To paraphrase a famous quotation, Canadians love to complain about the weather, but nobody does anything about it. Similarly, the need for a national (or common) securities regulator has been discussed for decades, despite little promise of movement on the issue. Although the dark clouds of uncertain economic times precipitate further discussion, we finally have the opportunity to take action together – and we must act together – to establish a common regulator. All we need is one final push, and the federal government is trying to make it happen.
This monumental effort to curb potential systemic risk has come at an opportune time, with the International Monetary Fund reporting that global risks to financial stability have increased in the past few months. The creation of a common securities regulator would better insulate our economy.
As the Expert Panel on Securities Regulation (on which I participated) made clear in 2009, a Canadian national regulator would reduce the red tape faced by market participants, create a more efficient and globally competitive capital market and strengthen enforcement to better protect investors. All of this would enhance productivity and create jobs, economic growth and long-term prosperity. It would also better prepare Canada to anticipate and deal with global systemic risks.
The federal government drafted legislation largely based on the panel’s recommendations. It then submitted it to the Supreme Court of Canada for an opinion on whether Ottawa has jurisdiction in the matter.
In December’s ruling on the proposed Canadian Securities Act, the Supreme Court recognized that federal and provincial governments share responsibility for securities regulation. The court also suggested the means to establish a national securities regulator and overcome the current system’s shortcomings: federal-provincial co-operation.
Speaking from personal experience as Canada’s representative on the executive board of the International Monetary Fund, I can say that in spite of the many competitive advantages our financial system possesses today, securities regulation remains perilously insufficient in certain global crisis situations. Canada remains the only developed country without a national securities regulator – seven months after the Supreme Court’s ruling, the policy imperative for a national regulator remains.
Perhaps reminded by the enormous 2007-08 asset-backed commercial-paper crisis in Canada, the Supreme Court’s opinion emphasized Ottawa’s role in mitigating the types of risk that come from financial contagion, whether it be national, regional or international.
Through such federal agencies as the Bank of Canada, the Office of the Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation, Canada’s financial system has earned a global reputation for soundness and stability. A similar agency tasked with financial systemic oversight does not exist in the field of securities regulation, even as global financial risks surround us.
Provincial securities regulators have traditionally endeavoured to protect investors while increasing market efficiency and confidence. However, the recent global financial crisis has illustrated that the line has become blurred between traditional securities regulation and regulation that tries to prevent market liquidity crises and insolvencies. (This is called “prudential” regulation.) Systemic risk is no longer confined to deposit-taking financial institutions, such as banks. An effective securities regulatory framework at the national level would address these gaps.
A common securities regulator would be best suited to handle systemic risk across a truly national securities market. For example, the Canadian over-the-counter derivatives market is national, if not global, in nature, and the largest market participants are our large, federally regulated banks. With the establishment of central counterparty clearing houses (CCPs) for over-the-counter derivatives abroad, recognition by a single common regulator (as opposed to a series of provincial regulators) seems obvious and sensible. Additionally, highly leveraged, largely unregulated non-bank financial institutions and hedge funds play increasingly larger roles in national financial markets, so national oversight is not just prudent but essential.
So how can we make the final push? The classic Canadian way: co-operation. Governments working together to build a common securities regulator. There are many models to consider – the Canada Pension Plan Investment Board is one of the most successful partnerships of this kind.
Stephen Harper’s government should be commended for exploring a federal-provincial co-operative solution that would establish a comprehensive securities regulator and for extending the mandate of the Canadian Securities Transition Office, which is tasked with crafting the common regulator’s potential shape and regulations. As a result, resources continue to be available for the final push – but the window is closing.
Also to be praised are the provinces that are working toward this objective and whose role now, in the wake of the court ruling, is pivotal. Ontario remains critical to the project’s success. The recent re-election of the Progressive Conservatives in Alberta provides an opportunity to cement an agreement with most of the key provinces.
I can only hope that parochial politics does not frustrate this national imperative. If that occurs, however, I believe the federal government should get on with regulating those areas of securities markets that the Supreme Court insists are properly federal responsibilities.
Tom Hockin is the executive director for Canada, Ireland and the Caribbean at the International Monetary Fund and former chair of the Expert Panel on Securities Regulation.