On October 21, 2021, the Financial Services Regulatory Authority of Ontario (FSRA) released a 35-page consultation document ("Consultation Document") detailing its proposed Innovation Framework. FSRA's Innovation Office, created in 2020 to facilitate financial services innovation in Ontario, is coordinating the initiative. Supporting innovation in Ontario's financial services sector is a core part of FSRA's mandate as a regulator. The Framework set out in the Consultation Document is open for comment until November 18, 2021.
While the new framework will affect all areas of financial services under Ontario's jurisdiction, the auto insurance sector will be the first to access the new testing environments described below. FSRA is empowered to grant certain forms of exemptive relief that may be required to implement a service or product test that it has approved.
Outline of the Consultation Document
The Consultation Document includes discussions of the following:
- The Innovation Office and its role;
- The innovation process;
- Test and learn environments; and
- Industry engagement and outreach.
In this post, we summarize some of the highlights of the Consultation Document.
The Innovation Office and its Role
The Innovation Office will be the "central driver and coordinator" of FSRA's mandate to foster what the Consultation Document refers to as "responsible innovation". In an environment of responsible innovation, any risks that innovation could pose to consumers, or to businesses that deal with the auto insurance sector, will be carefully managed. The Innovation Office's three key roles are:
- Fostering an environment that will encourage responsible innovation;
- Focusing on improved consumer choice and value while protecting consumer interests; and
- Continuously improving its approach and tools.
The Innovation Office will have an "orchestrator" role within FSRA itself, driving FSRA's mandate to pursue innovation. It will engage in dialogue with innovators, while functioning as a disruptor:
"The Innovation Office will challenge established structures and closed mindsets that stifle innovation. We will play a challenge function role both within FSRA and in Ontario's financial services sector, pathfinding for innovative and new ideas and services when the established approach would otherwise act as an obstacle."
While regulatory changes may occur eventually, the Innovation Office will initially operate within Ontario's existing regulatory framework. It will have a research and outreach function and will make use of the Test and Learn Environment ("TLE") described below.
FSRA is seeking comments on the role that it should play in innovation as well as on experiences industry participants have had to date in bringing innovative ideas to FSRA.
The Innovation Process
The innovation process envisaged by FSRA includes "inside out" and "outside in" approaches. The first of these leverages the experience of FSRA's own teams to bring new trends, problems and solutions to the surface. The second involves working with stakeholders to bring their innovation ideas to fruition. As part of this plan, FSRA is adopting an innovation culture, with Innovation Liaisons across FSRA, whose job it is to facilitate communication among innovators, the Innovation Office and FSRA as whole.
The steps in the innovation process are as follows:
- Opportunity intake: discovery and consideration of innovation opportunities;
- Prioritization and management: Assessment and selection based on established criteria;
- Definition and "solutioning": Deciding which regulatory tool should be used for each selected opportunity;
- Risk assessment and testing: Scrutinization of opportunities for uncertainties and risks that might require additional testing and validation in the TLE, or by other means; and
- Communication and measurement: Communication of innovation opportunities and measurement of the Innovation Office's impact.
The intake form that will be available on the FSRA website is described in detail in the Consultation Document. FSRA is seeking comments on both the form and the innovation process more generally, as well as on the risk evaluation process described below.
The risk assessment process will consider risks of a proposed innovation to the customer, the industry and to FSRA itself. Depending on the results of the risk analysis, the innovator might be asked to revise its proposal (if the risk is high) or given the opportunity to test it in a testing environment (if the risk is lower). If the testing process proceeds satisfactorily, FSRA will make recommendations to the Government of Ontario respecting any necessary statutory or regulatory amendments.
Test and Learn Environments
FSRA's TLEs will provide "an adaptive, pro-innovation test environment while ensuring consumers are protected". From an innovator's standpoint, the TLE is "a relatively low-risk arena for gauging the market response to their innovations." This approach is intended, in part, to level the playing field between industry incumbents and new market entrants. Importantly, FSRA will have considerable authority to grant exemptive relief that may be required to ensure that innovation proposals can be tested effectively.
An "Approach Guidance" will be published to "provid[e] specificities on the general approach of how TLEs would work." In the meantime, the plan set out in the Consultation Document envisages two basic TLE types:
- Activity TLEs involve FSRA's exercise of regulatory authority to approve the testing of activities that would not otherwise be permitted under the existing regulatory framework; and
- Status TLEs give time-limited and conditional approvals for activities intended to test and validate innovative products and services to non-regulated entities that would not otherwise be granted such opportunities.
As noted above, the first TLEs will be in the auto insurance sector. A detailed auto industry use case, intended as an example scenario, is included in the Consultation Document.
The TLE fee structure has not yet been determined in detail. It appears, however, that the approach FSRA takes to fees will differ between regulated and unregulated entities - reflecting the fact that cost-recovery with respect to the former can be achieved, in whole or in part, through general assessment. FSRA is seeking comments on how fees should be charged, including stakeholder views on the fairest way to keep fees within the reach of innovators new to the market while discouraging the use of the TLE as "a free incubator or accelerator for early-stage ideas".
Industry Engagement and Outreach
The Consultation Document outlines FSRA's plans for extensive and ongoing stakeholder outreach, including constant engagement with sector participants and consumers. FSRA's goal is to be knowledgeable, adaptable, proactive and responsive to consumer and industry input. Among the functions that FSRA envisages for the Innovation Office is to co-ordinate meetings and discussions among stakeholders themselves.
Finally, transparency will be a core principle for FSRA and the Innovation Office. Public communication of decisions about TLEs will be communicated so that innovators and other stakeholders can build up an understanding, over time, of what FSRA is looking for in innovation proposals and where the boundaries lie. In the Consultation Document, FSRA requests input on how the Innovation Office's engagement efforts should be structured.
The Consultation Document invites comments on many key issues, including those noted above. The deadline for receipt of comments is Thursday, November 18, 2021.
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