Provincial governments should be looking to bolster consumer protection in industries that are self-regulated, argues a new report from the C.D. Howe Institute.

The think tank published a new paper Wednesday that examines the use of self regulation to govern certain industries and professions, and concludes that in certain cases, the public interest is not being adequately protected.

In Who Watches the Watchmen? The Role of the Self-Regulator, author Robert Mysicka, a commercial litigation lawyer, recommends that “governments tighten the procedural and substantive rules that affect the operation and scope of powers of self-regulatory and other organizations (SROs) delegated authority by legislation.”

The paper suggests that there are numerous advantages to self-regulation for both the regulated industry and the state. “Self-regulation can be a smarter solution when a state-organized regulator lacks the financial means or political willpower to regulate in the best interests of the public and at the lowest cost possible,” it says.

However, it cautions that the downside of self regulation is more complex, and less understood. For instance, self regulated professions may have an interest in preserving informational asymmetries between the industry and consumer, and they may regulate in ways that are anti-competitive.

“Professionals with specialized knowledge have an interest in maintaining or even perpetuating the information imbalance that exists between them and the consumers they serve,” it notes. “As the information gap shrinks or is closed entirely, professionals’ earning potential declines. Therefore, while many professionals have a duty (whether legal or moral) to educate the public and to promote better understanding of issues within the scope of their expertise, professionals always have an incentive to maintain, or in some cases even perpetuate, information gaps between themselves and their clients.”

“We have all heard the saying that talk is cheap. In the world of professional advisory services, at least, advice can be even cheaper, especially if the same knowledge benefits a large number of people,” the paper says.

The paper looks at a couple of examples where self regulation can prove problematic. For instance, there are “a number of difficulties with insurance markets that can be exacerbated by weak self-regulation or regulatory rules that fail to prevent the self-interest of brokers steering [consumers] towards anti-competitive or other practices that diverge from the best interests of their clients.”

To that end, it cites a 2004 study by a committee of the Canadian Council of Insurance Regulators (CCIR) which found concerns about a lack of transparency, and potential for conflict arising from commissions and other performance-linked benefits, in the insurance market; along with many concerns about broker independence. The chief concern, it says, was with inadequate disclosure.

“Exclusion of information has been found to be one of the concerns with self-regulation, where SROs or professional trade associations protect and/or withhold crucial information such as stock data, real estate listings or, in the case of insurers, commissions and fee information, from consumers. In many cases, the self-regulatory structures tacitly support such transparency gaps by failing to produce more vigorous codes of conduct that ensure effective competition and maintain the primacy of client interests,” it says.

Ultimately, the paper concludes that industries should not be granted self-regulatory powers without some constraints against self-interested and anti-competitive behaviour. “Canadian governments can enhance oversight by consulting with the Competition Bureau and consumer advocacy groups when administering or surveying self-regulatory powers. Ensuring the public interest is protected also entails the accountability of an SRO (either directly to the public in the case of a self-regulated body constituted by statute, or to government in the case of a body delegated statutory enforcement) and space for public participation in the management framework,” it says. “If these requirements are met, SROs can better fulfill their responsibility to the public while also ensuring a more competitive marketplace for professional services.”