FSRA’s case for principles-based regulation

Principles-based regulation is the right system for private sector innovation, a speaker told an industry event last week. 

“If you imagine trying to deal with a highly innovative sector based on a very rules-based rigid, detailed system, I think it can be clear why that’s not going to work,” said Dr. Cristie Ford, a professor at Allard School of Law at the University of British Columbia. This is because the rules are not flexible enough to imagine new ways of doing things, she said during the Financial Services Regulatory Authority of Ontario’s (FSRA) first-ever Exchange Event. 

“A purely rules-based system is going to produce maybe one of a couple of different outcomes,” Ford said. “One will be that it will stifle innovation, good, bad or otherwise, because the rules just prevent any kind of flexibility or creativity on the part of industry actors and on the part of regulators.  

“The other thing that might happen if you have a pure rules-based system is that you will just get loophole behaviour and circumvention on the part of industry actors or people will go elsewhere,” Ford continued. “So, the rules will be avoided, undermined, eroded.” 

Ford made her comments in response to a question from moderator Jordan Soloway, FSRA’s executive vice president, legal and enforcement, about whether principles-based regulation was the right system to manage profound innovative changes.  

Dr. Cristie Ford, a professor at Allard School of Law at the University of British Columbia, speaking at the 2022 FSRA Exchange Event.

FSRA’s established a new innovation office, which recently released an innovation framework along with a test-and-learn environment guidance. For example, the test-and-learn environment can be used to examine new auto insurance models that don’t fit within existing regulatory parameters. 

Ford said principles-based regulation can help  regulation to stay relevant and responsive to industry it’s meant to cover.  

“Through communication with industry, a principles-based regulator has better information,” she said. “A meaningful communication link with industry [means] the regulator has better access to information, understands what’s going on, understands the challenges that industry actors are facing, and also understands where the risks might be arising for consumer protection.” 

During a separate session, FSRA CEO Mark White described the regulator’s transition to a principles-based regulator.  

“We are moving away from prescriptive checklists and a compliance focus,” he said. “We want to evaluate regulated entities by, do they achieve the desired outcomes. And with principles-based regulation entitles are expected to understand and achieve the desired outcomes and they can do so in a way that’s suited to their size, nature and complexity of their business and where they are in the marketplace. It’s not one size fits all.” 

The first-ever 2022 FSRA Exchange Event on Jan. 27 saw nearly 1,000 participants. It included addresses by Ontario Finance Minister Peter Bethlenfalvy, a fireside chat with White, expert panels on principals-based regulation and innovation, and an address by FSRA board chair Joanne De Laurentiis.  

Feature image by iStock.com/BlackJack3D