As part of the Financial Services Regulatory Authority (FSRA) of Ontario’s mandate was the new regulator’s introduction of Principles Based Regulation (PBR), representing a marked shift from previous provincial regulatory regimes. The PBR approach integrates the current legislative scheme for the mortgage, insurance and financial services industry subject to regulation by FSRA.

In a presentation to stakeholders on September 24, 2019, FSRA’s Vice President, Legal and Enforcement, Jordan Solway, discussed the concept of PBR.

“Principles Based Regulation,” said Solway, “moves us away from detailed, prescriptive rules and relies more on high level, broadly stated rules or principles to set standards by which regulated firms and individuals must conduct business.” He added that this did not mean that PBR could not have rules, such as statutory provisions, or other regulations, but these would be implemented in a principles-based manner.

PBR has three main elements that set it aside from other regulatory environments: greater reliance on broad-based standards in preference to detailed rules; a move to outcomes-based regulation; and an increasing emphasis on senior management responsibility.

Solway used an example of a highway to illustrate the distinction between PBR and rules-based regulation. A rule, he said, might be to not to drive faster than 90 km/h. A principle might be to not drive faster than is reasonable and prudent in all of the circumstances. Under PBR, the regulator would investigate the range of relevant driving conditions and apply the background principle of what is reasonable to the situation. Meanwhile, the driver must determine what is best to achieve the requirement of driving no faster than is reasonable and prudent in the circumstances.

Solway said rules-based regulatory environments have proven problematic. First, he noted, rules are simply are what he called “best guesses” at what might happen in the future and are not “future proof.” New situations, he said, might arise that the regulator has not anticipated and the rule may be interpreted in ways not originally intended. Second, he said, it has been very difficult in the past to align rules with their intended purposes, as they have either missed things that regulator wanted to catch or conversely, cast too wide a net, snaring things the regulator never intended to catch. Third, he said, whether a given rule is clear depends on a shared understanding. Failure to have such an understanding could make for troubles, later on. Fourth, and finally, he said, just because a particular rule or principle is in place, does not mean it will have the desired effect. Regulators must consider factors such as enforcement and the attitude of individual companies.

“However,” said Solway, “since PBR gives the regulatory regime more flexibility, it allows it to respond to new issues without creating new rules.” This would allow for future-proofing, and help ensure the system worked as intended. The principles would both express the rationale for the rule and provide overarching requirements and can be applied flexibly to meet a shifting situation. They would make use of such qualitative and often evaluative terms such as “fair,” “reasonable,” and “suitable.” The expectation, he said, is that the regulated firms would “internalize” these principles, creating a compliance culture.

“Principles Based Regulation,” said Solway, “relies on both best and good practices emanating from industry to help define the content of PBR requirements, creating a feedback loop between regulator and industry.” However, he noted that successful PBR requires more than the drafting of rules and regulations that are principles-based. It needs, he said, to be accompanied by:
• Transparent, accessible, ongoing guidance and communication from the regulator;
• Efforts to incorporate industry experience (including best and good practices);
• Analytical methods such as outcome and risk-based analysis to evaluation regulatory success and allocate resources; and,
• Utilization of a variety of regulatory tools, ranging from moral suasion and warnings to criminal penalties and license suspensions.

As a regulatory approach, Solway said, PBR can facilitate compliance as it allows businesses to honour the spirit of the law by developing policies or other mechanisms that simultaneously comply with the rule and meet their individual needs.

For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.

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