Jim Poapst - [2022-006] - I am a mortgage broker and commend FSRA for its progressive thinking in implementing a PBR approach. I suspect there will be challenges in regulating the highly diverse, dynamic and quickly evolving nature of the mortgage brokerage industry but consider this to be an enlightened approach with great potential for all parties concerned. I am perhaps an old school practitioner - I work for one side only and am a true believer in full due diligence, full true and plain disclosure, exhaustive market coverage on behalf of my client and fulfilling the entire ambit of fiduciary duty. Frankly, in completing the most recent Mortgage Update course, I was surprised by the idea expressed therein of serving as an "intermediary" which seemed to diminish the full dedication required of the mortgage broker to best serve its client.
A significant advantage of a principles-based regulatory approach over a prescriptive one is that the former focuses on outcomes and higher-level principles such as acting with integrity and competence while keeping an overall focus on the best interest of the client.
PBR shifts the onus on industry participants to ensure that they are compliant with not just the letter, but also with the spirit of the rule and law. PBR makes it much more difficult for individuals to take advantage of regulatory loopholes or to avoid the underlying policy intent based on technical interpretation.
In adopting an outcomes-focused approach, PBR confers a level of discretion to regulated entities in the manner they achieve the intended outcomes.
We believe that PBR generally, and the achievement of FTC more specifically, are most likely to be successful when bolstered by high standards of professionalism at all levels of the industry.
This professionalism starts with an expectation that insurance sector stakeholders put the client’s interest first. When applied in a pragmatic and risk-based approach to financial advisors, this overarching mindset informs things such as the use of client-facing professional titles, the substance of continuing education courses, and how market conduct supervision is conducted.
We are mindful of the tremendous impact the financial services sector can have on consumers’ lives, both positive and negative.
Once a regulatory issue has been identified, all industry participants along with regulators have a role in effectively addressing the issue and advancing FTC outcomes.
Enforcement
2. CAAT Pension Plan - [2022-006] - David Gordon - 3p
1. Ensure an appropriate balance between Principles-Based Regulation and being Outcomes-Focused
6. - CLHIA - [2022-006] - Brent Mizzen - Canadian Life and Health Insurance Association - 3p
The benefits
Taking a principle-based approach to regulation is well suited to industries, such as life and health insurance, that are responsive to the needs of their customers.
It allows a company to determine how to best achieve a public policy objective in a way that makes sense based on its particular circumstances.
This gives it the flexibility to use its people, structures, and systems in the most effective way.
More prescriptive approaches tend to focus on what technically meets compliance obligations but does not necessarily best achieve the desired policy objectives.
Measurement
This guidance requires boards-of-directors and management to demonstrate how the processes,policies, and practices they put in place achieve the desired outcome.
We note that a board of directors and senior management have different roles and responsibilities.
A board’s duty is to ensure that proper policy frameworks exist, and that senior management implements mechanisms to ensure their effectiveness.
This is essential to avoiding costly changes to information systems.
Where principles-based regulation works
The consultation notes that FSRA will not be a purely principles-based regulator in its regulatory and supervisory approach. In some circumstances, there will be a need to rely on detailed Rules and prescriptive requirements.
We agree that in most cases a principles-based approach is most effective. However, there are certain circumstances when a more prescriptive approach is warranted.
For example, in highly competitive markets, the evolution of certain practices has led to a broad alignment. It is difficult for any single party to make a unilateral change in response to a general principle as they could become an outlier. In these cases, more detailed expectations from the regulator could be beneficial.
In addition, when it comes to distribution, products can be sold through intermediaries that are independent of insurers.
The approach to regulation must recognize the different parties involved in an activity for which they are responsible.
[Bonk: Are they referring to MGAs?]
[Bonk: If changes are to be made it has to start with the Regulator - No one company can do it by themselves.]
Clarifying, Simplifying, and Harmonizing Regulatory Requirements
As FSRA plans its approach to future regulation it should consider simplifying expectations by harmonizing key principles with other jurisdictions through the CCIR and CISRO. Clear, consistent, and simple communications are helpful to intermediaries, insurers, and consumers alike. Such an approach may support FSRA’s ongoing project to integrate and update materials transitioning from FSCO.
[Bonk: Roles - Consumer - Duty to Read, Reliance, etc.]
Section-By-Section Analysis - Overall, we agree with how principle-based regulation has been described throughout the consultation document. Below we offer feedback on specific sections.
Risk-Based
We agree with taking a risk-based approach to regulation. FSRA, like insurers, needs to focus resources where it will have the highest impact.
[Bonk: YouTube Life Insurance Influencers?]
If FSRA focuses its enforcement and oversight role where there is the highest risk, it is also important to recognize that the findings would not be representative of all advisors or insurers. This would result in a mischaracterization of the effectiveness of their compliance with regulatory requirements.
➢ For example, FSRA recently released its “Market Conduct: Life and Health Supervision Framework”. A risk-based approach was used to select advisors based on a history of noncompliance. FSRA took varying degrees of enforcement actions in most of these cases. Our concern is that this was positioned as being representative of the life and health insurance industry generally. Either within this principle, or as a separate principle, there is an opportunity to expand on the concept of “evidence-based” regulation. Regulators should focus on where there are market conduct risks to consumers.
[Bonk: Bad Apples. Reputational Risk, Mis-selling, MGAs? IULs? LIRPs? Target Premium? Universal Life Insurance Categorized as "Permanent"?]
We recommend that the FSRA business plan principle of “Regulatory Efficiency” be added as a seventh principle, or that its intent is highlighted and integrated within the existing Outcome-focused and Consumer-centric principles.
In our view, the principle of regulatory efficiency focuses upon intentionally avoiding or minimizing unnecessary regulatory burden on regulated entities. These costs are borne ultimately by consumers and pension plan beneficiaries in terms of increased pricing or the resulting restrictions on marketplace innovation, competition, and choice.
Greater accountability for acting in the consumers best interests transferred to the regulated entities
Principle-based regulations can create necessary room for regulated entities to innovate and serve its members and clients more effectively and at a lower cost. Therefore, to enable those advantages, the transfer of greater accountability for acting in the consumers best interests to the regulated entities is welcomed.
We support the direction of FSRA’s regulatory approach which among other things will place greater reliance on a regulated entity’s senior management and board of directors to internalize the requirements to achieve desired outcomes.
... the transfer of greater accountability for acting in the consumers best interests to the regulated entities is welcomed.
Roadmap required for sufficient evidence to demonstrate achievement of guiding principles
We anticipate that a transitional issue for FSRA and its regulated entities to overcome is to develop a common understanding of the evidence required by the regulated entity to demonstrate its achievement of FSRA’s guiding principles.
We recommend that FSRA, in partnership with the regulated sectors, develops an iterative multi-year communication and audit roadmap that is focused upon building common understanding of expectations.
Especially initially, it will be important for FSRA to demonstrate a “progressive” enforcement approach that focuses upon education and consensus building rather than upon penalties.
Enforcement
We look forward to the review of the specific guidance to outline FSRA’s approach to investigations and enforcement.
We support FSRA’s intention to take a progressive, measured, and proportional approach to enforcement.
The assumption of good faith by the regulated entity is appropriate. A balanced and reasonable approach to investigation and enforcement is optimal.
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10. - HUB - HFI - [2022-006] - Andrew Fink - HUB Financial Inc. - 2p
HUB believes the biggest challenge to PBR is interpretive risk. More specifically, the risk that an action will be interpreted differently by FSRA and the regulated entity. Accordingly, HUB agrees application of key Rules, which identify expectations of regulated entities, is needed in conjunction with PBR to implement an effective approach. FSRA should consider how it can reduce the impact of material differences in interpretation of a Rule and principles-based regulation and still achieve the desired outcomes.
FSRA Approach describes the need to continue to rely on detailed Rules and prescriptive requirements to ensure adequate consumer protection.
FSRA intends to design Rules and guidance supporting the principles and outcomes. HUB recommends FSRA considers clarity and ease of access for stakeholders and regulated entities to the Rules and guidance developed. Regulated entities will be more inclined to refer to fewer and concise sources of rules and standards over multiple reference documents, laws and sections of the Act. FSRA expectations need to be communicated and explained, in an easy to locate and understandable way.
FSRA guidance also describes the flexibility of Insurer management teams to determine what processes and actions are required within their companies to achieve regulatory PBR objectives.
Given that credit union, pension plan or insurer are specifically mentioned, is this same flexibility awarded to all regulated entities, only those with corporate structures which include board of director and senior management frameworks, or limited to credit union, pension plans and insurers as named within the FSRA Approach document?
HUB seeks confirmation of this aspect of FSRA guidance given FSRAs scrutiny of the distribution channel, and more specifically MGAs. where it expects to set out expectations pertaining to the oversight structure of MGAs in 2022.
If the intent of this approach is that insurers direct and prescribe the processes or actions that must be taken by regulated entities, including MGAs, the results will mean overlaying varying directives, processes and methods of oversight communicated by each Insurer and appears contrary to FSRA objective to reduce regulatory burden.
Insurers develop product, underwrite insurance and process claims while the MGA focus lies in the support to the manufacturers through the sales and service of life insurance products to Canadians.
MGAstake into consideration the regulations underpinning our industry, how it can best support the Insurers in distribution and meeting regulatory requirements and how to best serve the Canadian consumer life insurance needs and fair treatment principles when developing its own risk-based approach to meeting regulatory requirements.
If the outcome-oriented focus of PBR vision is consistent for all Firms, MGAs can meaningfully generate processes and practices capable of achieving desired regulatory outcomes relating to Distribution.
HUB would be happy to engage positively with FSRA to validate the desired outcomes are being achieved.
[Securities Sector] - In observing the securities sector, major reforms came into force over a number of years in an attempt to improve investment industry conduct, practices and customer outcomes.
The reforms impact to Firm policies, procedures and costs have been significant, but have they achieved the desired outcomes?
We continue to see a regular flow of enforcement and some Firms have felt it necessary to reduce product shelves and services which appear contrary to the fair outcomes for consumers.
[Training / Professionalism] - HUB further believes there is benefit in setting higher standards for the regulated population including professional standards of conduct, education, and qualification testing is a fundamental component of ensuring consumer interests and needs are best served. These measures might serve as a good foundation for improved customer outcomes and the success of PBR.
HUB takes this opportunity to commend FSRA on its approach to stakeholder engagement and consultation.
There are definite benefits of PBR, but we encourage FSRA to move cautiously as the consequences to consumers and the regulated entities could be impactful with unintended downfalls.
The merits of PBR vs. rules has been debated for years. The biggest PBR risk is interpretive risk, the risk that an action will be interpreted differently by the FSRA and the regulated entity.
Consider the extreme example of a highway with a posted speed limit of 100 km/h. You can’t drive faster than that, since that’s “a prescriptive rule.” Meanwhile, a principles-based law would require drivers to drive in a manner that is safe for road conditions, traffic conditions and taking into account the experience of the driver and quality of the vehicle. Such a system would require all drivers to accurately self-assess the scenario and make adjustments AND for highway patrol to judge the situation in the same way. This increases the regulatory onus on both drivers and police and could lead to material differences in interpretation and inconsistent enforcement and court decisions. The difficulty inherent in this regulatory approach is that it is impossible to determine, in a timely fashion, if the desired regulatory outcome is being achieved. This determination will only be available when sufficient accident data are obtained over a meaningfully long period of time. The absence of real-time feedback with PBR poses unique risks and challenges that FSRA may not be able or equipped to address.
Accordingly, Kenmar believe a combination of principles and key rules in high risk areas might constitute a more viable and effective approach at this time.
The PBR focus on outcomes
The arguments for PBR are compelling. PBR is based on the idea that Firms and their management are better placed than regulators to determine what processes and actions are required within their own businesses to achieve a given regulatory objective.
Firms, often complain that they are being coerced to deliver on the FSRA’s wider social objectives, but that is the point of regulation, to ensure that Firms operate in a manner that is consistent with the ‘public interest’, as defined by the regulator.
The most commonly cited consumer outcomes are:
Consumers can be confident that they are dealing with regulated Firms where the fair treatment of customers is central to the corporate culture
Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly
Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
Where consumers receive personalized advice, the advice is suitable and takes account of their circumstances
Consumers are provided with products and services that perform as Firms have led them to expect
Consumers do not face unreasonable post-sale barriers imposed by Firms to change product, switch provider, submit a claim or make a complaint.
A challenge for the FSRA will be designing a transparent PBR compliance system capable of assessing whether the desired outcomes are being consistently met by the regulated entities.
The central question is: Can PBR, as proposed and overseen, by the FSRA deliver these outcomes?
There are potential benefits of PBR but we encourage the FSRA to ease into PBR as the risks and consequences to consumers and the economy are not insignificant.
The 2008 global financial crisis has been blamed by some on PBR and “light touch” enforcement. There are many valuable lessons to be learned from that regulatory failure. See Principles-Based Securities Regulation in the Wake of the Global Financial Crisis - https://commons.allard.ubc.ca/cgi/viewcontent.cgi?article=1127&context=fac_pubs
[Banking Industry] - A FCAC review of Canadian banking industry sales practices provided an insight into the corporate culture of bank Boards and senior management. See Backgrounder: Domestic Bank Retail Sales Practices Review - https://www.canada.ca/en/financial-consumer-agency/news/2018/03/domestic-bank-retail-sales-practices-review-backgrounder.html -
The results suggest that the management of banks have been negligent in their oversight responsibilities as related to bank regulations and laws .To the extent that similar governance /culture shortcomings exist in the Firms that the FSRA regulates, the risks and challenges of a successful PBR roll-out and adoption will be that much greater.
The FSRA would be well advised to take heed of these cautionary findings.
[Securities Sector] - In the securities sector major reforms came into force in January 2022. These reforms were the product of extensive research, industry sweeps, audits and investor complaint analysis that signalled the need for major change. The client focussed reforms (CFR) are an attempt by the OSC/ CSA to improve investment industry conduct and practices. The Client Focused Reforms are based on the concept that client interests should always come first in the client-registrant relationship. The reforms are a combination of principles and prescriptive rules (e.g. use of misleading titles). The reforms will impact Firm policies, procedures and systems on compensation, conflicts-of- interests, disclosure, KYC, KYP, suitability determination and client complaint handling.
We encourage the FSRA to liaise with the OSC on issues related to PBR implementation.
NOTE: Soon after the CFR regulation came into effect, a number of large financial Firms took actions on proprietary products and restricted product shelves that were directly contrary to the regulatory intent of the CFR’s. The OSC is investigating.
PBR Considerations
It seems to us that there is insufficient empirical evidence to support the premise that PBR will work in the Canadian financial services industry.
Included below are some of our concerns with a PBR approach to regulation.
Kenmar believe that setting high standards, including professional standards, is fundamental for a regulatory system to function effectively. It is often necessary to consider more than broad principles in order to meaningfully regulate the Canadian financial services industry
We do not believe that the existing financial services industry governance and ethical structures are sufficiently mature to justify traditional PBR. The financial services sector ranks near the bottom of the 2021 Edelman Trust barometer scale. viz
The continued industry opposition to regulatory reform and financial consumer protection do not provide strong evidence the industry can be regulated based on a PBR framework.
The industry has vigorously and quite successfully deflected or minimized regulatory sanctions even where clear rules exist. PBR may make it more difficult to apply enforcement actions.
Existing industry compensation and reward structures are not consistent with PBR principles.
The industry is in a regulatory “burden” reduction mode, not exactly conducive to developing enhanced processes and practices consistent with PBR.
Poor industry complaint handling of consumer complaints is indicative of an industry that regards complaint handling as a means to mitigate legal exposure rather than an opportunity for process, practice or product improvement.
Ideally, we would want to see a more developed FSRA before supporting PBR. This would include more experience and history of compliance oversight and enforcement under a PBR regime.
Impactful sanctions and significant fines would be needed to support PBR not only to provide deterrence, but also to prevent recurrence and accommodate consumer compensation and redress.
An independent, well-developed financial Ombudsman service with a binding decision mandate and a mandate to investigate systemic issues will be necessary to support successful implementation of PBR. The Ombudsman will provide valuable feedback information to the FSRA on how well Firms are translating principles into action at the registrant-consumer interface.
Kenmar recommend that all closed cases be posted (anonymized) on the relevant ombudsman service website.
The existence of a well-funded and resourced financial consumer advisory Council to inform the FSRA of consumer needs/issues and counter influential lobbying organizations associated with FSRA regulated entities is an important component of a regulatory system primarily based on high level principles. A model here might be similar to the one proposed by the CSA, planned for late spring implementation.
On enforcement
2008 0329 - The New Yorker - “A principles-based system relies on dedicated, well-funded regulators who are interested in regulating. ... Simplifying the current thicket of rules makes sense. But it will only create more trouble if we’re not willing to appoint the people—and commit the resources—needed to make the changes work. A principles-based system offers the potential for smarter regulation—the kind that helps markets work more efficiently. But the best principles in the world won’t help much if those in charge aren’t willing to enforce them.”- James Surowiecki
Systems must be in place to ensure timely enforcement is not constrained due to staff fear of loss.
[Bonk: 1979 - FTC - Amway - Robert Fitzpatrick-?]
The nature of the enforcement regime is a critical element of PBR. Under PBR, Firms are required to think through the application of the provisions to particular situations to a far greater degree than they are with respect to a detailed rule. There is thus a greater risk that they will make the wrong assessment, i.e. one with which the regulator does not agree. They will seek to minimize this risk by calling for greater prescription from the regulator. In the absence of that prescription, the enforcement approach is critical. In a regime with a tough, punitive approach in which every infraction is met with a sanction, PBR will not succeed. It will transform into a system of detailed requirements, as that is what Firms will need. They will demand rules to provide them, and the regulator, with clear boundaries.
It is therefore imperative that fairness concerns associated with principles-based enforcement be addressed, and that a strong relationship between enforcement and policy functions be maintained. For enforcement purposes, FSRA expectations need to be communicated, explained, and justified in a regular, transparent, and understandable way. FSRA Guidance Notes, Case studies and Interpretation Bulletins provide support for PBR registrants.
PBR and complaint handling
Effective complaint handling is always based on a set of core principles. The FSRA has proposed a set of principles .But principles alone are not sufficient in defining a consumer complaint handling system.
There should be a prescriptive approach as to the use of Root Cause Analysis and how systemic issues are to be handled, although the information flow can vary between Firms. An external financial ombudsman service should be available with its own set of eligibility criteria, complaint handling protocols and consumer compensation constraints. Strong fairness and independence principles and generic descriptors of the complaint system by themselves will not, in our opinion, lead to optimal, consistent and high integrity consumer complaint handling.
Conclusion
PBR invokes, not deregulation, but a re-framing of the regulatory relationship from one of directing and controlling to one based on responsibility, mutuality and trust.
Regulators and regulated entities move from a directing relationship of telling and doing, to a relationship in which regulators communicate their desired outcomes and expectations clearly in principles and apply those principles predictably.
Regulated entities adopt a self-reflective approach to the development of policies, processes and practices to ensure that desired outcomes are substantively met, and, critically, both trust each other to fulfil their respective side of this new regulatory bargain.
Based on what we have seen in the banking and securities industries, we question whether FSRA registrants have yet earned this level of trust.
Accordingly, we urge an implementation plan that maintains key rules that may subsequently be removed once trust has been established.
When applying a PBR and outcomes-focused approach to a credit union, pension plan or insurer, FSRA says it will place greater reliance on a regulated entity’s senior management and board of directors to internalize the requirements in order to achieve desired outcomes. This reliance should be based on objective evidence that the entity’s governance regime is robust and representative of all stakeholder groups.
Kenmar take this opportunity to commend the FSRA on its approach to consumer engagement, consultation and regulation in general. The FSRA seems intent on building a modern, effective regulatory regime.
14. - Libro Credit Union - [2022-006] - Stephen Bolton - 3p
Innovative
We are supportive of FSRA’s desire to develop and incorporate innovation into its culture. To us innovation speaks to curiosity, questioning, advancing technology, open mindedness to ideas, and recognizing cost effectiveness in builds.
Risk Based
We are supportive of the risk-based approach that FSRA seeks to take and that the principle will focus on individuals and entities that pose the highest risk.
Transparent
Clear and concise communication will be important to achieving this principle. We worry about definitions and their various interpretations. When expectations, requirements, and definitions are shared having clear and recognizable interpretation will be helpful to ensure effective understanding across sectors.
Best Practices
FSRA mentions the use of industry best-practices when assessing credit unions approach. It would be helpful if these best practices were also proactively shared by FSRA so that credit unions could consider their relevance and implement as appropriate.
Enforcement Philosophy
In the guidance note, FSRA also outlines its philosophy to enforcement. We welcome a progressive, measured, and proportional approach to enforcement that assumes good faith by the regulated entity.
Enforcement should motivate compliance for the wellbeing of the sector, and not punishment and shame to its detriment.
Aside from federal solvency rules, a large portion of regulations that apply to insurance companies, namely sale and distribution, fall under provincial jurisdiction which remains largely harmonized across Canada.
[IAIS] - The IAIS’s support of principles-based regulation is evidenced by the use of principles-based statements in its Insurance Core Principles (ICP).
Role of Senior Management and Boards
Manulife agrees that the role and influence of senior management and the board of directors is critical in a principal-based environment as the “tone” at the top will set the “tone” throughout the organization. However, it is important that the roles of senior management and the board of directors be kept clear and distinct in PBR.
While senior management and the board of directors should have very close ties with fluid and frequent communication, their roles are quite different. While boards of directors should be expected to make major decisions, approve policies submitted by senior management and ensure there are mechanisms to oversee performance and adequate implementation of policies, a board of directors should not be expected to perform management duties. Instead, it is the role of senior management to execute strategies and implement policies adopted by a board of directors.
We suggest further clarity in the PBR guidance as well as other related documents that ensure accountability for specific functions rests at the proper level within the financial institutions.
Conclusion
Life insurance is a relationship based on reciprocal trust, honesty, and good faith. Insurers, including Manulife, must rely on consumers’ good faith and honesty during the application process to ensure accuracy of its risk assessment prior to an insurance contract being issued.
Customers must trust that insurers will be able to pay benefits at claim time.
Principles-based regulation, where the desired outcome is favoured over a prescribed approach, is well suited for an industry such as insurance.
Manulife remains supportive of a principles-based supervisory framework where focus is on the consumer outcome rather than meeting a series of prescribed requirements. We believe PBR serves customers better.
16. Meridian - [2022-006] - Sunny Sodhi - Meridian Credit Union Limited - 2p
2. Best Practices
“FSRA may leverage industry best practices when assessing the regulated entity or individual’s chosen approach. These industry practices should not be interpreted or implemented as a compliance “checklist.” Rather, best practices will be used to provide regulated entities with valuable insights regarding the identified approaches used by industry peers and provide a baseline from which to identify practices that are best suited to their own organization.”
We question FSRA’s reference to “best practices” as a “baseline” and would encourage FSRA to clarify where it will stand on the spectrum between minimum standards and “best practices”. More importantly, we encourage FSRA to clarify that when it disagrees with the standard or practices that a credit union has implemented based on its interpretation of PBR in the context of its organization, FSRA will apply its interpretation prospectively and not retrospectively.
It would be helpful to understand when a principles-based versus prescriptive approach will be used.
Sophisticated entities
One section of the Guidance that we would like further clarity on is the following:
FSRA will be guided by its Framework Principles when it adopts either a PBR or a prescriptive approach.
Factors that will impact the regulatory approach adopted by FSRA will include the relevant legal framework (i.e., statute, regulations, FSRA rules and case law), the complexity, magnitude and impact of the regulatory problem, and the sophistication and resources of the regulated entity to effectively address the issue.
Our interpretation of the above is that FSRA may adopt a principles-based approach for an issue for one administrator, but a prescriptive approach for the same issue for another administrator based on differences in their “sophistication and resources”.
We would like to confirm our interpretation and look forward to FSRA expanding on what this will mean in practice in the pensions sector.