Historical Perspectives on Canadian Financial Institution Regulation:The Regulatory Toy

Hope this is limited to history of a particular time. Where the financial institution regulator continues to work with the “problems” of a financial institution, in circumstances where it is evident that the problems will not be resolved through compliance by financial institution management. Reluctant intervention, if any, by the financial institution regulator.

In relation to events occurring, in many respects, over thirty years ago, hoping that history will not repeat.

From Bruce La Rochelle dissertation,
Canadian Financial Institution Failures:
The Pathologies of Regulatory Inaction

(Schulich School of Business, 1993)

Extracted from Chapter 10, “The Pathologies of Regulatory Inaction:
The Relationship Between The Regulator and The Regulated”

The regulator will always look like an ox playing tag with a gazelle.

Best and Shortell (1985: 339)

In (the Inspector General of Banks’) appearances before the Senate Banking Committee on revisions to the Bank Act, it was sometimes hard to figure out whether he was speaking about the banks or on behalf of the banks.

Stewart (1982: 160)

…Regulatory habituation to non-compliance results in a stratification and prioritization of violations, given their frequency. For example, in 1984, management of the Principal Group disclosed that it was ceasing to pay a portion of the interest on certain of its deposits, based on the fact that it was compelled under an investment contract to pay but 4%; the balance was discretionary. The holders of the investment contracts affected were not informed by Principal Group management, though Alberta regulators were informed. The Superintendent of Insurance did not compel Principal Group management to inform investment contract holders, on the basis that he was concentrating on “major issues” associated with capital deficiencies and the transfer of weaker assets from Principal Savings and Trust (Code, 1989: 368).

…in most instances, the regulators found out about the intercorporate transactions after they took place, contrary to the companies’ agreement in 1975 that they would obtain the prior consent of the Superintendent. the evidence tends to show that the regulators overlooked or forgot about that agreement, as there is no evidence of the regulators mentioning it in challenge to the intercorporate transactions carried out in the 1980s.

Code (1989: 371)

The foregoing raises the issue of the extent to which the regulated becomes the regulator’s “toy”, through regulatory habituation to non-compliance. The question thus raised is “If regulators have no basis from past experience to believe that informal arrangements with the regulated will be honoured, why do regulators persist in continuing to make such arrangements?”. As has been discussed, such persistence in the face of suboptimal performance is predicted by the circumstances of inertia identified by institutional theories (M.W. Meyer and Zucker, 1989). If the regulator cannot dictate behaviours but must instead rely on persuasion, and at the same time has no personal investment in the outcome, a cynic may regard the regulatory actions as little more than “playing with toys”. With respect to the Principal Group, continued attempts at informal settlements contributed to the delay in ultimately closing the institutions. Negotiations between the regulator and the regulated make for a busy day, with subsequent non-compliance causing no surprises. Continued negotiations by the regulator in the face of such non-compliance becomes not a demonstration of regulatory faith or optimism but rather a demonstration of how a regulator “finds something to do with the toys” or is not cognizant that changed circumstances require altered regulatory actions. For example, it has been shown how various actions of Principal Group management were clearly sanctionable from the early 1970s. Instead, the problems and non-compliance persist, yet one observes a number of regulators continuing to work on “Principal problems”–virtually as a career.

Delays in regulatory action would appear to lead to increasing discomfort on the part of regulators with acting in the face of even stronger facts which call for action. Continuing the “regulatory toy” dimension discussed with respect to the Principal Group, the ultimate closure of the organization would appear to illustrate discomfort on the part of regulators with the end of the “play period”. A failed compliance strategy gives way to a “do something/do anything” form of regulation:

…(Alberta Superintendent of Insurance Saleh) was directed to work with (First Investors Corporation) and (Associated Investors of Canada) to see if their problems could be worked out, though neither the companies nor (the Department) had a workout plan.

Code (1989: 418)

In addition, deficiencies in enforcement power of Alberta regulators were generally overlooked during the course of playing with the “toy”. That is, during the many years when Alberta regulators were purporting to regulate, they apparently overlooked deficiencies in their own enforcement powers. Notwithstanding a history of non-compliance by Principal Group management, it was only towards the latter stage of the Principal Group’s existence that regulators appeared to realize that “(w)hen the companies failed to abide by the agreements, the regulators had no means by which to force compliance” (Code, 1989: 401).

I believe that if the companies had come up with a half-way reasonable plan for working out the difficulties, that every effort by regulators and others would have been put forward to make that plan successful.

Testimony of A. Wooldridge, an insolvency expert hired by Alberta regulators six months prior to the closure of the investment contract companies, in testimony at the Code inquiry, as reported by Powell (1988b).

The nature of regulation has crossed the line. It has become micromanagement.

Comments of Edward L. Yingling, chief lobbyist for the American Bankers Association, with respect to proposed legislation which would permit bank regulators wide interventionist powers with respect to bank management, including the powers to determine management salaries and dividend levels, as reported by Foust (1992).

As an extreme example of what may in hindsight be viewed as an inappropriate compliance strategy, regulators of the Principal Group effectively abandoned regulatory action, pending resolution of problems by Principal Group management. When difficulties with the investment contract companies became evident in 1986, the Assistant Deputy Treasurer of Alberta told Principal Group management that regulators would “duck their heads” while management attempted to solve financial difficulties (Fisher, 1988c). Regulators ceased to “duck their heads” only when it became evident that the attempts by Principal Group management to solve financial difficulties would not work.


Best, P. and A. Shortell 1985
A Matter of Trust: Power and Privilege in Canada’s Trust Companies. Markham, ON: Penguin Books Canada Limited.

Code, W.E. 1989
Final Report of The Inspector. Edmonton: Government of Alberta Publications.

Fisher, M. 1988c
Principal firms given time to solve problems. The Globe and Mail, September 27: B4.

Foust, D. 1992
The bank police get a bigger stick. BusinessWeek 3281 (August 31): 59

Meyer, M.W. and L.G. Zucker 1989
Permanently Failing Organizations. Newbury Park, CA: Sage Publications, Inc..

Powell, J. 1988b
Principal said deaf to bearers of bad news. The Financial Post, July 13.

Stewart, W. 1982
Towers of Gold, Feet of Clay: The Canadian Banks. Toronto, ON: Collins Publishers.


About brucelarochelle

Practising Lawyer and Part-Time University Instructor (Accounting, Commercial Law, Organizational Behaviour); Part-Time Federal Tribunal Member. Non-practising Chartered Professional Accountant (Chartered Accountant and Certified Management Accountant).
This entry was posted in Financial Institution Failures, Financial Institution Regulation. Bookmark the permalink.

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