October 29, 2014, Shanghai,
People’s Republic of China
Check against delivery
Canada’s journey in financial supervision: Top lessons learned
Good morning and hello again.
There’s a funny cartoon that goes: “Those who don’t study history are doomed to repeat it. Yet those who do study history are doomed to stand by helplessly while everyone else repeats it.”
In preparation for this Seminar, I’ve reflected on my Agency’s experience after nearly a decade and a half of overseeing consumer protection in Canada’s financial system. What has our history taught us? What feats and flops can we share to help others who are embarking on their consumer protection journey or moving into its next phase?
I think it is fair to say that we are among the veterans around the table. When my organization, the Financial Consumer Agency of Canada – or FCAC for short – was founded in 2001, Canada was one of the first nations to construct a formal, comprehensive regime for financial consumer protection. We did so from scratch, with few prototypes to guide us – and unchartered waters ahead.
Fast forward to 2014. I would like to think that Canada today has one of the strongest and most effective financial consumer protection frameworks in the world.
This may well have contributed to our ability to withstand the global financial meltdown a few years ago. And it has resulted in a consistently high level of compliance, among financial institutions, with federal laws, regulations and voluntary codes that are designed to protect consumers.
Our thinking and approaches have certainly progressed over the years. Our track record, over our 13-year history, reveals and reinforces the more effective practices and techniques. Drawing on this experience, let me give you our top seven lessons in financial supervision.
Lesson #1 – Build the right team
Lesson one – make sure your compliance division is made up of individuals with industry knowledge and experience.
Regulating a system as complex as the financial sector, it is vital to have people who know the vernacular. Who understand how the products and services work. And who get the business practices behind those products and services.
Specific legislation that we enforce can be learned. But the in’s and out’s of how the financial sector and institutions function is best grasped by those who have lived and breathed it.
Since opening our doors, our Agency has worked to assemble a compliance group mostly of people with background in the sector. This is what the best championship sports clubs have in common with the best corporate teams: strong, experienced talent.
Having deep team strength has not only improved our ability to supervise effectively. It has also facilitated dialogue with regulated entities and garnered their respect and confidence in our abilities. From the vantage point of the financial organizations we regulate, they feel that we have a solid understanding of their business.
Lesson #2 – Create robust internal controls
Lesson two – ensure that your compliance division has robust internal policies and procedures in place.
New and existing employees alike need clear direction: What types of supervisory activities does your organization engage in? How should these be executed, and when? What is the process for escalating issues up the chain of command? What are considered conflicts of interest?
Policies and procedures should be formalized, well defined, comprehensive – and, of course, accessible. They should reflect the strategic and organizational vision, while establishing clear roles and responsibilities for each position within the division.
At the FCAC, strong internal controls have helped create consistency in our compliance approaches, such as our case management process. In addition, whenever our activities have come under the public microscope – for example, by a Judicial Court or in Parliamentary sessions – robust policies and procedures have reassured others that we documented our work and followed due process in the spirit of fairness and transparency.
Lesson #3 – Aim to be a proactive and risk-based regulator
This leads to lesson three – aim to become a proactive and risk-based regulator. This is a theme I spoke to the other day.
Early on, our compliance operations at FCAC were complaint driven. Our compliance team focused on gathering its information almost entirely from individual consumer complaints. We would receive a complaint, and then act.
After a few years, we thought that there must be a better, more productive approach, as the approach we were using monopolized our scarce resources. A lot of time was spent reviewing matters with little to no significance on the broader marketplace. This made it difficult to stay on top of issues with potentially greater impact on consumers.
Also, being complaints-driven encouraged a reactive approach to compliance, rather than being forward-looking and trying to identify possible trends in the industry. If financial regulators have any hope of contending with the volume and complexity of issues that surface, our sights must target those of greatest consequence.
As our Agency matured, we moved to a risk-based approach to supervise the conduct of financial institutions, focusing on issues and institutions that carry the greatest compliance risk in the marketplace and that could have significant market and consumer impact. To that end, we now gather information from regulated entities on systemic compliance issues and we monitor the marketplace to proactively identify possible compliance matters that may arise.
As early as possible, a regulator should equip itself with the appropriate risk assessment tools to effectively:
- Focus on higher-risk entities compared to industry peers;
- Focus on higher-risk products or services, due to their complexity;
- Identify potential trends in the marketplace; and
- Use and assign internal resources to important priorities.
Lesson #4 – Foster strong relationships with regulated entities
Moving on to lesson four – value the importance of fostering strong business relationships with your regulated entities. Our experience has taught us that collaboration and the ability to have an open dialogue are fundamental to achieving richer outcomes. We work together with financial institutions to build and maintain a strong consumer protection framework.
One key practice we established over time is having dedicated relationship managers, who are responsible for a specific portfolio of financial institutions – handling their requests, working closely with each of them to identify and rectify issues, clarifying their regulatory obligations, and so on.
In our Agency’s early years, we didn’t assign an officer to a portfolio, and soon realized that this wasn’t the most productive way to nurture relationships or promote compliance. It often resulted in misunderstandings, disagreements or unresolved opposing views.
Having dedicated relationship managers has been beneficial for both sides. It enables more fruitful dialogue, reduces uncertainty, and promotes greater collaborative problem solving. This has made it possible to raise the level of compliance effectively and constructively.
Today, in the course of supervising a range of compliance issues in the federally regulated financial sector, our Agency generally receives great cooperation and responsiveness from financial institutions.
We found that it is much more satisfying for the members of our staff to collaborate on finding solutions rather than on finding fault.
Lesson #5 – Engage all stakeholders
Another approach we use for relationship building – not just with regulated entities but all of our community stakeholders – is actively involving them on topics we are studying and initiatives being planned. This is the fifth big lesson we’ve learned over the years: engage stakeholders meaningfully in your work.
Such an approach makes good business sense, both in the short-term for our Agency’s current needs, and in the long-term for enduring projects and activities.
As one example, we have found formal industry consultations extremely valuable in developing guidance for those we regulate. We want to know the industry’s views beforehand to ensure our compliance materials are practical, effective and engender corporate acceptance and support.
On the flipside, the industry – including regulated entities, industry associations and other government departments – feels involved in important compliance-related matters that may have significant impact on their operations.
Formal consultative processes also enhance their understanding of our Agency’s role and work. And they create a sense of transparency and predictability from a regulator’s perspective.
Recently, the Government of Canada launched cross-country public consultations to invite stakeholders to comment on the development of a new and comprehensive financial consumer code. Individual Canadians from of all walks of life participated and shared their views on a range of consultation questions – from ways the code could help them make more informed financial decisions to additional tools our Agency may need to effectively carry out our supervisory role.
Such engagement keeps us tuned in, to the evolving needs of consumers, and ultimately, helps us better serve and protect them.
Lesson #6 – Be vocal in policy decision-making
Lesson six – While some of us are not policy makers, we can and should, as supervisory organizations, provide valuable input into the policy-making environment. Being in the trenches of consumer protection, we are well equipped to inform the policy dialogue.
When first created, our Agency wasn’t nearly as involved in the policy-making processes of government as perhaps we ought to have been.
That has changed. Today we are more engaged in contributing to policy discussions about consumer issues in the financial sector. We have gained a level of credibility with policy-makers and politicians, as a result of our valuable input over the years.
Lesson #7 – Empower consumers
The seventh and final lesson relates to our consumer education role: be a helpful, accessible and objective resource for consumers.
Since our inception in 2001, FCAC has been at the forefront in helping Canadians build their know-how – not just of financial topics but also their rights and responsibilities. In my view, it’s about empowering consumers. Education promotes self-protection. Financial literacy is the great enabler that allows people to enhance their financial well-being and security.
In this role too, our Agency evolved over time. Our initial focus was on being ‘content developers’, and we created considerable resources to help Canadians navigate the financial marketplace. From this foundation, we then shifted to being ‘content promoters’ – engaging in community outreach to promote both the value of financial education and the work of many other organizations in the financial literacy field.
FCAC has worked in another crucial way to educate Canadians: by encouraging financial institutions to use clear, plain language in their information materials. Ben Bernanke, former chairman of the U.S. Federal Reserve once said, “The capacity of any consumer, including the best informed, to make good choices among financial products is enhanced by clear and well-organized disclosures.”
Financial institutions must have an objective to give customers good information that they can make sense of. Too often, people can't get their heads around money matters because financial institutions' materials and application forms may be too complex, confusing – overwhelming. This is a consistent complaint we've heard from Canadians over the years. And it's a major obstacle to greater financial literacy.
But we must not neglect the fact that consumers also have responsibilities. This is another message we have sought to advance. Consumers can’t stay passive. They need to seek out advice, shop around and understand the agreements they are getting into. And importantly, they must be able to recognize when their rights are not met, and know how to exercise those rights and make a complaint. In the end, it all ties back to the importance of being financially literate.
An Ongoing Journey
If there’s an overarching theme to my retrospective today, it’s that supervision should be viewed as an ongoing journey – a work always in progress. As the industry, technology and consumer needs change, the role and approaches of the regulator must change as well.
At the Financial Consumer Agency of Canada, we have made considerable progress in fulfilling our consumer protection and education responsibilities for the benefit of all Canadians. It took time to get our bearings in place so that we could better define the Agency’s role as a regulator of market conduct. We built on our successes, learned from our misfires and challenged ourselves to be relevant for consumers and those we regulate.
Hopefully, our experience in Canada as I have touched upon today has provided some food for thought: new ideas, fresh perspectives and even validation for approaches that you have considered or are currently under review.
French economist Jean Tirole, who won this year’s Nobel Prize for Economic Sciences, once said that it’s not about advocating “necessarily more or less of the state, but rather better state intervention.”
While the environments in our respective countries may be different, all of us here are driven by the overriding goal of improving the outcomes of our work. The broad themes I have outlined, I believe, are sound guiding principles for strong, effective and responsive consumer protection no matter what jurisdictional variables a regulator may face.
In closing, please let me show you a short video that was recently developed by my Agency…
Thank you.
