CAFII Holds Webinar on “Principles-Based Regulation (PBR); The Emergence of Rule-Making Authority; and How They Work Together: A Complementary, Harmonious Fit Or “Dynamic Tension” For Canada’s Insurance Regulators.”
On 3 May, 2022 CAFII held a well-attended webinar on “Principles-Based Regulation (PBR); The Emergence of Rule-Making Authority; and How They Work Together: A Complementary, Harmonious Fit Or “Dynamic Tension” For Canada’s Insurance Regulators.” Two leading Canadian experts participated in the panel discussion: Dr. Cristie Ford who is a full tenured Professor at the Peter A. Allard School of Law, University of British Columbia; and Stuart Carruthers who is a partner at Stikeman Elliott and a member of their Insurance & Reinsurance, Financial Products & Services, and Mergers & Acquisitions Groups, and a lawyer with whom CAFII has worked in the past.
Over 100 people registered for the webinar, including over 45 regulators and policy-makers, including 14 registrants from FSRA. In total, the following regulators registered for the event:
- The Government of the North-West Territories;
- The British Columbia Financial Services Authority, or BCFSA;
- The British Columbia Ministry of Finance;
- The Insurance Council of BC;
- The Government of Alberta;
- The Alberta Ministry of Finance ;
- The Alberta Insurance Council;
- The Financial and Consumer Affairs Authority of Saskatchewan, or FCAA;
- The Insurance Councils of Saskatchewan ;
- The Financial Services Regulatory Authority of Ontario, or FSRA ;
- The Ontario Ministry of Finance ;
- The Autorité des marches financiers, or the AMF ;
- The New Brunswick Financial and Consumer Services Commission, or FCNB;
- The Canadian Insurance Services Regulatory Organizations, or CISRO; and
- The Office of the Superintendent of Financial Institutions, or OSFI.
Professor Ford began the webinar by stating that principles-based regulation ) (PBR) could be viewed as a “changed approach” to regulation, and she identified four characteristics of such an approach. The first was that more of the regulatory rules would be at a higher level of generality to allow for flexibility. An example of this would be not to say “do not drive over 50 kilometres and hour” (which is a rule) but rather to say “you should drive in a manner that is prudent and reasonable” (which is a principle). Furthermore, when a new requirement comes about, the first approach should not be to develop a new rule, but rather to see if existing rules can cover that situation.
Second, principles-based regulation makes sense in an environment where there is more change or complexity, and where one set of rules will not cover everything. In this sort of environment, regulators can struggle to get the rules right and to get the information they need to build rules that are effective and able to adopt to constantly changing circumstances. In a principles-based regulatory environment, on the other hand, the regulator sets out the overall context, and industry fills in the details.
The third feature is that principles-based regulation works most effectively where it is outcome-oriented and data-driven. This involves ongoing consultation and dialogue with industry to ensure that the principles are understood and being met. Fourth, cooperation is critical to the success of this model, but there has to be an enforcement capability that regulators can use if they need to. Overall this model is more effective in many cases than developing a rule, to which industry may try to find a loophole, which the regulator then tries to close. Principles-based regulation is more about industry and regulators working together towards a common objective. Professor Ford said that the development of the FSRA Unfair or Deceptive Acts or Practices (UDAP) rule is an example of principles-based regulation, in that the rule is only 8-pages long and is based on broad, open concepts.
Stuart Carruthers commented on PCR and its relation to the fair treatment of customers (FTC) and said that FTC was the logical outcome of a principles-based regulatory regime. This regime has its source in developments that begin in the United Kingdom coming out of the global financial crisis. A critical source of insurance principles is the work done around insurance core principles (ICPs) by the IAIS (International Association of Insurance Supervisors), in particular ICP-19, which establishes core insurance market conduct principles. This principle looks at a product across its entire life-cycle.
Christie Ford said that PBR and enforcement capability are not at odds, but rather they are complimentary. Rules can have benefits as they can produce certainty and clarity, but they can also be restrictive and arbitrary. The challenge for the regulator is to get the balance right. The key here is proper implementation of the mix of tools the regulator has at its disposal. Dialogue with industry is necessary to fill in the areas of vagueness.
Stuart Carruthers said that the benefit of rules-based authority is to give regulators the ability to respond to developments more quickly. Principles-based regulation should allow for a more efficient system, letting industry apply expectations in a way that makes sense for their organization, while allowing regulators to focus on a risk-based approach that emphasizes the largest regulatory issues they need to look at. A drawback of PBR is that it can lead to more ambiguity, which in turn can lead to more work and a requirement for more resources. For smaller firms with fewer resources in particular, rules-based approaches can be easier to deal with.
Cristie Ford said that PBR does require a mental shift in terms of the approach taken to regulation. PBR is an ongoing, evolving regulatory approach that requires confidence and transparency. Regulators may need to provide support for smaller firms that have fewer resources. Christie Ford added said while PBR can produce more innovation, not all innovation is necessarily good—and the financial products that led to the financial crises is an example of that. Stuart Carruthers felt that a PBR-regime fosters more innovation because it is more flexible and adapts better to change.
Stuart Carruthers felt that Canada does not have a PBR-regime throughout the country, with different provinces at different stages down this path, but that there is a general trend toward principles-based regulation. On the issue of the Canadian insurance industry having 17 regulators and therefore a need for harmonization, Stuart Carruthers mentioned CCIR and CISRO as an example of an effort to coordinate activity. But there are also siloes where different provinces are going in different directions. More provinces are providing their regulators with rule-making authorities, and there is a tendency for regulators with rule-making authority to use it.
Cristie Ford said that rule-making authority for regulators is better than relying on the legislature to shift rules where necessary, which is a very time-consuming process. But that does not mean rules should be developed unless they are absolutely necessary, and unless existing rules cannot manage the outcomes the regulator is seeking. Stuart Carruthers said that some of the work that FSRA is doing is the high-water mark in Canada around principles-based regulation.
Stuart Carruthers said that a rules-based approach leads to compliance departments being like referees; PBR leads to compliance departments being more like coaches. On the issue of how to demonstrate a FTC culture, Cristie Ford said it was difficult to measure but ongoing dialogue and transparency can help show that the regulated industry is doing the right thing.
Stuart Carruthers said that Canada was a world leader in PBR and Canadian regulators have better relationships with their regulated entities than is the case in many other jurisdictions. Canada does not suffer from the problems other jurisdictions have where the regulator is focused on fines for revenue-generation, and where regulatory leaders are politically-appointed and use those positions as a stepping stone to political careers.
