Canadian Underwriter

Ontario: THE HEART of Regulatory Evolution

October 1, 2000   by Dina Palozzi, superintendent of the Financial Services Commissio

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Over the last several years, the Canadian financial landscape has shifted. In the past, financial services regulation was based on the concept of the traditional “four pillars”. Changes in the marketplace have occurred across geographic, sectoral and jurisdictional boundaries and have caused these pillars to blur. On top of this, the use of new information-based electronic commerce has exploded with no end in sight.

The pace of change is expected to continue and intensify, reflecting the evolving needs of both consumers and business, customer demand for new products and service, and global competition from specialized financial institutions.

Today, regulators must be on the cutting-edge of developments in the marketplace. Harmonization of regulation is no longer merely a good idea, it is a necessity. Regulators in the insurance, pensions and securities sectors recognized this need and responded by forming the Canadian Council of Insurance Regulators (CCIR), the Canadian Association of Pension Supervisory Authorities (CAPSA) and the Canadian Securities Administrators (CSA) respectively.

Last year saw two additional significant developments. First, CCIR and CAPSA became more formalized and established their own permanent secretariats. Second, CCIR, CAPS and the CSA got together to form the Joint Forum of Financial Market Regulators. This year, Ontario’s Finance Minister, Ernie Eves, announced the merger of FSCO and the Ontario Securities Commission (OSC).

Pillars fall

The Joint Forum was formed in January 1999 to discuss issues of common interest among Canadian securities, insurance and pension regulators arising from the growing integration of the financial services sector. The forum meets twice a year and has developed an ambitious agenda that focuses on consumer protection issues. As chair of this body, I am constantly reminded that regulatory issues can no longer be neatly categorized by territory or sector. Issues such as harmonization of intermediary proficiency standards and licensing, the harmonization of individual variable insurance contracts (segregated funds) and mutual funds, and proficiency requirements for financial planners are important to us all, whether we are in Ontario, another province, Ottawa or another financial services sector.

The Joint Forum is addressing these regulatory issues by reducing duplication and eliminating unintended gaps or conflicts in the regulatory system. For example, the considerable similarities between mutual funds and segregated funds mean that consumers often cannot differentiate one from the other.

A report created for the Joint Forum found that although regulation of segregated funds and mutual funds is carried out by different regulators (insurance and securities) the rules provide the same level of protection. The report also outlined 15 recommendations for harmonization (a regulatory “to do” list). Included in this list are measures to govern such issues as the regulation of products, disclosure, manufacturers and distribution. These recommendations have been released to the industry and consumers to keep them informed of the Joint Forum’s activities and plans.

Setting credentials

The field of financial planning advice is an area that has concerned regulators in Canada. Consumers have no way of knowing if the person they rely on for financial planning advice has achieved a standard level of proficiency. To address this, the Joint Forum is also developing a harmonized approach to intermediary licensing and proficiency. Given the enormity of this task, the forum has outlined four key areas that will be pursued sequentially. These are the development of a practice standard or code of conduct which will apply to all financial services intermediaries, common, minimum qualifications and entry standards, clear minimum continuing education standards and specific licenses for intermediaries who provide more than one service. In December this year, the CSA released for discussion a proposed code that would create uniform standards for financial planners. Insurance regulators are contemplating enacting similar regulation so that insurance licensees would be bound by the same code. The earliest possible date for the implementation of these standards would be 2001.

A single regulator

As changes in the marketplace have changed the way provincial and federal financial services regulators work with each other, these changes are also changing the way financial services regulators within Ontario work with each other. Two years ago, FSCO was formed from the former Ontario Insurance Commission, Pension Commission of Ontario and the Deposit Institutions Division of the Ministry of Finance. The creation of a single financial services regulator in Ontario represents the next stage of evolution of financial services regulation.

Ontario has been monitoring and reviewing the regulatory restructuring and harmonization initiatives of other jurisdictions in order to benefit from their experiences. We recognize the increasing trend in the competitive global financial marketplace of integrated regulation across the financial services industries to better protect consumers and ensure healthy financial markets.

While there is already a great deal of cooperation between FSCO and the OSC, the new organization will provide a one-window approach to regulation. Our goal is to create a regulatory approach that will be more efficient and effective, and will eliminate gaps and duplication in regulation across the financial sectors in Ontario.

It is proposed that the new organization will be a Crown Corporation with self-funding and rule-making authority responsible for regulating financial services in Ontario. On September 8, the provincial government released a discussion paper on the establishment of a single financial services regulator in Ontario. MPP David Young, parliamentary assistant to the Minister of Finance, is leading consultations on the discussion paper with consumers, investors, pension plan members and industry participants. Feedback and advice to Eves from this consultation process will form the basis for legislation creating the single financial services regulator.

A level playing field

Because of the rapid evolution of financial products and services, regulatory regimes have been slow to catch up. Through efforts such as the Joint Forum, the CCIR, CAPSA and the new financial services regulator in Ontario, we are striving to provide our stakeholders with the service and protection they deserve. Our goal is to streamline processes, eliminate duplication and create a more level playing field for financial services products, providers and institutions. By doing so, we will create a business and regulatory climate that encourages investment, competition and jobs.

A standardized regime of financial regulation is a win-win situation. Consumers win because the people they deal with will have a measurable level of competency, people in the industry win because rules are becoming more standardized, and the regulators win because their stakeholders will be operating effectively and competitively in a streamlined, efficient regime.

There is a lot of work to be done, but at FSCO and the OSC, it is business as usual. This is an exciting time in the financial services industry in Ontario and I am happy to be part of the process of creating Canada’s first integrated financial service regulator. I am looking forward to it and hope you are as well.

The crumbling of the four pillars of financial services represent a time of transition for insurers. One phase in this transition is the establishment last year of the Joint Forum of Financial Market Regulators which has brought together regulators of securities, pensions and insurance to enhance consumer protection by coordinating and streamlining market regulations. And for insurers, the work of the Canadian Council of Insurance Regulators (CCIR) is furthering the process of regulatory harmony across the country.

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