Financial Services Regulation Needs More Than Incremental Tinkering

From: Jeremy M. Kronick and Mark Zelmer
To: Canada’s ministries and departments of finance
Date: January 12, 2026
Re: Financial Services Regulation Needs More Than Incremental Tinkering

A country’s financial sector plays a crucial role in driving economic growth – Canada’s included. Canadian financial institutions and markets have had a long and successful track record in transforming savings into loans that have stimulated economic growth, supplying the plumbing for the economy through its payment systems, and pooling risks so that we can buy insurance against bad things like car accidents. 

To get the best out of any financial system, it needs to be both competitive and safe. With major economic and financial transformations taking place these days, now is the time to ask whether our financial system and its supporting regulatory and policy infrastructure remain fit for purpose.

Therefore, our wish list starts with a commission or council of advisers to answer that question.

But, first, let’s review some of the key changes we are seeing in the system. There is the growing role of private markets and institutional investors in intermediating savings and credit. There are new payment service providers and new technology based on blockchain ledgers affecting how payments are conducted. And, inevitably, the growing role of AI. All these are disruptive to incumbents and the financial system writ large.

At the same time, our economy is also being upended by a changing world order, led by a more hostile United States.

Big shifts like these make the case for taking a step back and thinking deeply about what kind of financial system and supporting regulatory framework we will need to help fund the major restructuring that needs to be done to our economy and economic relationships. 

We believe the financial system will need to become more competitive and innovative if it is to fully support this restructuring. The question, of course, is how to bring that about without unduly compromising the safety and soundness that have traditionally been the hallmark of the Canadian system.

This is where public policy and regulation come to the fore. The past 25 years have seen only incremental changes to the policy and regulatory framework. That approach has been fine up to now. But going forward a more fundamental revamp will be required to the regulatory framework so the system can continue its central role in driving economic growth. 

That’s why an independent task force of experts should be asked how the financial sector regulatory framework should evolve. If not a full-fledged commission, a council of advisers for financial sector policy. Whatever we call it, there are some key questions/ideas it should address. 

First, we start with a general point that any recommendations will need to accept and respect the division of powers between Ottawa and the provinces that currently exists. Having said that, we would hope the recommendations would push for more ways that we can harmonize rules and regulations across the country. Such harmonization is becoming more essential as many of the financial innovations noted above have been taking place outside of the traditional federal sphere of regulation.

Second, if we are to have more competition and innovation, the financial system will need to be more accommodating to the new entrants that are leading many of those innovations, and at the same time we will need better mechanisms for smoothly exiting failing firms. On the latter point we must consider how we can manage failures in a way that maintains public confidence in the financial system and minimizes disruptions to the intermediation of credit, risk, payments, and savings in Canada, along with reducing the need for public bailouts.

Third, how we can better leverage market discipline and promote more accountability of boards and management of financial institutions? Greater accountability may open some doors to reduce regulatory burden, and by doing so promote more competition and innovation.

Lastly, and in light of geopolitical developments, we need to ask whether there are ways to reduce the risk of foreign interference in the financial system and ensure that Canadians are treated equitably in the unlikely event that an internationally active financial institution encounters stress.

With so much change and disruption taking place, Canada must consider the path forward for its financial system so that we can all profit from its changing landscape and position it to facilitate the major shifts we need to make as a society and as an economy in our brave new world. It has been more than 25 years since our last major review. The time has come to step back and think again.

Jeremy Kronick is vice-president of economic analysis and strategy at the C.D. Howe Institute. Mark Zelmer, formerly with the Office of the Superintendent of Financial Institutions, the Bank of Canada, and the International Monetary Fund, is a fellow-in-residence at the C.D. Howe Institute.

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The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.

A version of this Memo first appeared  in The Hill Times.

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