Policymaking is ugly

And why the government doesn’t care what you think

A kluge is a superficial fix to a deep problem. You’ve used one if you’ve ever duct-taped a leaky pipe instead of replacing it. You’ve also downloaded one if you installed the latest software patch on your smartphone. When programs need debugging, programmers don’t rebuild them from scratch. Instead, they write new code on top of the old to eliminate the exceptional glitch. 

Kluges only scratch the surface of deep problems, but there is a wisdom to them: they’re the only way to keep complex systems running when overhaul is impossible. 

That’s why Canadian financial sector policy is a kluge-magnet. Our system of financial laws, regulations, rules, guidance, voluntary codes, and industry standards is one of the most complex around. It is so complex that calling it a system even misses the mark. It is a system of systems. It emerged over centuries, an accumulation of decisions to unify the country, win elections, expand regulatory turf, respond to financial crises, and keep up with technological change.

By now, kluges are more common than not. 

When Ottawa wanted to curb the “predatory” behaviour of non-bank lenders in 2023, a first-principles solution would have been to pass a law prohibiting this predatory behaviour, such as obscuring the true cost of a loan, or using aggressive collection tactics, such as showing up to a borrower’s workplace to shame them in front of their friends and colleagues. The government could have given our financial consumer watchdog, the Financial Consumer Agency of Canada, the power to ban these practices, and enforce the bans with hefty fines.

Yet this was an impossible solution because of the Canadian constitution, which gives provinces, not the feds, jurisdiction over most consumer protection. 

Instead of vainly trying to rewrite the country’s most fundamental lines of code from scratch, Ottawa found a kluge in the Criminal Code, a federal law that wouldn’t invite a constitutional challenge. Policymakers used criminal law to lower the max interest rate a lender could charge a borrower, even though an interest rate is, itself, not predatory. By lowering it, however, the feds priced the riskiest borrowers out of the market, suppressing the demand that makes predatory lending most viable. In this new composition of the market, the average borrower would be less desperate and vulnerable, and so the average lender would need to play nicer to earn their keep. It was nowhere near perfect policy, but kluges aren’t supposed to be perfect.

The government’s cap on NSF fees, introduced just this year, is another kluge. Consumer groups have been urging Ottawa to act, arguing NSF fees disproportionately hit low-income people the hardest.

NSF fees are an infrastructure problem. It’s no coincidence that the only payment methods to trigger NSF fees—cheques and pre-authorized debits—are routed through the Automated Clearing Settlement System (ACSS), a descendant of the first clearinghouses: dingy taverns where bankers would meet to exchange IOUs and settle scores, before anyone knew whether the money was even there. Back then, bankers didn’t charge NSF fees. Clearinghouses managed the risk of insufficient funds with strict membership requirements and the threat of expulsion if a banker bounced too many payments. NSF fees came later, when mass retail banking created the risk of millions of customers spending money they didn’t have.

A deep solution to the NSF-fee problem would have been for Ottawa to tell banks to upgrade the ACSS. The banking industry doesn’t charge NSF fees on wires, debit card payments, and e-Transfers, which are routed through different systems. For these types of payments, the payor’s bank is able to check whether there are any funds in the account before a transaction is completed, long before the IOU is exchanged with another bank in a clearinghouse. 

There is a technological fix here, but actually making it is next to impossible. Almost a decade ago, the industry tried to replace the NSF fee-laden ACSS with another system it was calling the Settlement Optimization Engine (SOE). The plan to launch the SOE was quickly shelved because it meant rewriting code, integrating into banks’ back-office computer systems from the 1960s, and getting buy-in from the entire industry to do all of this on a common schedule. Not just an overhaul, but a coordinated one. So the feds decided a kluge—an NSF fee cap, to be exact—was the best they could do.

The last kluge worth mentioning is how the crypto ecosystem is currently being regulated. 

Ever since QuadrigaCX’s Hollywood-worthy Ponzi scheme blew up, regulators who had neglected to supervise the crypto industry were left scrambling to clean up the mess. Regulators weren’t being lazy. Crypto just didn’t look enough like anything regulators already knew how to regulate. But the risk of another scandal was enough to break through analysis paralysis. 

Provincial securities regulators swooped in, asserting their jurisdiction to supervise all things crypto. Their argument, essentially, was this: unless crypto companies are immediately delivering the crypto assets their customers are buying, then the companies are dealing in securities and are subject to securities law. Securities regulators liberally interpreted their powers, extending their authority to activity that not only feels like securities trading, but also like deposit-taking, issuing money, and even lending.

The kluge here wasn’t about working around the constitution, like the crackdown on non-bank lenders. Nor was it about working around legacy technology, like the cap on NSF fees. The kluge was a band-aid on poor governance. Crypto’s strangeness challenged the whole of Canada’s regulatory framework. The deep solution would have been to modernize the whole thing. But that would have required political buy-in, legislative rewrites, and coordination across different regulators and levels of government. A kluge was much easier: call it a security and move on.

Kluges are what we reach for when a system is too knotty to fix yet too important to fail. Kluges are good enough for the pipes under kitchen sinks, and for the computer programs that our financial system runs on. So why shouldn’t they also be good enough for the laws, regulations, rules, guidance, voluntary codes, and industry standards that govern our financial system? 

Objections to these kluges were often layered: practical on the surface, but symbolic underneath. Non-bank lenders warned of unintended consequences, of course, but they were also reacting to being labelled as criminals. Banks said NSF fees aren’t “junk fees” they gouge customers with; they’re fees they charge to encourage responsible spending. And crypto companies said securities law doesn’t always fit because it treats the industry as something it fundamentally isn’t. These were semiotic objections—about language and meaning—which is why policymakers, focused on achieving very particular outcomes, shrugged them off.

Our financial sector will continue to be a kluge-magnet for some time. Still, the semioticians of the financial sector can rest assured that no system can survive on kluges forever. Add enough patches and the code eventually breaks. Stack enough rules and sooner or later nobody remembers what they are. Pile on kluge after kluge until one day the whole system collapses under the weight of itself. And then it’s finally time to build anew.