July 30, 2024 – Canadian financial sector rules need careful weeding to safeguard the system and market stakeholders, while creating conditions for innovation and efficiency, according to a new C.D. Howe Institute report.
In “The Good, the Bad and the Unnecessary: A Scorecard for Financial Regulations in Canada,” Paul C. Bourque and Gherardo Gennaro Caracciolo examine whether financial regulators’ activity follows a sound and structural approach – avoiding unnecessary regulations and implementing rules that ensure stability and consumer protection, while balancing the need for competition and innovation. The authors review rule-development practices and produce a scorecard of Canadian regulators’ performance; checking whether the principles followed are consistent with those defining efficient and effective regulatory frameworks.
“The purpose of this paper is to create a checklist of criteria necessary for an effective and efficient framework for regulatory intervention in the financial system,” according to Bourque.
Bourque and Caracciolo explain that Canadian regulators have largely been successful in identifying potential risks and clearly stating their regulatory objectives; producing rules and regulations that have enhanced financial stability and consumer protection. However, regulators have been less successful in demonstrating the costs and benefits of their proposals. It has also disproportionately focused on stability and protection, likely at the expense of innovation and competition.
For instance, their topic analysis tools find that most regulators’ regulatory initiatives, approximately 85 percent, primarily target market abuse, stability, transparency, and improved consumer protection. On the other hand, a smaller fraction – around 18 percent – explicitly aim to enhance efficiency, promote growth and account for the typical stability versus dynamism trade-off of any regulatory structure.
Bourque and Caracciolo find that the current approach used by regulators tends to lack adherence to general and pre-established principles, specifically with respect to performing and reporting cost-benefit analysis. While this allows for flexibility and adaptability, it fails to achieve consistent and predictable regulator outcomes.
“A disciplined approach to policy development, employing market failure, cost-benefit, and post-implementation impact analysis, is the first line of defence in curbing the tendency to overregulate,” according to Caracciolo.
The authors explain that the challenge for regulators is achieving the best balance between market integrity and financial stability, and market competitiveness and market dynamism, by intervening in markets only when necessary. “In short, every new regulatory initiative must be necessary – and remain necessary – if Canada is to improve the competitiveness of its financial sector,” Bourque and Caracciolo conclude.
For more information contact: Paul C. Bourque, K.C., Senior Fellow, C.D. Howe Institute; Gherardo Gennaro Caracciolo, Faculty, Simon Fraser University; and Lauren Malyk, Senior Communications Officer, C.D. Howe Institute, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.