The Role of Enforcement in Supervision

In a new TC Note published by the Toronto Centre, Clive Briault, Chair of the organization’s Banking Advisory Board, explores the circumstances in which supervisory authorities should turn to formal enforcement powers rather than relying on dialogue and persuasion, and discusses what makes an enforcement framework credible and proportionate.

“Effective enforcement is not an end in itself but one component of effective supervisory intervention, supporting supervisory authorities in achieving their statutory objectives, influencing behaviour, and maintaining confidence in the financial system,” Briault writes. The TC Note explains that authorities typically sit somewhere on a spectrum between “persuasion and dialogue” and an “enforcement-driven” approach, and that the right position depends on an authority’s risk tolerance, the type of rule at issue, and its available resources.

The Note lays out six criteria authorities commonly use to decide whether enforcement is warranted: the nature and seriousness of a breach, the entity’s culpability, steps taken to prevent the offense, actions taken afterward, implications for individual fitness and propriety, and international context. It illustrates these with contrasting cases, including two securities firms that both missed the same money-laundering red flag, where one faced enforcement due to a “culture of non-compliance” and weak controls, while the other avoided it by promptly self-detecting the failure.

“The key question here is whether the most effective (and efficient) approach for a supervisory authority is to change behaviour through dialogue and persuasion, or through taking formal enforcement actions,” Briault writes. “In practice this is likely to vary by entity or person, by the type of behaviour that causes the supervisory concerns, and over time. Both approaches should be available to an authority, which can choose between them depending on the circumstances.”