightened self-interested business as they frankly make good sense for good business practices in a strong and sustainable financial services marketplace.

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We set specific outcomes based on the principles and there's an example on the screen of good governance is a facet of high standards of business conduct.

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We are working with you every day to put flesh on the bones of what good governance entails.

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For example, we produced guidance on good governance for insurers and credit unions last year, pardon me, for credit unions, and last year we had their first daylong conference on that very topic.

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And we're going to be holding another conference for boards of of our insurers and credit unions next month.

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The outcome is to gain a shared understanding of what good governance means, which we then ask you to implement in your business practices and your operations.

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I'm gonna pause for a minute and say a few things about guidance, which is a critical tool for a regulator for PBR.

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When you use PBR as approach, general principles need to be translated into specific business conduct expectations.

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in context using administrative guidance, which allows those regulated to implement or adjust their processes to ensure they're achieving the desired regulatory outcomes.

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Guidance is but one tool which we utilize for our PBR approach to develop what is referred to as an interpretive community that better understands regulatory expectations and can usefully interpret regulatory pronouncements about concepts such as what reasonableness or effectiveness means in different contexts.

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Other tools that we use in our PBR approach are public speeches such as this webinar, no action letters, thematic reviews, specific enforcement actions, and even our dear CEO letters.

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While all of these tools of PBR are critical to its success, I think guidance is perhaps the most foundational since it provides a flexible and a useful mechanism for clarifying regulatory expectations, providing transparency, and frankly, putting meat on the bones of principles without resorting to detailed or complex rulemaking.

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Let me give you an example.

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Following our launch on June 8th, 2019, our operations, like everyone else's, were impacted by the global pandemic.

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In the early days, it was quickly apparent that consumers were not driving because of the declared emergency, but they were still paying auto insurance premiums on the basis of normal usage.

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FISRA issued one of its first pieces of approach and interpretation guidance, which referenced the principles it would be applying to the regulation of auto insurance rates in Ontario.

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The guidance include a new file-and-use process that removed auto insurance regulation barriers to allow for the immediate introduction of premium relief to consumers.

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The guidance also gave an overview of other tools that insurers could use to provide financial relief to their consumers without any need for physical review or approval.

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Notably, the guidance didn't prescribe what insurers had to do.

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It simply identified the principles which we would apply to rate regulation as well as the mechanisms available to insurers to address the current situation in order to achieve the desired regulatory outcomes.

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At the time, no one had any idea of how long the pandemic would continue, and auto insurers in Ontario historically had been reluctant to reduce rates at a point in time because it could take months and sometimes years to adjust them upwards as conditions changed.

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However, that isn't what happened with the more principles-based approach which identified the regulatory outcome, providing financial relief to consumers during a declared state emergency without mandating what to do or even how to do it.

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The guidance was then followed by a dear CEO letter on May 1st 2020 which reinforced the importance of maintaining public confidence in the auto insurance system in Ontario by ensuring that rates were demonstrably just and reasonable and encouraging insurers to provide the necessary relief. The result was astounding.

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14 of the major auto insurers in Ontario representing 95% of the market provided total consumer relief in excess of a billion dollars.

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This actually made Ontario one of the leading jurisdictions, not just in Canada, but in North America that provided consumer relief for auto insurance during the global pandemic.

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Guidance was issued to help interpret the rate requirements against the identified principles.

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The auto insurers in Ontario met those outcomes in a way that demonstrated a collaborative approach and responsiveness to issues affecting consumers.

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The PBR approach asks you to achieve specific outcomes.

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You need to demonstrate that you've in fact achieved those outcomes to demonstrate that you're in compliance.

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Share that information with FISRA in sufficient detail and with supporting evidence and data so that we can assess your success.

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Show us that you've met the intended outcome.

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And if not, why not, and what the impediments were to doing so.

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You need to validate that you've been successful in achieving the outcomes, and you need to evaluate that success so you can make adjustments as necessary.

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Let me take two additional examples.

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Credit unions, pension plans and insurance companies and mortgage brokers in Ontario know that one of the key components of your operations is that you have good governance over those operations.

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But good governance is partly prescribed by legislation, regulation, and fiscal rules.

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Aspects of good governance are legal requirements that you should be meeting.

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Because we're outcome-focused about what good governance should look like for your business, we have regard to our statutory objects, including the intention that you should have high standards of business conduct, and that the rights and interests of the consumers who are your customers should be protected, And also that we want to see a financial services sector in Ontario that is strong, sustainable, competitive and innovative.

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These are examples of the principles in our statutory objects which help give meaning to what good governance should entail.

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Where it's reasonable to do so, we use these principles to interpret your legal obligations.

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But outcomes are not just a matter of statutory interpretation.

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Outcomes are the way in which our statutory objects are made effective or come to life.

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Our statutory objects tell us what the Ontario legislature wants to see for the standards, practices and environment for financial services in this province.

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They are our goals as a regulator which are made effective through your business operations.

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So to come back to good governance is an example.

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Good governance of a board is not just about having the right number of directors or holding meetings every quarter.

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We want to see directors who can exercise the kind of oversight, ask hard questions of management where necessary and make oversight decisions which may be required so the board can exercise good governance as a matter of fact and not just on paper.

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PBR essentially asks you to do the same.

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A successful outcome for you in the appointment of a board director to your board is that they are effectively supporting the good governance of your organization.

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Another example is about OCAMS aimed at treating consumers fairly, but it is also an example which shows you a bit more about how PBR actually works in practice.

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When we discuss good governance, we were looking at an example of PBR as it operates in day-to-day supervision.

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PBR also operates to help FISRA and our regulated entities solve problems which we've identified throughout a sector across Ontario or more locally.

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This example is going to show how FISRA, pardon me, how PBR enables FISRA to be proactive in solving problems that matter and also making positive changes for Ontario to use the products and services in our financial services sectors.

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Auto insurers are required to take all comers.

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That is, they are obligated by law to accept the request for an insurance quote from a consumer who, consumers who meet their FISRA approved underwriting rules.

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In our early days as a new regulator, we became aware that certain business practices were adopted, which appear to contravene the takeout commerce requirement.

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So what we did was undertake a review and uncovered systemic noncompliance through non-transparent practices, which made it difficult for some types of consumers to get quotes.

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We found that there was consumer harm, unfair competition, and diminished market health.

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We took a multi-phase supervisory and policy approach to solve this systemic problem.

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First, we engaged the CEOs of the 12 largest auto insurers in Ontario.

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We brought them together and we worked collaboratively with them.

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The result of that was an undertaking by them to change their practices to achieve the outcomes that we had identified for consumers, specifically that consumers have timely access to insurance quotes and to monitor this change and to inform FISRA of their progress.

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That was all part of the undertaking.

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FISRA then conducted interviews with consumers, brokers, brokerages, insurance agents, and representatives.

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We issued guidance to ensure that insurers understood their obligations as we had interpreted them and our expectations.

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We also amended our UDAP regulation and turned it into a rule to ensure that it was based on outcomes and continued active reporting and supervising, including on-site investigations, all to ensure that consumers retreated fairly and having access to auto insurance quotes.

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We worked with the 12 insurers to further our statutory object to promote high standards of business conduct, to promote public confidence in the auto insurance sector, and of course to protect the right in the interests of consumers.

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We set outcomes for the insurers to achieve, specifically to have in place policies and procedures which ensure that there was an effective take-all-commerce practice in their financial institutions for auto quotes and also to evaluate and monitor this for continued achievement of that outcome. The insurers reported to us as to how they achieved those outcomes.

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83% of the insurers adopted underwriting rules that went beyond the requirements filed and approved by FISRA.

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75% enhanced their governance and monitoring controls in response to our guidance and internal audit reports.

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How is this different example from how first we would have behaved if we had been a compliance-focused command and control regulator?

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Well, let me tell you, we could have immediately instituted enforcement actions without any notification or discussion, and we could have imposed administrative monetary penalties against the insurers.

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This would not have captured the entire market, and it would not have given any incentive to other insurers to adjust their practices to meet fair consumer outcomes.

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Most importantly, and above all, this would not have facilitated the immediate ability of consumers to get timely insurance quotes from the insurance market.

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The process of investigating and imposing penalties on each insurer could have taken years without achieving a change in the boards and senior management, which resulted in them actively pursuing the outcome of fair treatment of consumers through take-all covers.

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This PBR approach allowed FISRA to address the systemic, non-compliant market practice through collaboration and persuasion, but ultimately ensure that the regulated entities were responsible for achieving the desired regulatory outcome.

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The result was fair treatment for all Ontario consumers in accessing auto insurance quotes.

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The approach taken by FISRA is also reflective of how PBR is a dialogue.

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We welcome discussions with you about outcomes and about what achievement of an outcome entails.

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Sometimes in our guidance we give examples, but there's often not one right answer as to how to achieve an outcome.

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Please don't ask us what to do. Tell us what you've decided to do and what you've done to achieve those outcomes.

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This is really one of the main benefits of PBR.

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You're in control of your processes and your policies that fit your business model and your business environment.

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You know your business best.

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You will know what may work for your organization, and you should be asking how you can be effective.

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It's your responsibility to do so.

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In this sense, PBR is not a checklist of requirements or forms that you fill to comply with meeting a rule or a regulation.

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I would encourage you to think of PBR as an aspect of good business practices, to embed the principles in your business processes and in your business culture and make them effective by seeking to achieve those outcomes.

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This can actually serve to reduce the regulatory burden and helps FISRA to support innovation and also to be flexible in regulating financial services in Ontario.

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Remediation is sometimes an aspect of achieving outcomes.

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FISRA will, in some circumstances, make a determination that you haven't done all you need to try to achieve an outcome.

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In these instances, we aim to discuss, collaborate and identify outstanding issues so that you can make decisions as to how you will better fulfill the outcomes which have been set.

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We will want to see evidence to substantiate the achievement of those outcomes.

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Let's take another example.

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We might find a gap in the oversight of the board of a credit union where the board is not informed consistently or effectively of the evolution of the risk profile of the credit union.

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We'll want to see a plan in place to ensure effective oversight.

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Remediation may be iterative, and we will work collaboratively with you until there is demonstrated effective oversight of the risk function by the Board.

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In the short term, PBR can require that regulated entities and licensed individuals make adjustments to more effectively adhere to the PBR regulatory approach, as systems and approaches to compliance may change.

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In the long term, however, that flexibility to design effective processes based on your entity's own business structure and operations can actually reduce the regulatory burden, can facilitate innovation and afford ultimately a competitive advantage.

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But this must be earned through the trust with the regulator and the ability to consistently demonstrate the capacity to achieve the desired regulatory outcomes.

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Requiring that you operationalize the regulatory principles enables you to be agents rather than the subject of regulation.

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It requires you to turn your mind to the compliance process and its relationship to your particular business risks.

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It is unthinkable that FISRA could conceive of regulating all of our diverse sectors and businesses that we supervise and regulate in a single, singular way.

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How the PBR is operationalized will be a function of the legal and regulatory framework in your sector, the severity and complexity of the problem to be solved, and the sophistication and resources of the regulated entity or the entities.

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It's a matter of sound judgment on the part of FISRA how we supervise day-to-day on a day-to-day basis and how we respond to problems.

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In some sectors and in some circumstances, there are detailed prescriptive legislative requirements and regulations.

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While the rules which FISRA makes aims to be principles-based, sometimes that's simply not possible and sometimes we need to respond to our assessment of a high risk of consumer harm or harm to sustainability of financial services with more prescriptive rules.

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However, we aim to be principles-based in our rules as we are in practice and we will amend prescriptive rules to be more principles-based when an exercise of judgment on our part results in that regulatory choice. Let me give you another example.

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Our new UDAP rule in the insurance sector which became effective April 1st 2022 and it does represent a market departure from the previous overly detailed prescriptive regulation.

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This has required change in approach for regulated entities and individuals from a checklist style compliance indicators to actually understanding and measuring outcomes to determine whether or not they're effectively in compliance with the rule.

33:27

Enforcement, of course, is an integral part of our principles-based and outcome-focused approach.

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However, we take a progressive, a measured and proportionate approach to enforcement that's informed by our framework principles.

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Where a regulated entity or an individual has not complied with regulatory requirements, we will determine the appropriate course of action after considering the evidence and the unique circumstances of non-compliance or non-adherence to a particular obligation, including the seriousness and the nature of the contravention, the risk to consumers and pension plan beneficiaries or depositors, the potential impact on stakeholders, the nature of the regulated entity or the licensee, past behavior, efforts to remediate and to mitigate, the need for deterrence as well as transparency to us.

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We will strive to be measured in our approach to enforcement, assuming good faith on the part of the regulated entity or the individual.

34:28

Principles based in outcome-focused regulation are not penicillas for all ills.

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They require a substantially different relationship between the regulator and the sectors that we regulate.

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The regulator cannot be seen as the central articulator of non-negotiable requirements.

34:47

There needs to be common understanding of themes and outcomes of cooperation and trust between the regulator and its sector.

34:55

Principles-based systems supported by meaningful regulatory oversight will make cosmetic compliance more difficult.

35:03

With effective compliance in a PBR context comes legitimacy that is conferred by regulatory approval.

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This allows certain benefits, such as a reduced regulatory burden, greater consumer confidence, and ultimately a more sustainable and resilient sector.

35:22

We at FISRA have made significant strides in being a principles-based regulator, particularly considering the various challenge that we experienced following our launch, but there's still much work to be done.

35:34

Continuing collaboration is critical not just between the regulator and the regulated sectors but other stakeholders such as our Office of the Consumer and the Office of Innovation.

35:45

As everyone knows we live in a world of increasing complexity requiring a broader range of perspectives to inform what is complex problem-solving that is required of today's modern regulators.

35:57

Many thanks for your time and for your attention for this webinar.

36:00

I'm going to turn it back Thanks so much, Jordan. That was really helpful.

36:08

This concludes the formal portion of today's presentation.

36:12

Thank you for your attention.

36:14

We'll now have some time to respond to questions that we've received through the chat.

36:18

If you have any questions, you can still answer them.

36:22

Sorry, you can enter them through the Q &A icon on your screen.

36:26

There are a number of questions that have come in.

36:29

We'll do our best to respond.

36:30

And just a reminder, those we are not able to answer today, we'll issue an email to those in attendance with the answers.

36:38

In some instances where questions are similar, we'll respond once.

36:43

So for the first question, Jordan, how is PBR effective at protecting consumers?

36:54

So as I indicated during my remarks, Risha, that consumers can expect that FISRA will identify the outcomes that we're trying to achieve through our supervision, regulation, and ultimately our enforcement.

37:07

What it allows us to do is to work ideally in partnership with those we regulate to make sure that those outcomes are being achieved.

37:14

And if they aren't being achieved, then we use our regulatory tools, whether it's thematic reviews, dear CEO letters, or ultimately enforcement to make sure that the consumer is protected.

37:26

People sometimes think that PBR is light in terms of consumer protection, and that couldn't be further from the truth.

37:33

PBR really requires us to work more in a partnership, but the partnership requires good faith, trust, and it requires transparency.

37:44

And so, where regulated entities have issues of non-compliance, they should report them to us so we can work constructively and collaboratively with them to make sure the consumer is being properly protected and to make sure the outcomes are being demonstrated that's really helpful thank you another question if you don't achieve the desired outcomes does that mean that you're not in compliance and will be sanctioned so the answer is it depends I mean we wouldn't if there's transparent disclosure we wouldn't resort immediately to sanction.

38:20

We'd wanna understand what the impediments were to achieving the outcome.

38:25

We saw that would take all comers where it required a dialogue with the sector, with the companies to understand what the issues were and to work with them to remove the impediments.

38:36

Ideally, what we wanna see is validation of the outcomes through data and through evidence.

38:42

If, however, the company refuses to do that or the regulated entity just refuses to achieve the outcomes and isn't prepared to make the commitment to do so, then ultimately that could be escalated to enforcement.

38:55

I look at enforcement as a last resort, frankly, which is kind of ironic since I head up in enforcement, but you wanna try to work with the regulated entities because in my experience, 80% of those we regulate are trying to achieve the right outcome.

39:09

They really are.

39:10

And sometimes things happen through human error, operational error, or just lack of understanding.

39:16

And so helping them get to that right result ultimately better serves the consumer.

39:21

We want to reserve and dedicate our resources for the 20% who don't believe in principles-based regulation, who are trying to game the system, or that are just ignoring regulatory requirements and are indifferent to the outcomes.

39:36

That's helpful.

39:38

So another question, where do you find FISRA's desired outcomes in a given sector?

39:46

So they're gonna be reflected in our guidance.

39:49

I mean, there's a variety of tools that we use, but guidance is the principles means through which we communicate.

39:54

In our guidance, we're doing three things, right?

39:57

It's almost like we're providing our next rate to our thought processes to how we're gonna supervise and regulate.

40:05

It also in cases where we interpret regulatory requirements in the sector statute.

40:10

It explains why we're interpreting it specifically to achieve an outcome and the outcome is identified.

40:17

And I'll come back to take all commerce as an example.

40:20

We interpreted the requirement to say that a consumer should have timely and unobstructed access to a quote where an insurer is acting within its filed rules.

40:33

And so ultimately proof is in the pudding, we want to see timely access to that quote.

40:38

So that's an outcome in the guidance. We also can use DRCO letters, right?

40:43

And we did that and we have used that repeatedly to identify specifically when we have areas of concern and what's bothering us, right?

40:51

Like, we will identify where we're seeing potential problems.

40:54

We'll ask the regulated entity whether they have similar views and if they don't, why not? We also can use thematic reviews.

41:02

We recently we just published a thematic review dealing with property insurance claims and the handling of claims, which ended up being quite topical in light of the severe and natural catastrophes that consumers have experienced, not just in Ontario, but in Quebec and BC and in Alberta.

41:17

And so that's another source where we'll identify outcomes and identify where we're trying to move the needle in terms of our supervision and our regulation.

41:27

Okay, so this is a bit of a longer one, Jordan.

41:30

What compliance means in a PBR context seems very unclear.

41:37

How are regulated entities supposed to govern their behavior if it is not clear what compliance looks like to FISRA?

41:46

This uncertainty itself will lead to increased costs and inefficiency.

41:53

So I think that question belies a misunderstanding of PBR.

41:57

So compliance is ultimately demonstrated through the outcomes and the outcomes have to be validated through evidence and through data.

42:06

And so if you're saying in a specific sector that you're treating your consumers fairly and we've identified a specific outcome, you know, we've done that in the life and health industry, in the PNC industry, in the mortgage brokering sector.

42:19

For example, an outcome in mortgage brokering is that there not be falsification of income and that documents that are repaired and submitted to the lenders be accurate.

42:29

So we've identified that, we've imposed that obligation to achieving that outcome in our guidance through the principal broker.

42:36

And so if I'm regulated, I want to be able to demonstrate that I'm actually achieving that outcome.

42:42

So it requires a mind shift change by the regulated entity.

42:47

when you move away from a tick box approach to compliance, in the short run, it is more work because you have to change the way you're doing things to demonstrate those outcomes.

42:56

But once you're able to do so, then you're given more latitude by the regulator to operate your business.

43:03

And so I don't believe that it is an increased cost.

43:07

I think that it's your approach to how you embrace and adopt it.

43:11

I've worked in businesses on the other side where you ultimately wanna make sure your processes and that the compliance requirement isn't just sort of in the corner, it's embedded into the business so the business understands through the various control functions you have within a regulated financial services business, whether it's a board, an audit function, a risk management function, or a compliance function, so that they're working together in partners to achieve those outcomes.

43:39

Okay.

43:39

So, I'm going to ask this question because it's related to what you just said.

43:43

Sure.

43:43

So it is, can I use the guidance as a checklist so I know what I'm supposed to be doing?

43:50

So I think if you're using guidance as a checklist, then you're not affording yourself with the benefit of what PBR can actually offer, right?

44:01

Because in the guidance, what it's doing is it's identifying outcomes.

44:05

It may also reference best practices or good practices, but ultimately it's the outcome that matters, not the process to achieve the outcome.

44:15

And so if you treat it as a list of prescriptive requirements, then you're frankly missing the forest for the trees.

44:23

All right, the trees are, are we achieving this outcome?

44:26

And a lot of these outcomes, in fact, all of these outcomes are actually good for your business, right?

44:31

What business that we regulate wouldn't say that they want to have high standards of business practice, or what business that we regulate would say, we don't want to treat our consumers fairly, or that we don't want to facilitate innovation so we can offer our services more cost-effectively to consumers.

44:48

So I have trouble and I struggle sometimes when people say that, you know, well, if I treat the guidance as a list of things to do, that's the only way I can actually achieve compliance, because that actually isn't correct.

44:59

Compliance is achieved through the outcomes, and outcomes are measured through evidence and data. Okay, here's an interesting one.

45:12

PBR is an expert regulator.

45:14

Do you have the expertise to understand industry well enough to work with us? Regulators seem to play catch-up. How is this different?

45:25

So I think it's a really good question.

45:27

I think that's one of the things I've learned on this is that you are, some regulators will sit in an IV tower, they'll be removed from the actual pressures and day-to-day operational challenges of a business.

45:39

It's why it's so important to have a transparent dialogue.

45:43

We're not the experts in running an insurance company or being a mortgage broker or running a credit union.

45:49

And so making sure that we have a recurrent, like an open dialogue with those we regulate to understand how they're experiencing their businesses, what the challenges are, is absolutely critical.

46:03

And I think that we try to supplement our own internal expertise by doing consultations.

46:09

We use, as you know, sector advisory committees.

46:12

We use technical advisory committees.

46:15

We bring in people from time to time to inform us.

46:18

We have, you know, just coincidentally, one of the leading experts in artificial intelligence who's coming in to speak to our board and hopefully will be presenting at our FISRA exchange next year.

46:27

And so we have to constantly educate ourselves, but that doesn't mean that we're always going to be up to date and informed, but the sector has to work with us to make sure that we understand it.

46:38

They should be doing everything to educate us on their business so we understand whether or not the approach to supervision and regulation is actually being effective.

46:48

Okay, thanks Jordan.

46:49

Now taking a turn a little bit.

46:52

Sure.

46:52

My next question, does PBR mean anything goes for FISRA? No, I think that we have to be held to our guidance, right?

47:02

We have to articulate, if we're coming up with an interpretation, it has to be founded in our sector statute, and it has to be reasonable having regard to the words on the page, and whether they're clear, if they're vague, or they are ambiguous. And so it doesn't mean anything goes.

47:20

We're ultimately subject to review by the financial services tribunal or the courts and so we work within that, we're accountable and we're also accountable to our to our sectors and our stakeholders and I come back to you know we do we're probably one of the most consultative regulators of any regulator in Canada right now and so that doesn't mean that we're just going to do what the sector wants. It means sometimes that we have to have tough conversations.

47:48

Our role ultimately is to the ref and sometimes when the ref blows the whistle there's a winner and a loser and you know people don't like that but ultimately we want to be fair and balanced we want to be transparent and you know we want to learn is every anybody does from if we make a mistake we will course correct but it doesn't mean anything goes right i mean we try to use those principles and the outcomes identified with the principles to be very clear in terms of what our expectation is And if we've identified an expectation which people think is not reasonable or unfair, there's different means by which that communication and that feedback can be provided to us.

48:29

Thanks, Jordan. Next question.

48:31

How will PBR work in the context of some of the statutory regimes that are very prescriptive?

48:39

Yeah, well, that's a really good question, and that was a question I asked myself many times, as you know, back in 2019.

48:45

So, ultimately, statutory provisions have to be given life and interpreted, and interpretations are going to change over time, depending upon the context.

48:55

And so, we work, you know, we do this through three things.

48:59

First is, we look at the outcome and whether the application of a prescriptive rule, as many of our statutes has, achieves the right outcome.

49:09

And if it doesn't, then we question whether or not that requirement makes sense, and we use things like no action letters or forbearance, if the requirement actually results in an outcome that is not consistent with what we're trying to achieve or doesn't make sense.

49:26

Two, we have, as the sectors know, we have rule-making authority over different parts of our sector statutes, and we identify areas where we need to develop rules.

49:37

Sometimes that does take time, right?

49:41

It's a discussion and identifying with our partners the Ministry of Finance because ultimately the authority to make a rule is the authority to make law which is a very serious thing.

49:51

It requires approval as you know by our board and ultimately by the Minister of Finance in Ontario but our rule of making authority allows us to change as we did with UDAP where something is prescriptive and isn't achieving the right outcomes.

50:05

Thirdly, we also consider whether the application of prescriptive requirements is stifling innovation And so if our sector statutes are too regimented in creating too much of a burden and they're having a negative impact on the ability of a regulated entity or an individual to achieve innovation, and by innovation, it doesn't mean necessarily a technological solution, what it means is you're able to offer your product or services in a more efficient way, which often means a win for the consumer because it's a lower cost.

50:40

and we have an example of that in the insurance sector where we actually used regulatory discretion to interpret a prescriptive requirement in a way that achieved the right outcome for the business and for the consumer.

50:56

Okay, I think this is going to be the last question.

51:00

Can you give me an easy one?

51:02

No, that's why you're on the hot seat today, not me.

51:05

This is the last question, I think.

51:07

I'm having trouble understanding how this works.

51:10

There are a lot of rules in my area, and it seems that compliance should be enough.

51:17

How do principles work with our compliance?

51:20

So I think this relates to what you just said, but I'll leave it to you.

51:23

So I think this is really the mind shift change, right?

51:27

And so if you're on the other side of this webinar and you're trying to figure out, well, how do I make sure my business is in compliance?

51:36

You start where I started, which is what are the outcomes the regulator is trying to achieve?

51:41

What are the specific outcomes in my business that they're looking for?

51:45

And so, if it is, you know, I've used a range of examples throughout the webinar, but the guidance, the dear CEO letters, the thematic reviews, I mean, let's take the recent example, which is the thematic review on property insurance claims in Ontario, right?

52:02

There is a requirement in the UDAP rule that there not be unreasonable delay for the payment of a claim, Right? That isn't defined, what unreasonable is. It's going to be very contextual.

52:13

And what may be a reasonable amount of time when you're responding to a natural catastrophe, when your resources as a business are being taxed, relative to a normal state where it's just a normal claim, and, you know, not dealing with floods or wildfire, etc. So it's going to be contextual.

52:31

The point is that you need to start tracking and looking at your business to say, well, what is our average claim time?

52:37

Why does it take longer?

52:39

What are the drivers that extend the time?

52:41

And start to figure out, can we offer this service more efficiently and effectively to get those claims paid quicker so that consumer is not out of pocket?

52:50

And are there impediments to doing so under the statute or under the regulatory framework?

52:55

And if there are, that's a discussion and a dialogue with the regulator.

52:59

But the point is that compliance is contextual and it is gonna be whether or not you're achieving the outcomes.

53:05

And I'm not, I'm not pretending this is easy because it's a different way to do your business, but what it does do is it ultimately aligns, it better aligns the interests of the regulator with the consumer and the business that we regulate.

53:20

And as I come back to what I said before, you know, what business doesn't want to, what business that we regulate would say, oh, we don't believe in high standards of business conduct, or we don't believe that consumers should be treated fairly, right?

53:33

I mean, we want to achieve the same thing.

53:35

we would be happy if your business grows and you're incredibly profitable, provided you're achieving the right outcomes vis-a-vis the consumer, the depositor, the plan member.

53:45

And so it's really a discussion and I think it's a discussion, frankly, at the highest levels of an organization, including the board and perhaps in some ways, most importantly, the board, because the board needs to be able to understand what the regulatory outcomes are that the regulator has identified and then it should be looking to management to say how are you adjusting your processes and systems and operations to achieve those outcomes.

54:10

And if it's costing more money to do so, they should question whether or not it makes sense given the scale, complexity and size of the business.

54:18

Because one of the things that we've reiterated and I've spoken about this morning is that you can adjust those processes depending upon the size, scale and complexity of your business.

54:28

As long as you're achieving the outcomes, it's less important about the process that you're using to achieve them.

54:37

So I hope that answers it.

54:39

What I've found is, even within FISRA, we've had to change our culture to move away from a regulatory approach that was highly prescriptive, that only focused on the application of a rule and didn't really look at the specific outcomes.

54:57

And so we have to change our culture at all levels of the organization and have still in the process of doing so, but we're getting better at it.

55:05

And I think that, you know, the opportunity is has been presented through this guidance in the webinar is to be transparent and to have a discussion and to continue to have a discussion.

55:15

We're not just once and done with a webinar.

55:17

If there are continued questions or concerns, then we meet and we review them and we discuss them and we try to get on the same page with our regulated entities.

55:25

Awesome. So Jordan, I'm not going to let you off the hook quite as yet.

55:29

There's a question that I think relates well to what you've been talking about.

55:35

Where do I find outcomes for my area? I'm not sure where they are.

55:41

So there's probably three or four main sources.

55:44

The first is in the guidance that is used in your sector. Look at the guidance.

55:50

We've produced a tremendous amount of guidance in last five years.

55:54

And some would see that some perceive that as being increased burden, but it's actually not.

55:59

The guidance is the way we communicate, right.

56:01

So it's so you don't have to pick up the phone, you know, if that calls five different people and get five different answers.

56:06

So guidance is the principal source, you also have a relationship in many of our sectors, we have relationship managers, particularly in the pension, credit union and insurance sector.

56:15

And so you can have a conversation with your relationship manager and ask them specifically.

56:20

We also do it, as I've said, through the reviews, when we publish a thematic review, people should pay attention to that because we're not just publishing for the sake of publishing, we're publishing because we perceive that there may be a problem.

56:33

We may be dealing with an inordinate amount of complaints, we may have whistleblower issues, or we may be hearing noise from other sector participants who are telling us that there's a problem.

56:42

That's often the case where well-run businesses will come to us and say, you know, we're doing it this way but a lot of our competitors aren't and we're seeing a lot of problems with consumers coming to us who are very satisfied.

56:54

So there's different channels and different avenues through which you can get the information, but it's also can be something as simple as picking up the phone and calling someone at FSRA and asking them to walk through the specific outcomes that we're looking for from a supervisory perspective and ultimately from a consumer perspective. Thanks Jordan.

57:14

I think that's really helpful practical guidance.

57:17

Thanks so much for being on the hot seat today and you're officially off the hook.

57:23

So to everyone else, thanks so much for taking the time to be with us today.

57:28

I'd also like to remind you that today's webinar was recorded and the recording will be available on FISRA's website in the following weeks.

57:37

As always, and repeating what Jordan has said, you can contact FISRA if you have questions as well.

57:44

We truly hope you found this session helpful.

57:46

Have a great day and thank you again, Jordan.

57:48

Thanks, Rishan. Thanks, everybody, for supporting us.

57:52

Have a good night.

1. Given existing rules-based framework is acknowledged as inadequate to regulate industry, and that FSRA's PBR implementation is an approach to interpretation and enforcement not creating new legal obligations, how does FSRA plan to ensure compliance with the principles? Does it have all the powers it needs?

   • FSRA does not seek compliance with principles through enforcement action. We have expectations of good practices based on principles, and we interpret legal obligations so far as reasonable to do so as consistent with the principles in our statutory objects, which align with the outcomes we set.

2. Will PBR mean that FSRA will start leaning away from rules as their primary instrument and more towards guidelines?

   • All statutes have legal requirements and there are regulations which contain rules. FSRA also makes rules, but FSRA will make few rules, and they will, so far as possible, be drafted in a principled-based way.

3. Regarding "Don't ask us what to do, rather, tell us what you did". Plan Sponsors are wary of proceeding forward on a path without acknowledgement from FSRA that it would be acceptable, so it is more likely that we would want to say " This is what we would like to do, do you have any objections or concerns?" What do you think of this approach?

   • Speak to your relationship manager about your concerns. We want to hear from you and will collaborate on the achievement of outcomes.

4. Outcome is a very nebulous term. What does it mean? Is desired outcome the same for industry and consumer? Who is expected to define it? How can it be measured in real time? Will the victim of a bad outcome be compensated?

   • Outcomes are goals we seek to have regulated entities achieve. For example, one outcome we seek to achieve at a high level, is good governance. We expect regulated entities to consider good governance issues and to address them and embed in their processes, procedures and businesses, for example, measures directed towards achieiving effective good governance. The same can be said of goals related to the protection of consumer rights: we want to see regulated entities working in a way which does not cause consumer harm and protects their rights. Outcomes support innovation, competition and a strong and stable financial services sector for Ontario. How regulated entities achieve outcomes may be different from one entity to another. Size, complexity and business model are all releveant to how outcomes might be achieved. Outcomes are collaboratively developed with regulated entities, and based on our statutory objects which provide the principled basis for outcomes.

5. Hello, does this mean with PBR the end always justifies the means regardless of what the means of achieving the outcomes are? Are there any specific cases where the means might be a problem even if the outcomes were achieved?

   • PBR is not about the ends justifying means; it is about allowing Regulated Entities choice in how to best achieve outcomes, depending on their circumstances.

6. Are the desired outcomes determined by the legislators? How much are the outcomes based on ideal operation of a sector as compared to political decision-making.

   • Outcome are goals which FSRA seeks Regulated entites to achieve, based on the statutory objects which the Legislature has asked FSRA to pursue. Focusing on outcomes allows FSRA and the Regulated entities to work for high standards of business conduct while also protecting consumers in Ontario.

7. With a principles-based approach, regulators have more discretion in determining if an insurer has complied. This increases the risk of subjective enforcement, where penalties may be imposed based on your interpretation of the principles, rather than clearly defined rules. Despite that we appreciate PBR, how would insurers know what “good outcomes” looks like from your perspective.

   • Good outcomes should be clearly understood, and we work with Regulted Entities to help understand and achieve outcomes that fit your business model. Talk to your relaionship managers.

8. PBR is premised on expert staff who understands business and industry, willing to learn and understand company difference and nuances, and open minded to different approach to achieving the principles so long as outcomes are met. How is FSRA ensuring staff have the right expertise - as well as approach - to successfully implement PBR without overreaching?

   • PBR is a collaborative approach. We work to ensure our staff are equipped to understand business and industry so that we can collaborate, understand and evaluate efforts made by businesses to achieve outcomes suitable to their business models.

1. When you use the term "consumer" do you include "non-personal" participants within the use of this term, ie: corporations?

   • Consumers are individuals.

2. In a world of competing pressures and consequently doing the minimum required, how does PBR protect consumers?

   • The PBR approach supervises regulated entities with a focus on the protection of the rights and interests of consumers, and FSRA expects Regulated entities to demonstrate that they embed a focus on consumer protection in their processes, policies and ovesight.

3. Can we use another term than "consumers" when referring to the PBR? We are really talking about employees that participate in an employer's pension plan.

   • Yes, when we refer only to pension plans, we refer to the rights of plan beneficiaries, and for credit unions, we refer to deposit holders.

1. What can regulators and governments do better to ensure regulatory guidance is operationalized at the provincial level in a way that creates a consistent experience regardless of where in Canada a consumer live?

   • Guidance is made under authority of the Regulator who makes it.

2. Is guidance meant to be binding - what if there are expectations in guidance that cannot be met?

   • Guidance is not binding through legal enforcement. However, interpretation guidance lets Regulated Entities know the way FSRA interprets legal obligations. If there are expectations in guidance which cannot be met, work with your relationship manager collaboratively.

1. Is enforcement commensurate with the size and sophistication of the entity in question?

   • FSRA recognizes that regulated entities vary in size and complexity. All regulated entities are expected to comply with regulatory requirements and must do so where they are legally mandated. How regulated entities achieve outcomes varies depending on size and complexity and we work with regulated entities to help them achieve outcomes which fit their business model and circumstances.