Canada's financial regulatory system requires a significant rebalancing to foster innovation and competition while maintaining its traditional focus on stability and consumer protection, according to a recent analysis by financial expert Gherardo Caracciolo.
The Current Regulatory Imbalance
Canadian financial regulators have historically operated with mandates that prioritize financial stability and protecting consumers. This approach proved successful during the 2008 global financial crisis, helping Canada avoid the worst impacts experienced by other nations. However, Caracciolo argues that this emphasis has now shifted too far toward caution, creating a system that stifles economic dynamism and innovation.
The evidence appears in regulatory documentation itself. Fewer than 15 percent of current regulatory documents explicitly address market efficiency, innovation, or competition, while the overwhelming majority focus on conduct requirements, supervision, and consumer protection measures.
The Compliance Burden Crisis
The consequences of this regulatory imbalance manifest in substantial compliance costs that burden financial institutions, particularly smaller firms and startups. Compliance now accounts for 22 percent of total labour costs within Canadian financial firms—a staggering figure compared to the 2.3-2.7 percent reported in the United States.
The impact extends throughout organizations, with compliance duties affecting approximately 73 percent of employees at financial firms. Nearly three-quarters of staff now handle some regulatory responsibilities as part of their regular work. About eight percent of employees dedicate the majority of their working time—75 to 100 percent—exclusively to compliance tasks.
International Comparisons and Solutions
Caracciolo highlights a fundamental difference between Canada's regulatory approach and those of other developed nations. Unlike regulators in the United Kingdom, Australia, and the United States, where innovation and competition serve as explicit statutory objectives alongside stability, Canadian regulators often operate with mandates that treat stability and investor protection as supreme priorities.
This structural difference creates particular challenges for smaller financial firms, which shoulder nearly double the compliance burden of larger institutions. Since these smaller companies often drive innovation and competition, the regulatory environment ultimately threatens Canada's economic competitiveness and future growth prospects.
The solution, Caracciolo suggests, involves reforming regulator mandates to explicitly recognize the necessary trade-offs between stability, protection, and economic dynamism. He also recommends implementing transparent, public, and data-based cost-benefit analyses before introducing any new regulations, providing accountability for the substantial costs that regulations impose.
With more than 40 financial regulators operating across Canada, the need for coordinated reform has never been more urgent for maintaining the country's competitive position in the global economy.
