CD Howe paper considers whether regulatory framework strikes the right balance
Canada’s financial sector regulators have an important role to play in ensuring compliance to protect consumers, the integrity of the markets, and stability of the financial system, but does this come as a cost for innovation and competitiveness?
A new paper from the C.D. Howe Institute considers whether regulators activities strike the right balance and only does what is necessary.
Paul C. Bourque and Gherardo Gennaro Caracciolo have looked at the rule development practices of regulators to ascertain whether they follow a sound and structural approach to avoid unnecessary rules - and marked them on a scorecard.
“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,” explained Bourque.
Canada’s regulators score well generally for identifying potential risks and ensuring that stakeholders understand their objectives in protecting consumers and maintain financial stability. However, they are not so good at explaining the costs and benefits of rules and regulations.
The authors of “The Good, the Bad and the Unnecessary: A Scorecard for Financial Regulations in Canada” also found that regulators’ actions focus heavily on stability and protection with a likely downside for innovation and competition.
Their analysis found that 85% of the regulators’ regulatory initiatives target market abuse, stability, transparency, and improved consumer protection, while just 18% focus on promoting efficiency and growth.
The report found a lack of adherence to common standards of conducting and reporting cost-benefit analysis of rules and regulations which weakens predictability for regulator outcomes, although the authors accept it does allow for flexibility and adaptability.
“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,” noted Caracciolo.
The report concludes that regulators should only intervene in markets when appropriate: “every new regulatory initiative must be necessary – and remain necessary – if Canada is to improve the competitiveness of its financial sector,” they wrote.
