Ontario regulators seek firms’ plans for business outcomes, risk management

Regulators in Ontario say they want more interaction with firms to avoid gaps in principles-based regulation and achieve desired client outcomes.

“We still have a lot of regulated entities looking for checklists from the regulators,” said Antoinette Leung, executive vice-president of market conduct with the Financial Services Regulatory Authority of Ontario (FSRA), when asked about gaps in principles-based regulation. Leung, who’s responsible for the life and health insurance sector as well as the mortgage broker sector, made the comment during a regulatory panel at FSRA’s annual conference in Toronto on Monday.

Checklists aren’t effective, because, as regulators, “we don’t run your business” or understand where you may want to take the business, Leung said. Closing the gap arising from checklist expectations requires more conversations between regulators and firms, she said — about outcomes, plans to achieve outcomes and risk management.

“For principles-based regulation to work, we have to have a common understanding of what’s the desired outcome,” in alignment with the fair treatment of consumers, Leung said. Further, “let us know how you are changing your business, what are the risks that you’re seeing,” she said. “That’s going to be critical.”

Jeff Kehoe, executive vice-president, legal and enforcement with FSRA, and panel moderator, said principles-based regulation isn’t a “softer form of regulation.” He described it as a supervisory philosophy that “shifts the central question” from “Did you follow the rule?” to “Did you achieve the expected outcome?”

Further, “it operates on a spectrum from principles to prescriptive, depending upon the context, risk profile and the sophistication of the regulated entity,” Kehoe said. “That’s what makes this approach genuinely demanding for everyone in this room.” Both the regulator and the regulated must exercise judgment under principles-based regulation, he said.

Panellists discussed the limits of principles-based regulation when a regulated firm’s culture doesn’t support the regime.

Dan Oprescu, head of regulation and strategic initiatives, credit union and insurance prudential with FSRA, said the Great Financial Crisis showed that “when risks materialize, principles are not sufficient.” As a result, principles-based regulation must be “risk-focused and outcome-focused.”

That means “relationship management” with firms is integral to the supervisory approach, Oprescu said, as is early intervention (which is based on a five-point scale). “Businesses are free to chart their own course, manage their own risks, but with regulatory outcomes aligned with business outcomes,” he said.

That alignment reduces regulatory burden, and also introduces a “big” change from previous regulatory regimes: the regulatory relationship is “elevated to board and C-suite level.” Information between regulators and firms is a two-way exchange, he added.

Good-quality, granular business-related data is also crucial to principles-based regulation. “How are you going to verify [compliance] if you don’t have the evidence?” Oprescu said. Business-related data also helps address industry challenges, such as consumer-driven banking, he said.

Leung said business decisions should be made with consumer-centric outcomes in mind — a sentiment that was also recently reflected in public comments from the commissioner of the Financial Consumer Agency of Canada. “Governance and principles-based regulation outcomes [have] to be all tied together,” Leung said. Otherwise, “you’re going to have an organization that is not going to be operating in a way that aligns with what we’re looking for.”

Generally, she suggested that firms discuss business developments, and how the firms will manage associated risks, with the regulator early.

When panellists were asked how they’ll proactively engage with the sectors they oversee, Leung said firms would regularly hear from FSRA outside of supervisory assessments and enforcement proceedings.

“It’s really in day-to-day interacting — more disciplined and more structured conversation with the sector,” she said. “It’s not only to talk about [how] your business is evolving, but it’s also a way for regulators to talk about what’s top of mind for us.”