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Can Financial Regulation Increase Consumer Participation?

There is finally the possibility of shaping a modern securities regulatory framework that encourages financial inclusion and innovation. t's an exciting time for regulators. Thanks to technology, regulators can finally assert themselves as innovators that help to grow the markets they are stewards of protecting versus being boxed into dampening them by working solely on bans, exclusions and restrictions.

By
Hande Bilhan
,
on
November 13, 2019

There is finally the possibility of shaping a modern securities regulatory framework that encourages financial inclusion and innovation

Last week Ontario's Minister of Finance the Honourable Rod Phillips tabled his Fall Economic Statement and with it, his intent to modernize the Ontario Securities Act. It was refreshing to hear his vision includes a focus on competitiveness and modernizing investor protection. Coupled with the Ontario Security Commission's recent focus on industry growth and investor confidence, there is finally the possibility of shaping a modern securities regulatory framework that encourages financial inclusion and innovation.  

It's an exciting time for regulators. Thanks to technology, regulators can finally assert themselves as innovators that help to grow the markets they are stewards of protecting versus being boxed into dampening them by working solely on bans, exclusions and restrictions.

Securities regulators, among other things, are responsible for guiding the provision of financial advice. Top priorities for most global securities regulators are protecting investors, ensuring fair, efficient and transparent markets, and reducing systemic risk. They have shared concerns regarding potential misaligned interests between clients and advisers and the ambiguity around the nature of the client-adviser relationship.

Financial inclusion needs to be an important aspect of investor protection and must be expanded to include access to insurance, credit, and investment products and services.

These traditional concerns remain as crucial as ever. However, regulators also need to recognize that clients and advisors share aligned goals – growing client savings and sound investment returns are a win-win. Regulators must be agile in response to emerging consumer needs and preferences. With the disappearing act of traditional pensions, financial inclusion needs to be an important aspect of investor protection and must be expanded to include access to insurance, credit, and investment products and services. Achieving this degree of financial inclusion will require a concerted collective effort on the part of government, providers, regulators and consumers.

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As the role of regulators evolves, principles of consumer protection must be reassessed and at times, redefined. First, we need a more comprehensive understanding of consumer protection. Current regulations are primarily aimed at "average" consumers as homogenous rational decision-makers. Such an approach is ineffective as it results in a one-size-fits-all approach that often fails to help those it meant to protect in the first place. Moreover, regulators often limit their impact analyses to current investors, failing to consider the broader need to get more citizens engaged and participating. It fails to recognize and meet the needs of excluded investors or anticipate the preferences of future investors.

Second, regulators must consider the supply and demand-side problems that make consumer protection necessary. In addition to the traditional safeguards against unscrupulous business practices, there is growing evidence that consumers need protection from their own lack of financial knowledge and self-exclusion. Demand-side solutions have a pivotal role to play in increasing financial inclusion and consumer outcomes.

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Third, consumer protection must be balanced with consumer empowerment, which is associated with increased innovation, competition and productivity. Key is striking a balance between enabling and empowering versus safeguarding and protecting consumers. Arming regulators with legislative tools such as blanket exemptive relief and regulatory sandboxes can go a long way to encourage consumer-centric innovation.

Applying an evidence-based approach to regulation will help expand financial inclusion

Regulators have the unenviable task of weighing the relative costs and benefits of regulation. Ultimately, they must determine when the resulting benefits to a minority of consumers outweigh the costs to the majority. Regulators also must evaluate rules according to impact, not just the intent. Applying such an evidence-based approach to regulation will help expand financial inclusion. Financial inclusion is a necessary element of investor protection and facilitating more inclusion requires balanced regulation that is evidence-based and targeted. Technology goes a long way to facilitate such a feat. Modern regulators such as IIROC have embraced a data-driven, technology-assisted approach along with a clear understanding that their mandate is to help financial markets thrive through greater participation. New regulatory bodies such as FSRA appear to be adopting similar thinking. Along with new technology, new regulatory thinking holds out the promise of a bright future for greater financial services participation.

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