Benefits of privacy regulation on commercial activity in Canada should be weighed against annual economic cost of $3.8 billion
Feb 16, 2012, 09:00 ET
"The economic effects of privacy regulation on commercial activity are similar to an iceberg—most are hidden from view," said Michael Bloom, Vice-President, Organizational Effectiveness and Learning. "In many ways, Canada's current regulatory approach is sensible, especially when it engages the private sector to take responsibility for ensuring reasonable privacy. This evolving partnership among consumers, regulators and firms could be harmed by a movement away from the current ombudsman approach and toward harder regulation - which would make privacy governance more adversarial."
The current system—at both federal and provincial levels—is based largely on complaint resolution and business policy advocacy. It approaches the issues chiefly from a legal perspective and operates largely without cost-benefit analysis on how regulatory regimes affect the broader economy. The legal perspective should be complemented by economic and business perspectives that take into account the use of private information in a modern economy.
This report, which was funded by Google Canada Inc., contributes to an informed national dialogue that strikes a balance between consumer protection and economic efficiency. In this study, costs take three forms:
- Direct costs: these include human resources, administration, equipment, and the like.
- Indirect costs: the costs that are incurred by changing managerial behaviours of firms and the buying decisions of customers.
- Induced costs: the broader costs that are incurred throughout the economy from change in the way the economy functions.
The total cost of administering privacy regulation is estimated to be $3.8 billion annually, or approximately 0.2 per cent of Canada's $1.7 trillion economy. These costs are highly concentrated - combined, the retail and the financial services sectors account for 45 per cent of the total costs.
Costs also spill into effects on corporate behaviour, such as the ways in which firms invest, innovate, and market their products and services. Using a costing model detailed in the report, the Conference Board calculates that privacy regulation will reduce cumulative nominal (non price-adjusted) business investment between 2011 and 2030 by $18.8 billion. This reduction would have the effect of lowering GDP by 0.11 per cent in 2030 than it would otherwise be.
In addition to assessing costs, the study also explores economic benefits of effective privacy protection, which include a reduced risk of identity fraud, a reduction in data breaches and improved consumer trust.
- A reduced risk of identity fraud - The Conference Board estimates that, in 2008, identity fraud and credit card fraud combined cost Canadians more than $500 million in total out-of-pocket and time costs.
- Fewer data breaches at firms - The potential costs to business of poor privacy governance may include lost business opportunities, damage to brand, and even monetary loss or lawsuits. Several U.S. studies have attempted to quantify the impact of data breaches on firms.
- An improvement in overall consumer trust - Trust has a real economic benefit in terms of reducing search costs and lowering the cost of information exchange. For example, the Conference Board applies the findings of a McKinsey study in Europe to estimate the value that Canadian consumers derive from the free use of Internet services. At least some part of this annual $5.5 billion value would not be realized if consumers felt their private information was at risk through use of the Internet.
This is the first study to quantify the economic impact of privacy PLRs on commercial activity in Canada. Given the data limitations, these calculations are indicative, not definitive. However, they point to the importance of calculating costs and benefits in advance of expanding regulatory powers.
The report is publicly available at www.e-library.ca.
For further information:
Brent Dowdall, Media Relations, Tel.: 613- 526-3090 ext. 448
E-mail: [email protected]
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