Financial sector regulators need to do a better job of targeting, evaluating and justifying their rule-making efforts, argues an upcoming report from the C.D. Howe Institute.
The Toronto-based think tank is set to issue a paper co-authored by Paul Bourque, former president and CEO of industry trade group the Investment Funds Institute of Canada, which finds that regulators have generally done a good job of identifying and addressing financial stability risks and consumer protection concerns; however, they need to do a better job of evaluating the costs and benefits of their policy solutions, including implications for competition and productivity.
“Rules and regulations are important in the financial services sector to protect consumers and ensure system stability. However, at some point the costs to firms of remaining in compliance crowd out investments in innovation and productivity,” the paper said.
The paper, co-authored with Gherardo Gennaro Caracciolo, a lecturer with Simon Fraser University and former policy analyst with C.D. Howe, advocates for better balance between ensuring financial stability and consumer protection on one hand, and fostering efficiency and innovation on the other.
“Our findings suggest that, moving forward, enhancing comprehensive cost/benefit analysis could achieve a more balanced regulatory framework, fostering both stability and innovation for better consumer outcomes,” it said.
While there is a general requirement for federal agencies to carry out cost/benefit analysis as part of their rule-making efforts, the paper argued that this doesn’t result in “precise and systematic guidelines” for this sort of work.
And it notes that the Ontario Securities Commission is the only provincial securities regulator that’s required to carry out a cost/benefit analysis when it introduces, or revises, a rule.
“As a result, among Canadian financial regulators, we struggle to find consistent applications of cost/benefit analysis,” it said.
“Canadian financial markets would benefit from a consistent and coordinated approach to cost/benefit analysis from federal and provincial financial regulators,” the paper argued. “Combining resources and expertise would enable a harmonized approach to the assessment of the costs and benefits of important rule implementation across all financial services markets.”
It also suggested that “post-implementation impact analysis will help to decide what works and why.”
While there are examples of regulators carrying out an analysis of the efficacy of policy efforts — such as the Canadian Securities Administrators’ recent review of the impact of the Client Relationship Model (CRM2) reforms — the paper said this kind of analysis is relatively rare.
“In the aggregate, Canadian financial regulators have not integrated these disciplines across their membership in a way that would deliver a consistent policy development process with predictable results,” it said.
“A disciplined approach to policy development, employing market failure, cost/benefit and post-implementation impact analysis is the first line of defence in curbing the tendency to overregulate,” it concludes.
“By striking a better balance between regulatory objectives and compliance costs, Canada can create a more efficient and effective regulatory framework that promotes financial stability alongside innovation and growth, leading to improved consumer outcomes,” it said.