FSRA board director defends principles-based regulation

Ontario’s insurance regulator offered a spirited defence of principles-based regulation last week, giving concrete examples of how the approach spares insurance companies from facing unnecessary prescriptive rules.

Joanne De Laurentiis, chairwoman of the Financial Services Regulatory Authority (FSRA), also addressed industry concerns about the increasing number of data requests insurance companies are receiving to support the regulator’s principles-based approach.

“I think we all think, certainly at FSRA and the board, that providing the information and data to support our analytics is a more effective way of supervision than having a team of supervisors descending on you asking questions, gathering documents that may or may not tell the full story,” De Laurentiis said in her opening remarks at the 2024 FSRA Exchange last Monday.

“It can lead to less burden for you over time. Our discussions will be more focused, and our efforts directed to where they matter most.”

De Laurentiis provided an example of how an analysis of data in Ontario’s credit union sector led to the conclusion that no additional regulatory action was required around high-risk mortgage loans.

“We recently completed two thematic reviews of the credit union sector, one on residential mortgage lending, and the other on deposit-taking,” she said. “A total of 58 credit unions, pretty much the entire system, provided detailed data. For many, it required a substantial effort and considerable resources to fulfill, but it was worth it.

“With higher interest rates, inflationary pressures, and a resulting housing crisis, we found that credit unions have not — let me repeat, not — materially increased lending activity and high-risk mortgages.

“The bottom line: we are not seeing system-wide issues that should be addressed with more prescriptive guidance or rules. The ability to access that data in a timely manner allowed FSRA to reduce the regulatory burden by not imposing additional requirements, which would be a solution looking for a problem.”

Related: FSRA’s case for principles-based regulation

De Laurentiis acknowledged FSRA has heard from industry representatives who are concerned principles-based regulation is more ambiguous than prescriptive rules-based regimes. Some insurance defence lawyers have noted publicly that principles-based regulation isn’t always clear about what happens if a company doesn’t achieve the regulator’s expected outcomes.

To this, De Laurentiis clarified FSRA’s approach is a ‘hybrid model’ — a mix of both principles-based and rules-based regulation. She pointed out prescriptive regulations are laid out in legal statutes and laws governing the various industries — for example, the requirement to hold a licence.

“There will always be a need for rules under specific circumstances,” she said.

But a principles-based approach allows the regulator to adopt a more proactive attitude and move a regulated sector toward course-correction, rather than have to put out fires after they arise, De Laurentiis added.

“Good regulation comes from a regulator understanding your business,” De Laurentiis said. “Because it allows us to be more proactive than reactive, allowing us to identify potential issues and course-correct before something becomes a full-blown crisis and impacts the stability of the sector, or undermines the confidence of the consumer.

“This is really what PBR [principles-based regulation] is meant to achieve, from the regulator’s perspective: the ability to focus on the problems that matter.”

The principles-based approach is effective when the relationship between the supervisor and its regulated entities is one of cooperation, collaboration and mutual trust, she said.

“As your regulator, FSRA won’t act unilaterally for those who are committed to achieving the identified outcomes,” De Laurentiis said. “We will work to build consensus and understanding.”

She said the regulator would trust, but verify, the company’s information to assess whether the company is achieving the regulator’s expected outcomes. “The insight we get by your data-sharing allows FSRA to focus on fulfilling its statutory mandate.”

Feature image courtesy of iStock.com/Mykyta Dolmatov