Quest for the “Harmonization Grail”

Listening to the words of the financial services regulators, at both the provincial and federal levels, it would appear that a dim light is beginning to show at the end of the long tunnel of regulatory reform — an issue which numerous lobby organizations from across the insurance industry have been striving toward for years. However, while the intent of the words spoken by the regulators are encouraging, the lack of subsequent action and the ongoing bristling of territorial egos of those heading up the various offices creates a less than optimistic outlook for a rapid conclusion to regulatory reform and provincial harmonization processes.

Recently, spokespeople for two key players on the regulatory stage, The Office of the Superintendent of Financial Institutions (OSFI), and the Financial Services Commission of Ontario (FSCO), presented their outlooks for future financial services regulation. Both parties in question were ardent in expressing the need for provincial harmonization and adapting the rules to accommodate the changing marketplace. In particular, the words “flexibility” and “integration” were repeatedly used by OSFI assistant superintendent Julie Dickson and FSCO superintendent Dina Palozzi in their addresses. Both emphasized the need to streamline the monitoring and industry filing processes, and adopting a “market conduct” approach to regulation rather than the long-held sectarian procedures applied to the different financial services pillars. Sounds great, but is this merely the same old “song and dance” routine being trotted out as the bureaucrats reshuffle their empires?

Explaining some of the benefits insurers can expect from the new federal financial services legislation, Bill C-38 (scheduled to go before parliament for approval in the fall), Dickson says the filing processes required at a national level have been simplified, with the Ministry of Finance having granted greater decision-making powers to OSFI, which in theory should allow for quicker conclusions.

Marvelous. But, without coordinating such initiatives with provincial regulatory reform, any benefits afforded to insurers at the federal level become spoilt gains. The varying regulatory approaches applied by the provincial watchdogs has put a bee under the bonnet of Bill Star, president of Kingsway General Insurance Company (see article in this issue of CU). The focus of Star’s chagrin is the “political swaying” of the provincial regulators in their decision making, in particular, the filing of rates. Political interference and poor responsiveness on the part of regulators is thwarting free market growth of the industry and in some cases may even present a threat to the financial security of companies, Star charges.

Which really brings the regulatory reform debate to its base issue: provincial harmonization with an eye to national regulation has to be achieved before any grand modernization plans are launched by OSFI or any other body on its own. In a sense, it would appear that the regulatory reform initiatives currently taking place are akin to “building the house from the roof down” with the foundations to be constructed at the last. Quoting the law of gravity would seem appropriate to the above metaphor, as well as the literal actions of the regulators, in suggesting that the house being built is likely to fall down before completion.

One of the more encouraging developments to provincial regulatory harmonization is the work of the Canadian Council of Insurance Regulators (CCIR), representing all of the provincial and territorial insurance commissions. Palozzi says 15 of the 20 regulators under the CCIR have signed an agreement in principal to bring about a uniform set of consumer protection standards while lifting the licensing restraints on financial services intermediaries.

Once again, on the surface, this development sounds wonderful. However, closer examination of the conflicting issues and positions of the provincial regulators would suggest that any real developments toward national harmonization are unlikely to ever get off the drawing board. Notably, British Columbia’s financial services regulator has openly stated its reservation to broad harmonization of the insurance rules, claiming that “some markets are too specific”. Needless to say, many of the other provincial regulators could argue the same logic, though I suspect that the real motivation in such stalling has more to do with protecting the existing bureaucracy and political influence of the provincial governments.

Even Palozzi, who is the most passionate supporter for regulatory harmonization and integration, stands against the concept of a federal financial services ombudsman (suggested by Finance Minister Paul Martin in the financial services white paper). Subsequently, the government has decided to exclude the insurance industry from the ambit of the national ombudsman. However, the question remains why Palozzi would be so opposed to the concept. The cynical answer to that question might be that she is unwilling to open the door to potential federal interference in her own jurisdiction. Until the provincial regulators can get past their own “political empire building ambitions”, and are willing to do more than sit around sipping iced-tea over polite conversation at CCIR meetings, the quest for regulatory harmonization is likely to remain an elusive ideal.