Canada’s financial regulators have long had mandates that prioritize stability and consumer protection. That approach helped the country fend off the worst of the 2008 financial crisis. But Canada has a productivity problem, and growth and innovation are important, too. It is hard not to conclude the regulatory balance has shifted too far in the direction of caution at the expense of innovation, competition and economic dynamism.
Stability and consumer protection dominate the current stock of regulatory documents. Fewer than 15 per cent explicitly address market efficiency, innovation or competition. Most of the rulebook consists of conduct and supervision requirements: more reporting, changes in the type of communication required, more oversight of how financial products are sold and more obligations to prove firms are treating customers “fairly.”
These measures may protect consumers, but they don’t make it easier for new firms to compete or innovate. This isn’t just an accident of policy inertia. The roots lie deep in the mandates of Canada’s federal and provincial financial regulators. Unlike their counterparts in the U.K., Australia and the United States, where innovation and competition are explicit statutory goals alongside stability, Canadian regulators often have mandates that treat stability and investor protection as priorities above all others, with economic growth subsidiary.
This imbalance carries real costs. Compliance burdens have surged sharply. They now account for an average of 22 per cent of the total labour costs within financial firms — compared with 2.3-2.7 per cent in the United States. Smaller firms and startups are hit hardest, shouldering nearly double the compliance burden of large institutions. Because smaller firms are often the engines of innovation and competition, this regulatory drag threatens the competitiveness necessary to ensure robust future economic growth.
The numbers tell an urgent story. Compliance duties now touch about 73 per cent of employees at financial firms, meaning that nearly three-quarters of staff — not just those in compliance departments — now carry some regulatory duties as part of their job. About eight per cent of employees spend most of their working time (i.e., 75–100 per cent) on compliance tasks alone. External costs — meaning spending on legal advice, consulting, audit, compliance technology, and governance — have also climbed, diverting resources from innovation, strategic growth, and client service.
Regulation obviously involves benefits. But, considering that there are more than 40 financial regulators in Canada, it also imposes substantial costs. Policy-makers need to address the rapid increase in compliance costs that the current imbalance of priorities has generated. A good step would be to require transparent, public and data-based cost-benefit analyses before any new regulation can be introduced. Regulator mandates also need to recognize — explicitly — the trade-offs between stability, investor protection and economic dynamism.
There is some improvement in this regard. Ontario’s Financial Services Regulatory Authority has adopted a principles-based approach, with the launch of “test-and-learn” environments that allow innovative financial products to reach consumers faster. In 2021, the Ontario Securities Commission changed its mandate to include fostering capital formation and competition — a focus that is also reflected in the February 2025 version of the Alberta Securities Commission’s mandate. The federal Office for the Supervision of Financial Institutions has been replacing or removing outdated and redundant guidance, including getting rid of the fixed-rate requirement for renewing some uninsured mortgages, and is rescinding 20 or so outdated guidelines to align its framework with emerging risks.
These are steps in the right direction, but if Canada is to remain competitive, financial regulation needs to accept innovation and competition as core objectives. The goal is not deregulation, but smarter regulation. Absent this shift, Canada risks falling further behind peer nations, entrenching sluggish growth and weakening its financial sector’s resilience. Safeguarding stability requires fostering economic dynamism. Getting that balance right is the next great test for Canada’s regulators.
Gherardo Caracciolo, fellow-in-residence at the C.D. Howe Institute, provides its annual financial regulatory scorecard.