Getting Financial Regulations Right: Avoiding Unintended Effects

Canada’s financial system made it through the 2008 global financial crisis better than many other economies did, but Canadian regulators nonetheless hastened to introduce a spate of new regulations to increase financial stability. However, all new regulations create effects, intended and unintended, and the process in Canada for assessing the impact of new regulations is not as useful as it could be. This could lead to regulations having unforeseen and unwanted effects on efficiency and investor protection, even if stability is improved. Such unwelcome effects might be minimized with a system that better assesses impacts both before and after new regulations are enacted. While Canada’s regulatory-impact analysis system is relatively less burdensome than that of the EU, which has adopted an elaborate process to ensure full transparency in its consultation with stakeholders, with that lack of burden comes a much higher risk of unnecessarily increased compliance and administrative costs. Since regulatory changes necessarily lead to uncertainty in markets, the lack of transparency in the Canadian system is also cause for concern. Chief risk officers tend to rank inconsistent regulation as the most prominent risk factor, far higher than any other, yet Canada does not rank very well in an OECD evaluation of regulatory-impact analysis systems compared to, for instance, the U.K. In addition, the lack of transparency, particularly at the federal level, heightens the risk of “regulatory capture,” which can harm individual and business consumers of financial services as well as smaller firms. While the sort of lengthy and costly regulatory reviews required by the U.S. and EU could prove counterproductive, there are issues in the Canadian system that could be improved without going that far. For instance, the Canadian system offers a much shorter time frame for stakeholder consultations, which could feasibly be remedied without adding undue cost or complexity to the system. Canada’s system tends also to focus on the effects of regulation on large institutions, without enough regard for smaller firms, where costs of compliance and administration are usually higher, potentially decreasing competition in the financial sector. At the provincial level there tends to be less accommodation for public input before new regulations are implemented. Once regulations are in place, the Canadian system does not require a thorough assessment of the subsequent (or ex post) impacts. A