IMPROVING ONTARIO'S FINANCIAL SERVICES REGULATION: Establishing a Single Financial Services Regulator

A DISCUSSION PAPER


September 2000


Introduction

The 2000 Ontario Budget announced the merger of the Ontario Securities Commission (OSC) and the Financial Services Commission of Ontario (FSCO) into a single financial services regulator. The announcement reflects the government's direction to create an effective one-window regulatory process to better serve and protect consumers, investors, pension plan members and industry participants.

The government intends to introduce legislation in the fall to create the Ontario Financial Services Commission (OFSC), a Crown Corporation with self-funding and rule-making authority responsible for regulating financial services in the Province.

David Young, Parliamentary Assistant to the Minister of Finance, the Honourable Ernie Eves, will lead consultations on this discussion paper with consumers, investors, pension plan members and industry participants across all of the regulated financial services sectors. Feedback and advice to the Minister from this consultation process will form the basis for legislation creating the Ontario Financial Services Commission.

The discussion, set out below, provides an overview of the Canadian financial services regulatory environment, outlines a vision for a new provincial regulator and sets out a proposed framework for harmonizing financial services regulation under the jurisdiction of the Province. To facilitate consultations and to solicit written comments, this discussion paper includes a number of questions.

Interested parties are invited to make written submissions by October 2, 2000. Written submissions should be sent to:

David Young, M.P.P
Parliamentary Assistant to the Minister of Finance
7 Queen's Park Crescent
Frost Building South, 7th Floor
Toronto, Ontario
M7A 1Y7

All submissions should indicate a contact person and contact details (return address, telephone, fax and e-mail address).

Parties interested in making an oral presentation to David Young should contact Melissa Cirinna at (416) 325-0393 or send e-mail at melissa.cirinna@fin.gov.on.ca.

Reason for Change: Ontario's Leadership Role

EXISTING REGULATORY STRUCTURE AND CONTEXT FOR CHANGE

Historically, each of the four financial sector pillars - banks, insurers, trust companies, and securities firms - was governed by separate legislation that granted the authority to provide a core financial service. Banks provided commercial and consumer loans, accepted deposits and offered chequing accounts. Insurers underwrote and sold insurance. Trust companies provided estate and trust administration and mortgage loans. Securities firms underwrote new issues of securities, and sold and advised with respect to securities in the primary and secondary markets. There was very little overlap between the products and services offered by each pillar and cross ownership between the pillars was limited or prohibited.

Ontario's financial services regulatory framework, like that in other Canadian provinces, was created when the four pillars were separate. The responsibilities of the regulators and the legislation under which they act assume that the institutions in various parts of the financial services sector and the regulatory issues pertaining to them are materially different.

Over the last several years, the Canadian financial services landscape has shifted. The pace of change is expected to continue and intensify, reflecting the evolving needs of both consumers and business, customer demand for new products and services, the advent of new information-based, electronic technologies and global competition from specialized financial institutions and capital markets. With the elimination of most of the rules separating the four pillars, Canadian financial regulation now allows far more competition among different types of providers. The result is that many of the products and services offered to consumers by the insurance, deposit-taking and securities industries are becoming virtually indistinguishable. Many financial services providers are developing products and services which cut across traditional regulatory boundaries.

Increasingly, financial products are emerging that are very similar, such as mutual funds and segregated funds. In this case, these products are distributed by individuals and organizations licensed by both the securities and insurance regulators. About 70 per cent of life insurance agents in Ontario are also registered to sell securities. From the consumer or investor perspective, the distinctions between these products may be very difficult to perceive. However, there can be substantive differences in the regulatory regimes that govern both the products and the distributors. The public is entitled to comparable disclosure and protections for similar products.

There is also a growing shift to defined contribution pension plans which give plan members choices on how to invest their pension assets. This marks a departure from the traditional role of the plan administrator, which included sole fiduciary responsibility for investing the fund. Given this trend, there is a need for regulators to clarify the plan administrator's fiduciary duties in these plans and to enhance protection for members to ensure that they have the tools to make informed investment decisions. Not only is harmonization needed across Canadian jurisdictions, there is also a need to clarify roles for pension, insurance and securities regulators and to create a level playing field for defined contribution pension plans.

The mismatch between the regulatory structure and the marketplace has resulted in duplication and overlap of regulations, different regulatory treatment of similar products, and gaps in consumer protection.

CANADIAN REGULATORY CONTEXT

The regulators in the Canadian financial services sector include the provincial and federal governments, the provincial securities regulators, the federal and provincial regulators of trust companies, credit unions and caisses populaires, insurers, and pension plans, and the federal banking regulators. The federal regulatory effort is focused on ensuring public confidence in the Canadian financial system. This is achieved through prudential regulation which includes determining whether an institution is in sound financial condition and encouraging management and boards to adopt policies and procedures to control and manage risk. Regulation is aimed at the corporate level - very few laws apply to the consumer beyond some cost of borrowing and service charge disclosure requirements. While the latest federal proposals to reform regulation of the financial services sector would introduce two new federal agencies, the Financial Consumer Agency and the Canadian Financial Services Ombudsman, the powers of these agencies to protect consumers are limited to federally regulated institutions.

Provinces and territories regulate securities, insurance, trust and deposit-taking institutions. Securities regulators principally focus on market regulation - ensuring capital markets and market participants operate in a way that is fair and transparent, and that consumers are protected from unfair, improper or fraudulent practices. Deposit-taking institution regulators and insurance regulators look at both solvency and consumer protection concerns. Federal and provincial pension regulators protect the entitlements of pension plan members, and funding of pension plans.

There are also self-regulatory organizations in the insurance and securities industries, as well as stock exchanges and compensation funds (such as the Canadian Investor Protection Fund, the Canadian Life and Health Insurance Compensation Corporation and the Deposit Insurance Corporation of Ontario) that supervise market activity.

In short, there are a significant number of regulatory bodies in Canada. A financial institution operating in every province and territory with both a securities subsidiary and an insurance subsidiary may have to deal with over 30 regulatory authorities, many of them with different rules and varying protections for consumers.

Provincial regulators have recognized the challenges this structure creates for the market and have taken steps to co-ordinate their activities. The securities, pension and insurance regulators have established national associations to facilitate discussions and harmonization initiatives. These associations are the Canadian Securities Administrators (CSA), the Canadian Association of Pension Supervisory Authorities (CAPSA) and the Canadian Council of Insurance Regulators (CCIR).

Several years ago, the federal government, Ontario and other interested provinces tried to forge consensus on a National Securities Commission. Although that effort was unsuccessful, it led to the CSA initiative to create a mutual reliance system in the securities sector by enabling a lead regulator to handle filings, applications and registration. Ontario remains committed to working closely with the financial services authorities of other Canadian jurisdictions to co-ordinate financial services regulation across the country.

A national forum of pension, securities and insurance regulators has also been initiated to discuss common issues arising from the growing integration of the financial services sector. This Joint Forum of Financial Market Regulators has started work on co-ordinating and streamlining market regulatory activity in Canada, across sectors and across provincial jurisdictions. Some recent examples of Joint Forum initiatives include: establishing a financial planning proficiency standard; working to harmonize the regulation of segregated funds and mutual funds; and developing standards for investment disclosure for defined contribution pension plans.

ONTARIO LEADERSHIP

The Ontario Government has taken a number of steps in recent years to strengthen the regulation of Ontario's financial services sector including: giving the OSC rule-making authority and self-funding status; merging the Ontario Insurance Commission, the Pension Commission of Ontario and the Deposit Institutions Division of the Ministry of Finance to form FSCO; and, more recently, passing legislative amendments to give the OSC additional powers to enhance investor protection, streamline regulation and promote harmonization with other provinces and territories.

The OSC and FSCO have also been working co-operatively to address the issues raised by regulatory mismatch and have taken the initiative in dealing with some of the most immediate challenges. On a provincial basis, the two regulators have established an informal council, the Ontario Council of Financial Services Regulators, to discuss and develop co-ordinated policies; on a national basis, both regulators have been driving forces in the creation of the Joint Forum of Financial Market Regulators.

Although these informal harmonization initiatives are promising, the process has its own complexities; it is very slow and risks leaving the regulatory structure behind the changes occurring in the markets and financial services industries. More effective and proactive action could be taken more efficiently if the two agencies were combined.

The pace of change in the provision of financial services is extremely fast, and all indications point to that pace accelerating. New products, services and ways of delivering them to consumers, such as e-commerce and on-line trading, appear almost daily. A regulatory framework designed in the era when deposit-taking institutions, securities firms and insurers operated entirely different businesses cannot adapt fast enough to address new issues, even with the many positive changes that have been made by governments and regulators in recent years. Both consumer protection and industry efficiency may be at risk of being compromised. By acting now, the Government is taking timely action to respond to this risk by ensuring emerging issues can be dealt with quickly, effectively and with a single, strong voice.

Ontario is the centre of Canada's financial services markets and it is Ontario's consumers and industry members who will benefit most from the improvements proposed. An integrated financial services regulatory framework here would foster international confidence in Canada's markets by consolidating financial services regulation to make Ontario a more attractive place in which to invest and set up business.

It is timely for Ontario to create a new regulatory agency by merging FSCO and the OSC into the Ontario Financial Services Commission. An integrated, efficient regulatory framework for the financial services sector will deliver stronger consumer protection and will demonstrate Ontario's ability and willingness to adapt to the evolving financial services marketplace. It is the logical next step in the process that began with giving rule-making powers to the OSC and forming FSCO.

HARMONIZATION AND MERGER ACTIVITIES IN OTHER JURISDICTIONS

Securities, insurance, and pension regulators have been discussing harmonization and rationalization of financial services regulation for the past several years. Regulators in several other provinces have also initiated discussions about possible restructuring and mergers, and have shown renewed interest as a result of the Ontario budget announcement.

Quebec initiated a review of its financial sector and introduced reforms to share responsibility for regulating the distribution of mutual funds, insurance products and financial planning services between the Commission des valeurs mobilières du Québec and the Bureau des services financiers.

Ontario has been reviewing the regulatory restructuring and harmonization initiatives of other jurisdictions in order to benefit from their experiences. The province recognizes that the trend in a competitive global financial marketplace is to apply integrated regulation across the individual financial services industries in order to better protect consumers and ensure healthy financial markets.

The most significant reforms in harmonizing regulation of the financial services sector have occurred in Australia and the United Kingdom. Australia, in particular, has been a leader in responding to the complex, competitive and global regulatory environment. In July 1999, Australia brought all financial institutions under the supervision of three regulators: the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority and the Reserve Bank of Australia. ASIC now regulates all the market conduct (advising, selling and disclosure on financial products and services) of the securities, insurance, pension and banking industries in Australia. In February of this year, the Australian Government released draft legislation to implement the recommendations of a comprehensive review of Australia's financial system, structure and regulation to further strengthen and harmonize its financial services sector. The key aspects of the legislation are:

  • uniform regulation of all financial products

  • a single licensing framework for financial service providers

  • minimum standards of conduct for financial service providers dealing with retail clients

  • uniform disclosure obligations for all financial products provided to retail clients

  • flexibility for authorization of market operations and clearing and settlement facilities.

The scope of ASIC's authority in market regulation and its integrated application across financial sectors will enable ASIC to create a one-window approach to regulation and begin to level the playing field.

In the United Kingdom, the Financial Services Authority (FSA) will become the sole regulator for the financial services industry (insurance, investment business and banking). The U.K. recently announced a target of about one year to complete and implement the Financial Services Markets Act replacing the different frameworks under which various regulators currently operate. This will consolidate existing law and self-regulatory requirements.

Other jurisdictions are also moving toward consolidation. On July 1, 2000, the Japanese government established a new regulatory body, the Financial Services Agency, to oversee securities, banking, insurance and other financial activities. On July 11, 2000, France announced plans to merge the Commission des Operations de Bourse, the country's top capital markets regulator, and the Counseil des Marches Financiers, which supervises market activity.

Vision for the Ontario Financial Services Commission

In moving towards a single financial services regulator, the government's goal is to create an integrated financial services regulatory agency that will lead Canada in consumer and investor protection.

The objective is to establish a one-window approach that will be more efficient and effective - gaps and duplication in regulation across the financial sectors in the Province will be eliminated. Consumers will be given adequate information to make informed decisions. They will be treated fairly and have adequate avenues for redress across financial sectors. Similar financial products and services in Ontario will be given equivalent and fair regulatory treatment.

The expectation is that the new financial services regulator will be in a better position to undertake the following tasks:

PUBLIC PROTECTION

  • ensure greater consumer and investor protection from unfair, improper or fraudulent practices within Ontario's financial services sector

  • enhance enforcement capabilities and aggressively enforce clear and unambiguous rules to protect consumers, investors and pension plan members

SIMPLIFY AND REDUCE RED TAPE

  • simplify financial services regulation in Ontario by creating a one-window approach to regulation

  • streamline and eliminate duplication, create a more level playing field for financial services products and institutions and create a business and regulatory climate that encourages investment, competition and jobs

FAIRNESS AND TRANSPARENCY

  • ensure common standards so that similar financial products offered by institutions now separately regulated by the OSC and FSCO are subject to equivalent regulation

  • ensure managers of pools of capital operated by mutual funds, insurance companies and pension funds are subject to similar rules of conduct

  • promote public confidence in and understanding of the financial system, including adequate disclosure of the benefits and risks associated with different kinds of investments and financial dealings

MARKET FREEDOM

  • provide a regulatory framework that is flexible enough not to impede new products, new technologies and competition, and permit market participants to respond to change in an innovative, timely and efficient manner

COST EFFECTIVENESS

  • enable more effective use of existing resources to improve services to consumers, investors and the industry itself.

Questions

  1. Is the vision and scope for the new regulator as described in this paper appropriate?

  2. The proposed name for the new regulator is the Ontario Financial Services Commission. Does the proposed name for the new agency adequately capture the activities of the new regulator? If not, what other name should be considered?

Key Elements of Proposed Legislation

The proposed legislation would establish the Ontario Financial Services Commission, a single integrated provincial regulator which would combine FSCO and the OSC into a comprehensive financial services regulator for the Province.

The legislation would establish the OFSC as a self-funded, non-share capital corporation with rule-making powers.

The proposed OFSC would administer, under the authority of a new Act, the statutes which are currently the responsibility of FSCO and the OSC. Thus the OFSC would have regulatory responsibility for:

  • all market participants as defined in the Commodity Futures Act

  • all co-operative corporations to which the Co-operative Corporations Act applies

  • all credit unions, caisses populaires and leagues to which the Credit Unions and Caisses Populaires Act, 1994 applies

  • all persons engaged in the business of insurance and governed by the Insurance Act

  • all corporations registered or incorporated under the Loan and Trust Corporations Act

  • all mortgage brokers registered under the Mortgage Brokers Act

  • all persons who establish or administer a pension plan or pension fund under the Pension Benefits Act and all employers or other persons on their behalf who are required to contribute to a pension plan or pension fund

  • all market participants, as defined in the Securities Act.

The OFSC would also have responsibilities under the Marine Insurance Act, the Motor Vehicle Accident Claims Act, the Prepaid Hospital and Medical Services Act and the Registered Insurance Brokers Act.

Questions

  1. Are there other financial services sectors or regulatory activities which should be included under the responsibilities of the new agency?

  2. Are there financial services sectors or activities that should not be regulated by the new agency?

AMALGAMATION

The goal is to ensure a smooth transition to the new regulatory entity for staff and stakeholders of both existing organizations.

The proposal is to introduce a single bill that would be proclaimed in two phases. In the first phase, the OFSC would be established to provide a framework for, and to supervise the establishment of, a single commission responsible for financial services regulation. The OSC and FSCO would continue as separate regulatory authorities until the second phase.

In the second phase, the OSC and FSCO would merge with and continue as the OFSC with rule-making powers.

GOVERNANCE

The proposed governance structure provides for an independent Commission accountable to the Minister of Finance. It is proposed the Commission have at least nine and not more than 18 members, appointed by the Lieutenant Governor in Council (LGIC) with a view to ensuring that among its members, there is experience and expertise in the regulated financial services sectors. The LGIC would designate a member of the Commission as full-time Chair and Chief Executive Officer of the Commission and up to three full-time Vice-Chairs. The proposed term of office for members of the Commission would not exceed five years.

The new Commission would have decision-making, rule-making and adjudicative powers, similar to the current Ontario Securities Commission. Panels of one or more Commission members would conduct hearings and rule on enforcement and other issues. The Commission would have the power to make by-laws which would be subject to the approval of the Minister of Finance. The members of the Commission would also serve as its Board of Directors, responsible for overseeing the management of the financial and other affairs of the Commission.

It is proposed that the Commission have the authority to delegate any of its powers or duties to any employee of the Commission, except the power to conduct hearings. This authority currently exists under the Securities Act and in legislation administered by FSCO.

A separate Pension Tribunal is also proposed, of which at least three members would also be members of the Commission. The other members of the Tribunal would be qualified candidates appointed by the LGIC.

The Pension Tribunal would only have adjudicative authority. For pension hearings, the panel would be chaired by a member of the Commission who is also a member of the Pension Tribunal. Other members of the panel would be selected from the Tribunal. This will ensure pension panels have the representation and expertise needed to effectively deal with pension matters.

The proposal to create a separate Pension Tribunal reflects the unique nature of pension hearings, which often involve disputes between employers and employees.

There would continue to be a Superintendent who would exercise powers similar to those exercised by the Superintendent of Financial Services under the Insurance Act and the Pension Benefits Act. Decisions or proposed orders of the Superintendent would be subject to a hearing by either the Commission or the Pension Tribunal. The Commission would designate one of its members (who could be a Vice-Chair) or an employee to be Superintendent.

Questions

  1. Should there be a separate Pension Tribunal to hear pension matters?

  2. Is the proposed structure of the Pension Tribunal appropriate?

RULE-MAKING: REGULATORY TOOL TO ACHIEVE HARMONIZATION

Background

To achieve the goal of harmonization and to ensure fairness, consistency and a level playing field across financial services sectors under the jurisdiction of the Province, it is proposed that the OFSC have rule-making authority for the statutes it will be charged with administering and enforcing.

The rule-making process is responsive and flexible, ensures appropriate accountability for the regulatory system and allows for openness, public participation and certainty in regulation.

The OSC currently has rule-making authority as defined under Section 143 (1) of the Securities Act and Section 65 of the Commodity Futures Act. The OSC was given rule-making authority on January 1, 1995 to give the Commission sufficient authority to regulate effectively in a flexible, responsible and accountable manner as recommended by the Task Force on Securities Regulation (Daniels' Report).

Rule-making in the Securities Act and Commodity Futures Act gives the regulator the ability to implement rules, to amend or repeal existing regulations as necessary in the face of a rapidly changing financial marketplace, while imposing checks and balances on the exercise of that authority. With rule-making, the regulator is able to capitalize on the specialized expertise of people who are familiar not only with the framework and philosophy of the legislation but also with the practices of the regulated sectors. This expertise is accessed through both Commission staff and stakeholders, including the public at large, in the development, review and comment on proposed rules.

Regulators generally use interpretative policies to assist their stakeholders. While such policies are helpful in interpreting the law, they are not binding. Often this results in lack of consistency in the application of the law as well as inefficient use of resources, both of the regulator and the persons affected. Rules, on the other hand, are binding and provide greater certainty in the regulatory environment. They make for a level playing field among sector participants.

Currently both the OSC and FSCO use non-binding tools to assist the regulated sectors and to provide direction on various statutory provisions. However, where a matter requires a mandatory direction, the ability to make rules, such as the OSC's current rule-making power, is an efficient and transparent way to regulate.

Rule-Making Process

To ensure accountability, it is proposed that the rule-making process continue to be open and transparent by providing notice of proposed rules and inviting public comment. The notice would set out the proposed rule, a statement of its substance and purpose, a reference to the authority under which it is proposed, a discussion of alternatives considered, reference to any significant reports, and a description of its anticipated costs and benefits. Following the initial publication of a proposed rule, the public would be given an appropriate period of time to consider it and to submit comments to the Commission. Under the current OSC rule-making process the period is 90 days. If a proposed rule is changed materially as a result of comments received, the Commission would subject the amended rule to a subsequent notice and comment period.

Once the Commission has adopted a rule after the notice and comment process, the Commission would deliver to the Minister of Finance a copy of the rule, amended to reflect comments, and publish a summary of the comments received on the rule and the Commission's response to significant issues brought to its attention. Within a reasonable period after a rule's delivery to the Minister (currently 60 days under the OSC process), the Minister may approve or reject the rule or return it to the Commission for further consideration. If the Minister does not approve, reject or return the rule, it becomes effective within a specified time period (currently 75 days after delivery to the Minister, unless a later date is specified in the rule).

The transparency provided by the notice and comment process sets up procedural safeguards which allow stakeholders' input to rules under which they would conduct business. The Minister of Finance can choose whether to approve or reject a proposed rule, or send it back to the Commission for reconsideration. In addition, the Government retains the ability to make regulations wherever there is rule-making. In the event of an inconsistency between a rule and a regulation on the same matter, the regulation would prevail.

The rule-making process is flexible and responsive to the financial marketplace and accountable to the Minister of Finance. Employing rule-making authority where it makes sense will extend its benefits across the regulated financial sectors in Ontario.

Current Rule-Making by the OSC

No change is proposed to the subject matters on which rules may be made under the Securities Act or the Commodity Futures Act.

Section 143 (1) of the Securities Act lists 56 areas in which the OSC may make rules, including matters relating to: requirements for registrants; disclosure and use of information; the listing or trading of publicly traded securities; prospectus requirements; standards of practice and business conduct; sales practices; and requirements for record-keeping.

Section 65 of the Commodity Futures Act permits the OSC to make rules relating to such matters as: registration including applications, suspensions, cancellations and reinstatements; matters relating to registrants; disclosure and use of information; requirements of financial accounting; and regulating recognized commodity futures exchanges.

Proposed Rule-Making Under FSCO Statutes

The introduction of rule-making authority will mostly affect FSCO statutes.

It is proposed that the OFSC be able to make rules under the specific Acts administered by the new agency. The rule-making process and accountability mechanisms, which as presently proposed mirror those currently set out in the securities legislation, would be set out in the enabling legislation, while the individual statutes would specifically enumerate "heads of power" for rule-making authority.

In proposing rule-making powers for the OFSC, the Government is reviewing FSCO statutes to determine the appropriate areas for rule-making. As a starting point, the regulation-making powers in the FSCO legislation are being reviewed as candidates for rule-making heads of power. Rule-making is being proposed in those areas which are currently governed by regulation or policies. The objective would be to co-ordinate rule-making heads of power in the FSCO statutes with those in the Securities Act and the Commodity Futures Act. This will give the new regulator rule-making authority across the statutes it administers in order to begin the process of leveling the playing field and harmonizing across financial services sectors.

The review is also highlighting areas where it may be appropriate and in the public interest for the Government to retain sole responsibility for making regulations, with no rule-making authority for the new agency. Such areas may relate to substantive public policy matters or interaction with other ministries or provinces/territories. Examples of regulation-making authority that may not be appropriate for rule-making are discussed under the specific Acts.

In addition, rule-making authority may not be appropriate for the Loan and Trust Corporations Act, the Motor Vehicle Accident Claims Act and the Pre-Paid Hospital and Medical Services Act because of the unique nature of these Acts and the Government's continuing review of these areas.

Compulsory Automobile Insurance Act

One potential area for rule-making under this statute could relate to the Facility Association, and could mirror the regulation-making power in section 15(1)(c.1) of the statute which permits making amendments to the Facility's Plan of Operation.

Regulation-making powers currently in the Act that may not be appropriate for rule-making include: prescribing identifying markers such as vehicle identification numbers and providing for their use, and reporting certain information to the Minister of Transportation.

Co-operative Corporations Act

As the Minister of Finance announced in the budget speech on May 2, 2000, the Government will examine ways to revitalize the agricultural co-operative sector by streamlining the regulatory framework for financing new co-operatives. It may not be appropriate to give the new Commission extensive rule-making power with respect to co-operatives pending this review.

However, given that FSCO's responsibility to approve offering statements is very similar to duties exercised by the OSC for prospectus reviews, it is proposed that rule-making authority under this statute be limited to the financing of co-operatives. The new Commission could make rules prescribing the content and use of offering statements; the disclosure of material facts in the sale of securities by co-operatives; and any exemptions to those requirements. Offering statements are addressed in sections 34(2), 35(2),(3) and (6), and 186(a.1) of the statute and in Regulation 178, sections 12, 12.1, 12.4 and 12.6.

Credit Unions and Caisses Populaires Act, 1994

Rule-making is proposed under this Act to include matters pertaining to incorporation, internal governance, and offering statements, among other things.

For example, the type of rule-making authority proposed for offering statements is similar to that in the Securities Act regarding prospectuses and to that proposed for offering statements under the Co-operative Corporations Act (such as prescribing requirements for the content and use of offering statements, and the disclosure of material facts in the sale of securities by credit unions, and any exemptions to those requirements). Offering statements are governed by provisions of the Credit Unions and Caisses Populaires Act, 1994 in sections 77(2), 78, 80, 83 and 318; and in Regulation 76/95, sections 6 to 11.

Another proposal for rule-making authority relates to internal governance, which could include prescribing the requirements for director training programs; matters relating to the duties and functions of audit committees and of credit committees; matters to be shown in financial statements; and limits regarding the bonding of, and insurance coverage for, directors, officers, agents and employees of the credit union. These items currently exist in Regulation 76/95 under the Credit Unions and Caisses Populaires Act, 1994 and in sections 121(1), 134(2), 137, 151, 317(1)4 and 27, and 320 of the statute.

It may not be appropriate that current regulation-making authority relating to the Deposit Insurance Corporation of Ontario (DICO) and stabilization authorities be subject to rule-making authority. The result would be that DICO, a self-regulating organization, would not be directly regulated by the proposed OFSC, and would continue to report to its stakeholders and the Minister of Finance as it is currently required to do under the Act.

Insurance Act

Proposed rule-making authority under the Insurance Act relating to automobile insurance could include: Designated Assessment Centres; property damage; underwriting, rates and risk classification; pre-inspection of automobiles and market conduct.

As well, there could be rule-making in relation to certain limited aspects of statutory accident benefit claims. For example, this could include rules relating to: disputes between insurers over who is required to pay statutory accident benefits; agreements to settle claims and disputes; assignments of statutory accident benefits; and prescribing classes of persons, classes of automobiles, and terms and limits pertaining to indemnification between insurers. The above items are currently found in Regulation 283/95, Regulation 664, Regulation 403/96, and Bulletin A-5/95.

Market conduct rules would permit the Commission to make rules prescribing standards of practice and business conduct for insurers; prescribing any activity or failure to act that constitutes an unfair or deceptive practice; and prescribing disclosure or furnishing of information to applicants for insurance, policyholders and the public. Current authority for corresponding regulation-making authority can be found in sections 121(1), 229 and 438 of the Insurance Act. Market conduct is also regulated pursuant to Regulation 7/00, and Bulletins A-11/97 and A-2/98.

Other potential heads of rule-making authority could include matters relating to: compensation corporations; regulation of agents and adjusters; group insurance; cost of borrowing; and regulation of variable insurance contracts (segregated funds).

It may not be appropriate to include rule-making authority relating to the level of statutory accident benefits, requiring insurers to offer optional benefits, or prescribing rules for interpreting the relevant regulations. As well, regulations relating to tort provisions, uninsured motorist coverage, information provided to the Ministry of Community and Social Services, and amounts payable to the Ministry of Health, may not be suitable candidates for rule-making. The investment provisions are under legislative review and therefore not currently being considered for corresponding rule-making authority.

Mortgage Brokers Act

Proposals for rule-making authority under this statute could include registration, prospectus requirements and market conduct.

Rule-making authority for market conduct may involve rules prescribing and establishing standards of practice for mortgage brokers. Market conduct issues are currently addressed by section 33(b), (h) and (i) of the statute, and Regulation 798 under the Mortgage Brokers Act.

Pension Benefits Act

The pension sector is unique in that pension plan members are often required to participate in pension plans as a condition of employment and pension issues, in most cases, are the focus of debate between employers and employees.

Regulation-making authority under the Pension Benefits Act which may be appropriate for rule-making authority include: pension plan and pension fund administration requirements, such as plan registration requirements; investment matters; time frames for filing information; the required contents of any form or application; rules regarding the records that must be kept by plan administrators; rates of interest; and the method of calculating interest payable.

An issue for consideration is whether other, more substantive, regulation-making authority should be considered for rule-making. In this regard, rule-making authority could include: employer funding obligations; criteria that must be complied with before any surplus may be paid out of a pension fund; the extent to which pension benefits are guaranteed by the Pension Benefits Guarantee Fund; methods for calculating the value of assets and liabilities of pension plans; rules governing the wind-up of pension plans including the determination of priorities of payment and the allocation of assets; the circumstances under which funds may be withdrawn from prescribed retirement savings arrangements; and the calculation of pension benefits on marriage breakdown.

The regulation-making authority to exempt pension plans, pension funds, employees, administrators and other persons from the application of all or parts of the Act could also be considered for rule-making authority.

Questions

  1. Are there areas of regulation-making that should remain solely within the Government's purview and not be subject to potential rule-making? If so, which regulation-making powers should not be subject to corresponding rule-making authority, and why?

  2. In what ways should rule-making powers be expanded in order to achieve a level playing field across financial services sectors?

  3. Should common rule-making powers, such as disclosure requirements, financial reporting and procedures for filing information, which cut across all the regulated sectors, be included in the enabling legislation?

  4. Are there any comments regarding the current OSC rule-making process and any suggestions for improvements?

  5. What is the most effective process for the new agency to communicate proposed rules, and more specifically, to provide notice of proposed rules?

INVESTIGATION, EXAMINATION AND ENFORCEMENT

The proposed investigation, examination and enforcement powers for the OFSC build on the provisions in the Securities Act and FSCO statutes.

Both FSCO and the OSC conduct informal investigations. In addition the OSC and, in certain cases, FSCO conducts formal investigations pursuant to orders. It is proposed that the OFSC's formal investigation powers be adapted from the existing provisions of the Securities Act. Furthermore, it is also proposed that there will continue to be provisions allowing for examinations and inquiries without the need for a formal investigation order.

To ensure that the new Commission has the powers needed to adequately perform its investigation and enforcement responsibilities, a number of new provisions are proposed.

It is proposed to include a provision, currently in the Insurance Act, that an officer, director or employee who is served with a summons to appear with corporate records will not be able to take the position that the records are not in his or her possession. Similarly, the provision currently in the Insurance Act permitting the Commission, upon obtaining a search warrant, to enter private dwellings to obtain relevant documents would also be included.

Another significant proposed change would permit evidence and material obtained under an investigation order to be disclosed without notice in certain additional circumstances, including disclosure to other regulatory agencies and self-regulating organizations.

Questions

  1. Will the new regulatory agency need investigation and enforcement powers in addition to those contained in current legislation?

FEES

The new agency would operate on a cost-recovery basis. It is proposed that the OFSC have the power to make rules covering fees and/or assessments, as authorized by statute. In setting fees and assessments, the new agency would attempt to ensure each regulated sector pays its fair share of costs. The new regulator would ensure no market sector would subsidize any other market sector's fees and revenues.

The proposed legislation will not interfere with the OSC's commitment to reduce fees for market participants. The OSC has been successful in reducing fees by 20 per cent and is on track with its initiative to reform the fee structure to ensure fees more closely match expenses.

OTHER POWERS

It is proposed that the OFSC have the power to enter into agreements and Memoranda Of Understanding (MOU) with financial services regulatory authorities, self-regulatory organizations and any governments or government agencies, within Canada or abroad. The Commission would be required to publish every MOU and the Minister of Finance would have 60 days from the date of publication to approve or reject an MOU.

To meet its short-term needs, it is proposed that the Commission have the authority, subject to Ministerial approval, to borrow money for periods of not more than two years.

ACCOUNTABILITY

The goal is to ensure the OFSC carries out its responsibilities in an open, transparent and accountable way. The new agency will be accountable to the Provincial Legislature through the Minister of Finance.

It is proposed that public accountability be achieved by:

clear governance structure
  • the Lieutenant Governor in Council (LGIC) would appoint members of the Commission for a term not to exceed five years and designate a Chair and up to three Vice-Chairs

  • the LGIC would appoint non-Commission members to the Pension Tribunal

transparency and public accountability in rule-making
  • rules would be published for public comment and the Minister may approve, reject, or direct the OFSC to reconsider any rule

  • the Government may also make regulations with respect to any matters on which the OFSC may make rules

  • in the case of an inconsistency between a rule and a regulation on the same matter, the regulation would prevail

clear reporting and accountability mechanisms
  • the Minister and the OFSC would enter into a Memorandum of Understanding setting out their respective roles and responsibilities, the accountability relationship and the responsibility of the Commission to provide the Minister with business plans, operational budgets and plans for any proposed significant changes in the operations or activities of the Commission and any other matter that the Minister may require

  • the Minister would receive an annual report and audited financial statements and the Provincial Auditor may also audit the financial statements of the Commission

accountability to Legislative Assembly
  • the Minister would table the Commission's annual report with the Legislative Assembly

  • every five years, the Minister would appoint an advisory committee to review all or part of the OFSC legislation, regulations and rules deemed appropriate by the Minister, solicit the views of the public and prepare a report

  • the Minister would table that report in the Legislature and a select or standing committee of the Legislative Assembly would be appointed to review the report, hear from interested parties and make recommendations to the Legislative Assembly

transparent operating framework
  • the new agency would deliver to the Minister and publish an annual statement of its proposed priorities and an outline of anticipated expenditures for the next fiscal year

  • before publication of its statement of priorities, the OFSC would invite public comment on the matters that should be identified as priorities

other accountability measures
  • Minister's approval would be required for any borrowing by the OFSC

  • agreements and Memoranda of Understanding between the OFSC and another financial services regulatory authority, any organization, and any government or government agency would be delivered to the Minister and published, and the Minister would have 60 days to approve or reject any agreement or MOU

Questions

  1. What additional accountability measures may be needed given the proposed rule-making and enforcement powers of the new agency?

  2. Should the proposed five-year review cover all the statutes under the administration of the new agency, or be selective? Is every five years an appropriate time frame for a review?

ORGANIZATIONAL STRUCTURE

With respect to the organizational structure, it is proposed that a functional approach be used to merge the business activities of both organizations. Although a number of factors need to be taken into consideration, including a cost-benefit analysis, resources and staffing implications, the intent is to integrate similar activities and functions within a common business group. For example, FSCO licensing and registration and OSC registration both engage in similar activities. The new Commission may wish to consider merging these activities into a single business. Other similar functions include: FSCO examinations and OSC compliance; and FSCO investigations and enforcement and OSC investigations and enforcement.

Questions

  1. How should the new organization be structured to meet the challenges of the marketplace?

  2. How should consumer complaints be handled in the new regulatory process?

  3. Currently there is an Ombudsman designated under the Insurance Act. Should the role of the Ombudsman be expanded to other sectors of the new agency? The federal government has introduced Bill C-38, to create a Canadian Financial Services Ombudsman. Should the province work with other jurisdictions and Ottawa to create a national financial services Ombudsman?

Conclusion

The Ontario Government's intent is to introduce legislation in the upcoming fall session of the Legislature to merge the Ontario Securities Commission and the Financial Services Commission to create the Ontario Financial Services Commission - a new, more effective financial services regulator that will have the tools to promote a healthy environment for business activity, financial market integrity and consumer, investor and pension plan member confidence and protection.

Background Information

  ONTARIO SECURITIES COMMISSION FINANCIAL SERVICES COMMISSION OF ONTARIO
Budget
(projected 2000/2001)
Revenue: $73.1 m
Expenditures: $51.5 m
Capital: $4.1 m
Revenue: $36.9 m
Expenditures: $36.9 m
Actual 1999/2000 Budget Revenue: $82.4 m
Expenditures: $41.3 m
Capital: $5.9 m
Revenue: $35.1 m
Expenditures: $35.9 m
Distributions to Government of Ontario
(projected 2000/2001)
$17.5 m Currently all revenues go to the Consolidated Revenue Fund (CRF).
Number of Employees 312 375
Corporate Structure Self-funded Crown corporation Provincial agency of the Ministry of Finance
Governance Structure Commission comprised of 12 members: a full-time Chair, two Vice-Chairs and nine part-time members. The Board oversees the management of financial and other affairs of the OSC. The Commission is also an administrative, adjudicative and policy-making body. Commission is comprised of: the Chair and two Vice-Chairs; the CEO/Superintendent of Financial Services; and the Director of Arbitrations. The Superintendent is responsible for financial and administrative affairs of FSCO. There is also an independent Tribunal that holds hearings. The Tribunal consists of 12 part-time members, including a Chair and Vice-Chair that are also Commission members.
Financial Services Sectors Served Capital markets registrants, investment products (including mutual funds), markets and clearing and settlement systems; all issues of securities traded in Ontario's capital markets. Insurance
Pensions
Credit Unions/Caisses Populaires
Co-operatives
Mortgage Brokers
Loan and Trust
Responsibility for Policy Commission makes rules (subject to Ministerial approval); Commission makes recommendations to the Minister of Finance for changes in legislation Commission recommends to the Minister of Finance changes in legislation. The Superintendent has the authority to make regulatory policy.
Statutes Administered
  • Commodity Futures Act

  • Securities Act
  • Co-operative Corporations Act

  • Credit Unions and Caisses Populaires Act, 1994

  • Compulsory Automobile Insurance Act

  • Financial Services Commission of Ontario Act, 1997

  • Insurance Act

  • Loan and Trust Corporations Act

  • Marine Insurance Act

  • Mortgage Brokers Act

  • Motor Vehicle Accident Claims Act

  • Pension Benefits Act

  • Prepaid Hospital and Medical Services Act
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