On June 21, 2016, Ontario’s Minister of Finance released the 92-page Final Report of the expert panel that has been reviewing the mandates of the Financial Services Commission of Ontario (“FSCO”), the Financial Services Tribunal (“FST”) and the Deposit Insurance Corporation of Ontario (“DICO”). While the panel’s final recommendations are generally similar to those in its November 2015 Preliminary Position Paper (which we discussed here), there are some significant changes in the finalized version.

Key restructuring recommendations:

  • FSCO to be replaced by a new Financial Services Regulatory Authority (“FSRA”).
  • DICO’s mandate as prudential regulator of Ontario’s credit unions and caisses populaires to be transferred to FSRA.
  • DICO to focus exclusively on overseeing the province’s deposit insurance system.
  • FST to enjoy more independence, with a full-time Chair and sufficient resources to attract the number of qualified members that it requires.

Background

The three members of the panel – George Cooke, James Daw and Lawrence Ritchie – were asked to examine the mandates of FSCO, DICO and the FST, which currently regulate financial services entities under Ontario’s jurisdiction. These entities include:

  • Provincially-incorporated insurers;
  • Pension plans, loan and trust companies;
  • Credit unions and caisses populaires;
  • Mortgage brokers;
  • Co-operatives;
  • Service providers who invoice auto insurers for listed expenses in relation to statutory accident benefits.

The panel was asked to consider the relevance of the existing FSCO, DICO and FST mandates to Ontario’s current goals and priorities and, in particular, to identify any changes in governance structures or possible transfers of functions between agencies (whether existing or new) that, in its opinion, would promote more effective regulation while also encouraging economic growth. The Final Report makes 44 specific recommendations, with substantial commentary about each of them. It also refers to comments received from interested parties during the process, which included more than 40 meetings with regulators, sectoral stakeholders and investor advocates.

Recommendations: “Radical change is required”

The Final Report begins with the observation that “radical change is required”. In the panel’s opinion, Ontario regulators have not kept up with the rapid change in the financial services market. The restructuring proposed in the Final Report is intended to create a flexible, expertise-driven system reflecting an institutional culture of responsiveness to change and openness to innovation. It includes not only a new agency (the FSRA) but a modernization of Ontario’s overall approach to regulation to take better advantage of modern regulatory tools. Another major focus of the Final Report is ensuring that Ontario’s financial services regulators have clear, consistent and non-conflicting functions that can be exercised with all necessary independence. For example, the panel was strongly of the view that DICO’s current mixture of oversight and prudential regulatory functions is not appropriate and that the FST needs a clearer institutional status in order to ensure its functional separation from FSCO/FSRA.

The Final Report’s recommendations would affect each of the regulatory bodies in the following key respects.

Financial Services Regulatory Agency (FSRA)

Institutional Structure

The panel likens its institutional vision for the FSRA to the Ontario Securities Commission (“OSC”) and Quebec’s Autorité des marchés financiers (“AMF”). In other words, the FSRA would have extensive authority to monitor and regulate the financial services sector in Ontario, including rule-making powers. Like the securities commissions, FSRA would operate on a cost-recovery (self-funding) basis and would also become an expertise hub. In order to achieve this, it would be given the ability to recruit expertise outside the Ontario Public Service’s collective agreements and to offer temporary secondment opportunities from the private sector. The FSRA would be led by an executive team headed by a CEO and including (among others) the three divisional Superintendents discussed below. Unlike FSCO, the FSRA would have a governance model that includes a board of directors, members of which would be selected with reference to a “clearly articulated skills matrix”.

Expanded Prudential Regulation Authority

If the panel’s recommendations are implemented, the FSRA’s mandate would be broadened in certain respects, most notably by taking over the prudential regulation of credit unions and caisses populaires from DICO, a function that would fit well with FSCO’s existing prudential regulation of certain non-federal insurers (mainly small farm mutual insurers and Ontario-focused captive or reciprocal insurers). A suggestion in the Preliminary Position Paper that some responsibilities in this area might be shifted to the federal Office of the Superintendent of Financial Institutions (“OSFI”) has been dropped from the Final Report.

“Modified Twin Peaks” Model

While recommending that the FSRA enjoy a broad mandate, the panel recognizes that giving the agency multiple functions creates a risk that its resources could be monopolized from time to time by one of the functions at the expense of the others. To prevent this, the Report recommends a “modified twin peaks (or triple peaks)” model, under which the FSRA would be divided into distinct Market Conduct, Prudential Oversight and Pensions Divisions, each with its own Superintendent and each of which would publish an annual “Statement of Approach” outlining how it intends to fulfill its part of the FSRA’s mandate. The expression “modified twin peaks” refers to the FSRA’s structural separation of its market conduct and prudential functions (a classic twin peaks arrangement) as “modified” by the inclusion of pensions as a third “peak”.

The Pensions “Peak”

In the case of pensions, market conduct and prudential regulation would be carried out within a single Division, in recognition of the fact (stressed by a number of commenters) that market conduct and prudential regulation are more closely intertwined in the pensions arena than elsewhere. Including the pensions function in the FSRA was preferred by the panel to the presumably costly alternative of establishing an entirely separate pensions regulator, as had been recommended by the Expert Commission on Pensions in 2008. As a final example of how the FSRA would be designed to ensure that all regulated entities received their fair share of knowledgeable attention, the Final Report recommends that each FSRA Division include experts in the sectors that it typically deals with.

Consumer Protection

In the panel’s opinion, consumer protection is among the most important aspects of the FSRA’s mandate. The Final Report recommends that the FSRA be guided by the OECD’s G20 High-Level Principles on Financial Consumer Protection (which could also be applied, with necessary modifications, to pension beneficiaries). An “Office of the Consumer” would be created within the FSRA and the agency would be given the authority to encourage market transparency in its regulated sectors (e.g. by requiring greater disclosure of costs of financial and pension products).

Enforcement

Enforcement is to be another area of redoubled emphasis. The Final Report recommends giving the FSRA the capacity to levy Administrative Monetary Penalties (AMPs) and offer whistleblower protection. The FSRA would also pursue enhanced collaboration with other regulators and more robust public engagement and communications. The panel concludes that the similarity of many insurance products to securities requires that life insurance agents be subject to oversight similar to that applied to securities dealers – in its view, there have been too many instances in where those whose securities licences had been revoked have been able to switch to insurance products. As it did in the Preliminary Position Paper, the panel emphasizes the importance of eliminating gaps in consumer protection relating to fraud by licensed sales agents and brokers, but it is now less convinced that a fraud compensation fund is the best mechanism for achieving this, as opposed to enhancements in mandatory insurance. It is also of the view that regulation of syndicated mortgage products would better be taken on by the new Cooperative Capital Markets Regulator than by the FSRA.

Scope of FSRA-Regulated Entities

The Final Report recommends that the Government “consider” giving the FSRA statutory oversight powers with respect to payday lenders, loan brokers, consumer credit reporting agencies, debt and credit counsellors and guarantee and warranty providers – each of which is now under the authority of the Ministry of Government and Consumer Services. The Preliminary Position Paper contained a somewhat stronger endorsement of this approach, but the panel tempered its enthusiasm on learning that the Government is currently conducting separate reviews of some of the sectors in question. Because it is not privy to those reviews, the panel did not feel comfortable going beyond suggesting a “consideration” of the possible of inclusion of these sectors in the FSRA’s regulatory space. On the other side of the ledger, the FSRA would not continue FSCO’s mandate to oversee co-operatives, other than to continue to review offering statements. However, with respect to offering statement reviews, the panel noted the growth of large-scale co-operatives that (in some cases) are raising hundreds of millions of dollars. In its view, the FSRA should continue to perform reviews for these increasingly complex co-operative financings only if it increases its expertise. Given the FSRA’s cost-recovery mandate, that likely means significantly increased fees for co-op offering statement reviews.

Auto Insurance

The FSRA would not inherit FSCO’s responsibility for the Motor Vehicle Accident Claims Fund (“MVACF”), which would instead shift to the industry-operated Facility Association once concerns about the MVACF’s unfunded liability have been addressed. However, the FSRA would continue to have responsibility for auto insurance rate review/approval and would ideally be able to use its rule-making power to de-politicize what the panel seemed to agree has become a politicized process. However, while the panel was clearly sympathetic to the concerns of insurers respecting the need to follow sound actuarial principles in setting auto insurance rates, it acknowledged that additional government input and legislation would likely be required to resolve this difficult issue.

Financial Services Tribunal (FST)

Four of the panel’s 44 recommendations directly concern the Financial Services Tribunal (FST). The panel focused on the need for the FST to have increased authority, resources and independence. In addition to having its own budget and administrative independence from the FSRA, the FST would have a permanent Chair and at least two Vice-Chairs, supported by a roster of part-time adjudicators, who could serve for a maximum of ten years. It would report directly to the Minister of Finance and have no relationship with the FSRA’s board of directors. The scope of the FST’s jurisdiction would depend on the jurisdiction ultimately assumed by the FSRA, but the FST’s function would, in any event, include hearing appeals from the FSRA decisions. Finally, the panel suggested that the Legislature “strive to ensure that the courts defer to the FST on policy or other matters that are within its subject-matter expertise.” While the panel accepts that the FST should continue to share administrative support functions with the FSRA, the Final Report stresses its functional independence from the FSRA more forcefully than was the case in the Preliminary Position Paper.

Deposit Insurance Corporation of Ontario (DICO)

The panel recommends that DICO should continue to exist for the purpose of administering and overseeing Ontario’s deposit insurance scheme, while (as noted above) its existing prudential regulatory activities would be transferred to the FSRA, effectively ending what a number of commenters considered an “inherent conflict of interest” in DICO as currently constituted. In a significant shift from the Preliminary Position Paper, the panel is no longer recommending that the Pension Benefits Guarantee Fund (“PBGF”) be brought under DICO. Its only recommendation with respect to the PBGF is that it not be administered or overseen by the FSRA.

Transition

The Final Report concludes by addressing the issue of transition, recognizing that regulatory changes of such significance must be “carefully and strategically planned, implemented and overseen”. The first step, after securing the passage of the necessary legislation, would be for the Government to appoint the initial FSRA board of directors, which would then work with Ministry of Finance staff to prepare a transparent implementation plan.