Financial regulators are wise to avoid fashions, according to the head of Canada’s banking regulator, Julie Dickson.

Speaking to the American Bar Association’s Spring Meeting in Vancouver over the weekend, Dickson, head of the Office of the Superintendent of Financial Institutions, said that regulators can get caught up in ideological fashions. “A few years ago, competition emerged between the U.S. and UK to be the world’s number one financial centre, and a centre-piece of this debate was unfettered markets, and the need to limit regulatory burden,” she said.

“It seems that every few years we move from concerns about regulatory burden, to concerns about not enough regulation. These types of discussions can have an impact on the type and extent of oversight provided by regulators. If a regulator gets praised by industry and government for deregulating there will be an incentive for the regulator to be even more light touch,” she added.

In Canada, regulators did not follow this fashion. “Our framework assumes that institutions, unfettered, will take risks that may produce outcomes that are very costly for society. Thus, Canada’s legislative and prudential rules prevent excessive risk taking while allowing institutions to go out along the risk curve to varying degrees,” she said. “The rules require more capital for more risk and OSFI’s supervisory approach results in more supervision for institutions that have higher risk or weak controls.”

While OSFI didn’t follow the deregulation trend, it also isn’t looking to crack down on the industry in response to the financial crisis. For example, Dickson noted that Hector Sants, CEO of the UK’S Financial Services Authority recently warned that, “people should be very frightened of the FSA”.

“Although this is not the approach OSFI has taken, it is important to look at what other regulators are doing and decide whether you should change course,” she said. “So while I will watch this change at the FSA, I think our current approach has served OSFI and the Canadian financial sector well.”

“I would not want to discourage financial institutions from giving us their views, and I would worry if a “be afraid of OSFI” stance curtailed such discussions,” she said. “I do not believe OSFI has to carry the big stick openly. We have a lot of powers at our disposal, and the industry is aware of that.”

“Regulators need to be able to stay the course, which is why formal independence, and independence of thought, are key,” Dickson said.

Additionally, both regulators and the financial industry need to do a better job of communication, Dickson said. “You can have a thousand pages of rules, and the best of intentions, but it will all mean nothing if regulators, or risk managers in an institution, are unable to clearly communicate their concerns about the risks in a product or a practice,” she said.

“To my mind, there is an information gap, and a plain language gap, becoming evident in the financial services industry and it is a growing cause of concern. Indeed, these gaps are likely responsible for much of the unraveling we have seen in the financial sector worldwide,” she added.

“More plain talkers might do more for system stability than many other initiatives,” Dickson concluded. “This is a challenge for OSFI and other regulators, and a challenge within financial institutions as well. We all need to be mindful of the risks brought on by the lack of clear communication and understanding around what is actually going on in an industry.”

IE