Restructuring of Ontario financial regulators moves ahead

November 21, 2016

On November 14, 2016, Ontario’s Minister of Finance announced that the province intends to proceed with plans – described in detail in our June 29 Update – to establish a new Financial Services Regulatory Authority (FSRA), the aim of which will be to reduce regulatory burdens on Ontario businesses while at the same time protecting consumers and investors. The legislation establishing FSRA, known as the Financial Services Regulatory Authority of Ontario Act, 2016 (FSRA Act) received first reading in the Ontario Legislature on November 16 (as Schedule 8 of the budget implementation act, Bill 70).

While the necessary regulations to the FSRA Act have not yet been released, all indications are that the restructuring of Ontario’s financial regulators will proceed in accordance with the Final Report of the Expert Panel that was commissioned to examine the mandates of the Financial Services Commission of Ontario (FSCO), the Financial Services Tribunal (FST) and the Deposit Insurance Corporation of Ontario (DICO). Currently, these entities provide public oversight for Ontario’s provincially-regulated financial services sectors, including:

  • Provincially incorporated insurers;
  • Pension plans, loan and trust companies;
  • Credit unions and caisses populaires;
  • Mortgage brokers;
  • Co-operatives;
  • Insurance agents and adjusters; and
  • Service providers to auto insurers in relation to statutory accident benefits.

When implemented, the Expert Panel’s 44 recommendations will effect an extensive reform of financial services regulation in Ontario. As discussed below, while DICO will retain its deposit insurance function and the FST will continue to provide dispute regulation services, the FSRA will be the primary regulatory authority over the sectors listed above. It will be structured as a flexible, independent, financially self-sufficient, expertise-driven body well-equipped to be able to respond to rapid technological and market change.

The FSRA Act

The legislation unveiled on November 16 establishes the structure of the FSRA. The agency will have a board of directors of between 3 and 11 members, led by a Chair chosen by the Minister. The Minister will also have approval power over by-laws. FSRA directors will be subject to the same conflict of interest, fiduciary duty and indemnification rules that apply to business corporation board members under the Business Corporations Act. The FSRA board will appoint a CEO and other officers, who cannot be board members themselves. The FSRA’s revenues will be used exclusively for its own activities, thus fostering its independence, rather than being deposited in Ontario’s Consolidated Revenue Fund. Those revenues will be raised in part through assessments paid by participants in the various regulated sectors, with provisions for licence revocation and other remedies in the event of non-payment.

What to look for in the FSRA Regulations

Much of the detail of the FSRA’s structure and mandate has been left to the regulations, which have not yet been published. Our June 29 Update on the Expert Panel Report summarizes the recommendations that will likely be implemented in the regulations. Some of the highlights are as follows:

  • The FSRA will be the centerpiece of the regulatory regime, replacing FSCO while also taking on DICO’s mandate as prudential regulator of credit unions and caisses populaires. The FSRA will be divided into distinct Market Conduct, Prudential Oversight and Pensions divisions, each with its own Superintendent and subject-matter expertise. The Expert Panel referred to this as a “triple peaks” model, in which the institutional separation of key functions serves to prevent the Agency’s resources from being monopolized by one function to the detriment of the others.
  • While the FST will share some administrative support services with the FSRA, the FST’s independence will otherwise be carefully safeguarded under the new structure. Enforcement will be stepped up, with provision being made for Administrative Monetary Penalties and specific whistleblower protections. There will also be increased co-operation with other regulators and ideally better communication with the public. DICO will continue to administer and oversee Ontario’s deposit insurance scheme.
  • The forthcoming regulations may provide additional clarity about some issues on which the Panel did not take a strong position, notably whether and how the FSRA’s auto insurance rate review and approval function will be insulated from political pressures.  As for the possible extension of the FSRA’s authority to payday lenders, loan brokers, consumer credit reporting agencies, credit counsellors and warranty providers – another issue on which the Panel opted not to take a position – it appears that the Government has decided against the idea, given that the FSRA Act defines “regulated sector” in exactly the same way as the existing FSCO legislation.

The government’s next steps

Recognizing that such a radical reform should be implemented cautiously, the Ministry of Finance has announced that, over the coming months, it will focus on getting the legislation finalized and passed, issuing the necessary regulations, appointing FSRA’s first board of directors and drafting a detailed implementation plan. Stikeman Elliott will provide additional updates as the process continues to unfold.

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