On March 16, 2022, the Financial Services Regulatory Authority of Ontario (FSRA) initiated a consultation on its proposed Principles-Based Regulation Approach Guidance (the “Proposed PBR Guidance”) for financial services institutions in Ontario. FSRA was launched in 2019 to oversee the non-securities operations of Ontario insurance companies, pension plans, credit unions, mortgage brokers, and other mortgage/loan agencies. The Proposed PBR Guidance sets out the pillars FSRA proposes will guide its regulation of these financial services institutions with a principles-based and outcomes-focused approach. Stakeholders and the broader public are invited to provide feedback on the Proposed PBR Guidance until April 29, 2022.
Understanding Principles-Based Regulation
Principles-based regulation (PBR) acts as a counter balance to the more traditional rules-based approach to regulation. Whereas a rules-based approach sets out prescriptive requirements for compliance, a principles-based approach sets out underlying values firms are to comply with. PBRs are often open-ended allowing them to capture a broader range of activities. For instance, while a rules-based approach may dictate disclosure of specific financial metrics on an annual basis, a PBR approach may require broad disclosure of any material financial information.
PBR allows regulators to adapt rapidly to new industry trends and regulation challenges. It also tends to provide a certain level of simplicity for regulation when compared to the often complex and interwoven rules found in a rules-based approach. However, PBR can be subjective and therefore can create uncertainties as to whether an individual or company is actually compliant.
FSRA’s Approach to Principles-Based Regulation
FSRA stated its intention to move away from rules-based regulations wherever possible and move towards a PBR approach. However, notably, FSRA made clear in the Proposed PBR Guidance and in FSRA’s inaugural Exchange Event held on January 27, 2022 (the “Exchange Event”) that where certain “bright-line” requirements for regulation are required, it will continue to rely on prescriptive requirements.
The Proposed PBR Guidance sets out the following six pillars FSRA will use to shape its PBR approach :
- Outcome-Focused: FSRA’s regulatory activity will focus on furthering specific outcomes for consumers, pension plan beneficiaries, regulated entities, and the broader sector, based on applicable legislation objectives.
- Innovative: Regulations will also seek to promote innovation and transformation within the industry. At the Exchange Event, FSRA emphasized the role of its Innovation Office in helping financial services firms innovate and introduce new products while remaining within the bounds of FSRA’s regulatory frameworks.
- Consumer-Centric: FSRA will focus its activities on improving outcomes for consumers and pension plan beneficiaries. At the Exchange Event, FSRA indicated its intention to use PBR frameworks to improve value propositions in areas such as auto insurance and pensions.
- Risk-Based: Regulatory focus will be on matters which pose the highest risk to the industry and consumers. In assessing potential risk, FSRA will look at the size, complexity, and nature of the regulated entity, as well as the potential harm to consumers.
- Transparent: FSRA will emphasize clear lines of communication between the regulator and industry participants to clarify what is expected and required of them. Rules and guidance will be designed with reference to the principles and desired outcomes.
- Collaborative: FSRA will engage with all stakeholders, including the public, to ensure its regulatory activities reflect all stakeholder interests, including the interests of consumers and pension plan beneficiaries. At the Exchange Event, FSRA emphasized the need for dialogue with industry players to address issues in a collaborative manner.
Through these six pillars, FSRA will provide high level and broadly stated principles that will identify desired outcomes and behaviours for the industry. Thereafter, FSRA will expect senior management of regulated entities to internalize the requirements and work towards compliance.
While no details have yet been provided regarding oversight and enforcement, existing tools such as delicensing and monetary penalties would continue to be used in the context of a PBR approach. FSRA also indicated that enforcement would be more targeted and remedial solutions that utilize collaboration with industry players will be implemented where appropriate.
Once FSRA finalizes the regulatory principles, it is expected that financial services entities will generate internal policies and practices which demonstrate their compliance with the outlined principles. The responsibility will then be on the regulated entity to demonstrate to FSRA how its activities comply with the established principles. FSRA clarified at the Exchange Event that entities would be able to work independently or with external advisors to tailor their approach to compliance with respect to the “size, nature and complexity” of their business, suggesting there will not be a “one size fits all model for compliance”.
A PBR regime in the context of the financial services industry will likely demand greater reliance on the judgement of senior management, who will ultimately be responsible for ensuring the actions of the financial services entity do not contravene the broadly stated principles or applicable legislation. To ensure ongoing compliance, regulated entities should develop individual written policies appropriate for each unique situation. FSRA also made it clear that further guidance is forthcoming with respect to what investigations and enforcement may look like in a PBR regime. FSRA stated that productive engagement from stakeholders and validation of internal management and controls may result in less intensive supervision or a less intensive risk mitigation program.
For assistance in responding to FSRA’s consultation on the Proposed PBR Guidance or in developing internal policies and procedures in light of the PBR regime, please contact any member of our Financial Services Regulatory Group.
The authors would like to thank Aryan Pour-Bahreini, Articling Student-At-Law, for his assistance in writing this Update.
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