Smaller firms are disproportionately disadvantaged by compliance requirements
Canada’s financial watchdogs continue to put stability and consumer protection ahead of innovation and growth, according to the C.D. Howe Institute’s latest Financial Regulatory Scorecard.
The new analysis, authored by fellow-in-residence Gherardo Caracciolo, finds that regulatory priorities have shifted little since last year, despite slow economic growth and mounting competitive pressures.
“In Canada, 92% of regulatory initiatives focus on market stability, transparency, and consumer protection, while only 14% target efficiency, growth, or innovation,” says Caracciolo. “Some agencies are making efforts to close this gap, but it’s clear more balance is needed.”
The new research follows the Institute’s recent call for regulators to rebalance the rules to help advisors reach underserved clients.
The Year Two scorecard points to a persistent structural bias in Canada’s regulatory mandates, unlike countries such as the United States, the UK, and Australia which explicitly weave competition and economic dynamism into their oversight frameworks.
Canadian regulators remain heavily anchored in risk mitigation and Caracciolo argues that this imbalance not only increases compliance costs but also discourages new entrants and constrains innovation.
“Nearly one in every five payroll dollars now goes toward meeting regulatory requirements,” he notes. “That may be sustainable for big institutions, but for smaller firms, it’s a real barrier to growth.”
The Institute’s research shows the compliance burden is disproportionately heavy for smaller financial firms, where regulatory labour costs can account for more than a quarter of payroll. Larger organizations, by contrast, can spread those costs more easily across their operations. The paper warns that the result is a system that unintentionally favors incumbents, dampens productivity, and erodes competitiveness.
C.D. Howe’s analysis calls for a modernized approach to financial oversight, embedding competition, innovation, and efficiency alongside prudential and consumer protection goals. Caracciolo also urges regulators to adopt transparent, pre-implementation cost-benefit analyses so that new rules can be judged both for their safeguards and their economic consequences.
“Financial stability does not have to come at the expense of progress,” the report concludes, emphasizing that a forward-looking mandate would help Canada align with international standards while maintaining resilience.
The full report, Pruning the Rulebook: Canada’s Financial Regulatory Scorecard, Year Two, is available from the C.D. Howe Institute.
