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02 December 2014
We know the law, but how well do we know our regulators? In an era where regulation is surpassing law on the radars of most in-house counsel and other risk managers, this question has never been more pressing. How do we best navigate regulators in order not only to get the best results, but also to preserve and continue good relations? This update looks at the Canadian insurance regulator and considers both the facts and the softer issues that are often critical to making the right judgement.
First, the structure, remit and objectives of the regulator should be considered. At present, there is an increasing global trend for a combined regulator to cover all major financial services, reflecting a growing acceptance that insurance is inextricably intertwined with banking, asset management and other sectors.
The Office of the Superintendent of Financial Institutions (OSFI) is the Canadian federal regulator of banks, insurers, credit unions and loan and trust companies, while securities dealers and asset managers are currently regulated provincially. The superintendent of OSFI is appointed by the executive branch of the Canadian government. In practice, OSFI operates independently of – but is sensitive to – government. In a number of instances (eg, acquisition of more than a 10% interest in an insurer), ministerial approval is required, and even then the minister acts on the advice of OSFI. It would be a rare instance in the insurance sector for the minister to override OSFI's recommendation. However, any 'independent' regulator is subject to being reined in where it is deemed to have overstepped the mark.
It is also worth considering the emphasis that the regulator places on, for example, conduct as opposed to prudential issues. In addition, what is the regulator's style? Is it consensual, with consultation on proposed rules? Or is it aggressive – the 'stick' approach – involving sudden, draconian fines?
OSFI is the federal prudential regulator, while the Canadian provinces regulate local licensing and market conduct. In that sense, regulation of insurers' solvency is largely a separate matter from regulation of consumer protection in Canada.
Since the 2008 economic crisis, during which Canadian financial institutions fared better than institutions in other countries and were consequently seen as well regulated, OSFI has been perceived and perceives itself as a senior regulator worldwide. As a result, OSFI works closely with other regulators to lead new international regulatory initiatives.
OSFI professes to adhere to the Anglo-Canadian style of consultation, but it takes a cautious approach and does not succumb to pressure. On the other hand, often OSFI can be supportive by helping to find creative ways to achieve insurers' legitimate goals within the regulatory framework.
OSFI consults with the industry by issuing new requirements in draft in advance and by inviting comment. Rarely does an OSFI initiative go by the wayside and only rarely will OSFI substantially diverge from the approach taken in the published draft. OSFI attempts to obtain the industry's buy-in to proposed new regulatory requirements, but regardless of any remaining controversy, OSFI expects compliance once the requirement has been finalised.
Personalities certainly matter. The OSFI website increasingly highlights the personal profiles of its senior people. Especially in recent years, the superintendent and other senior OSFI staff speak publicly both in Canada and internationally on a regular basis, although their remarks are generally limited to the regulatory (as opposed to the political) context. Former Superintendent Julie Dickson was a public figure in Canada and most of her efforts were covered by the media or advertised on the OSFI website. Her successor, Jeremy Rudin, appears to be carrying on this modern Canadian tradition.
What is the best way to challenge the regulator? The options range from – at one extreme – private representations, through to the prescribed appeal process, or – at the other extreme – public challenge or even court-based proceedings.
In Canada, the odds of success of a public challenge are not favourable. OSFI has broad powers and discretion, and the courts would be loath to interfere with its exercise of either. The much preferred route – and arguably the only one that is likely to succeed – is to discuss the matter with OSFI with openness and transparency in an attempt to obtain buy-in to the issue. OSFI staff will then be disposed to work with, as opposed to against, the insurer.
The approach at the provincial level is much the same. However, in cases where it appears that government resistance is unreasonable, it has been possible to invoke the political process to achieve a client's goal.
Experience shows that much can be achieved at the softer end of the scale. An organised and sensitive approach behind closed doors that plays to the regulator's strategic goals will invariably bear fruit. For this reason, the right adviser brings considerable value, regardless of the regulator's jurisdiction. Understanding how the regulator operates, the matters that the regulator must have addressed and getting the regulator's conceptual buy-in to the transaction at issue will be key.
For further information on this topic please contact Frank Palmay or Carol Lyons at McMillan LLP by telephone (+1 416 865 7000), fax (+1 416 865 7048) or email (firstname.lastname@example.org or email@example.com). The McMillan LLP website can be accessed at www.mcmillan.ca.
An earlier version of this update was prepared together with Richard Burger and George Belcher of RPC for publication by TerraLex.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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