Office buildings in Toronto’s financial district
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Facilitating financial services innovation is key solving Canada’s productivity problem, according to a report published Tuesday from the C.D. Howe Institute.

The report from the Toronto-based think-tank, Productivity and the Financial Sector – What’s Missing?, calls for policy reform to enable greater innovation in the Canadian financial sector, with the ultimate goal of enhancing economic productivity.

Productivity in the financial services sector is being “held back by a policy approach that does not properly evaluate the link between competition and productivity,” argues the report, as well as a regulatory structure that doesn’t adhere to international standards in certain respects.

For example, the report highlights the lack of a national securities regulator, the mix of federally- and provincially-regulated financial institutions, and the lack of a federal market conduct regulator for insurers, as some of the key differences between Canada and other jurisdictions.

“Closing these gaps and ensuring investors understand how co-ordination in Canada works should improve our ability to attract foreign capital,” the report says.

“Political and constitutional considerations restrict what governments can do, but some achievable goals include improving intergovernmental sharing of market data related to, for example, the analysis of financial stability in capital markets and strengthening links between market-conduct regulators across provinces and functions.”

Moreover, the existing rules in the financial sector “are not well tailored to smaller players,” the report says.

It argues that adopting a “functional” approach to regulation could serve to remove barriers to the development of fintechs, while also preserving consumer protection.

As well, policymakers should pursue regulatory oversight that is proportionate to functional risk, the report says. “If a particular function’s failure is unlikely to pose a risk to the system, oversight need not be as strict as in the case where failure puts the system in jeopardy,” it suggests.

Indeed, policymakers should consider whether Canadian regulators should incorporate a “more explicit productivity mandate,” according to the report which could incorporate some of the “innovative ideas” coming out of the U.K. Financial Conduct Authority, with its focus on competition and productivity.

“Removing the regulatory and policy obstacles would result in enhanced productivity, which in return will generate sustainable economic growth,” the report concludes.