FSRA chooses principle-based approach for Ontario pension regulation

The Financial Services Regulatory Authority of Ontario (FSRA), an independent regulatory agency created to improve consumer and pension plan beneficiary protections in Ontario, will implement a Principles-Based Regulation (PBR) approach, a framework that builds on FSRA’s risk-based, outcomes-focused supervisory approach to protect pension benefits and ensure good administration of plans. 

The PBR approach sets out six pillars that FSRA will use to guide its regulation of pension plans with a principles-based and outcomes-focused approach. The PBR approach relies on high-level, broadly stated principles rather than detailed, prescriptive rules in a rule-based approach. While the rule-based approach strictly requires plans to follow descriptive processes and practices, the principle-based approach is more outcome-oriented.  

PBRs are often open-ended allowing them to capture a broader range of activities. For instance, while a rules-based approach may dictate disclosure of specific financial metrics on an annual basis, a PBR approach may require broad disclosure of any material financial information. 

This approach facilitates the regulators’ ability to:  

• utilize an effective and efficient way to regulate and supervise regulated entities and individuals 

• respond more quickly to technological changes, consumer and beneficiary needs, and disruptions in the financial services landscape 

• more effectively focus on desired regulatory outcomes and objectives to be achieved 

• reduce regulatory burden through a more flexible regulatory approach, which allows regulated entities to determine how to best achieve adherence with outcomes based on their size, complexity, and risk profile 

FSRA’s approach to Principles-Based Regulation 

In 2022, FSRA announced its intention to move away from rules-based regulations wherever possible and move towards a PBR approach.  

FSRA’s PBR is based on six pillars: 

• Outcome-Focused: FSRA’s regulatory focuses on furthering specific outcomes for consumers, pension plan beneficiaries, regulated entities, and the broader sector, based on applicable legislation objectives. 

• Innovative: Regulations seek to promote innovation and transformation within the industry.  

• Consumer-Centric: FSRA focuses its activities on improving outcomes for consumers and pension plan beneficiaries.  

• Risk-Based: Regulatory focus is on matters which pose the highest risk to the industry and consumers. In assessing potential risk, FSRA looks at the size, complexity, and nature of the regulated entity, as well as the potential harm to consumers. 

• Transparent: FSRA will emphasize clear lines of communication between the regulator and industry participants to clarify what is expected and required of them. Rules and guidance will be designed with reference to the principles and desired outcomes. 

• Collaborative: FSRA will engage with all stakeholders, including the public, to ensure its regulatory activities reflect all stakeholder interests, including the interests of consumers and pension plan beneficiaries.  

Through these six pillars, FSRA will provide high level and broadly stated principles to identify desired outcomes and behaviours for the industry. Thereafter, it will expect senior management of regulated entities to internalize the requirements and work towards compliance. 

The framework principles are general statements, which outline how FSRA will regulate and supervise regulated entities and individuals. 

Well-controlled, well-governed, and effectively managed regulated entities that engage positively and openly with FSRA should realize real benefits from FSRA’s PBR and outcomes-focused approach, it says. For example, these benefits may be demonstrated by showing that the regulated entity’s own management and controls are functioning effectively to validate that the desired outcomes are being achieved. This can result in less intensive supervision or a less intensive risk mitigation program. However, this is predicated on the senior management and boards of regulated entities fully engaging in achieving the desired regulatory outcomes identified by FSRA and working with FSRA in a constructive and transparent manner to ensure that these outcomes are being achieved. 

More efficient and effective regulation 

FSRA believes it is more efficient and effective to regulate using a PBR approach rather than a regulatory approach that focuses on whether prescriptive requirements are complied with and/or satisfied. As such, the use of a PBR and outcome-focused approach to regulation and supervision will continue to form a foundational component of FSRA’s regulatory strategy moving forward. It should be evident that this method of regulation and supervision requires the exercise of judgment by both the regulator and the regulated entity, a collaborative approach and open communication. 

As for the process, Andrew Fung, executive vice president, pensions at FSRA, says the new approach is risk based. “The amount of effort we’re going to put into our engagements and then the examinations is going to be proportional to the level of risk.”  

Speaking at the FSRA Exchange 2024 session, ‘Pensions: Risk Management & Principles-Based Regulation (PBR),’ he said, “As a prudential regulator, if we have a concern, there is a process and a bit of progression involved.  

“We have internal expertise and senior advisors that assist us. We would have an internal discussion about whether this case is a real issue. Then we have conversations with the plan management to find out how they see the issue. Ultimately, we would look to the management to see if there's a way to remedy the issue. And, depending on the severity of the issue and the process, we would make our views known through correspondence that would be accessible by the board and management. We would look to the plan to either rectify that issue or give a satisfactory explanation as to why no of no action is taken.” 

Fung emphasizes that the process is one of transparency. “This allows the plan visibility into concerns and also allows the fiduciaries of those plans - specifically the board and executive management – to have visibility. With that information, they can then decide what their fiduciary duty is, and respond.” 

Fung closed the session with three thoughts on PBR. “First, PBR is a cultural change. So, change management on our part of the regulator. It's also a change to the sector. We need a certain level of open mindedness to be able to make PBR a success going forward.  

“Point number two is good faith and trust. When we look at a pension plan, the golden assumption is that they know what they are doing. We're not there to ‘catch them.’ We are here to collect data to verify what they are doing by showing us as opposed to just telling us. Collaboration and continued communication are crucial.”