George Orwell famously quipped that the restatement of the obvious is the first duty of intelligent people. With respect to securities regulation in Canada, there are two obvious observations: The current patchwork of 13 regulators in the highly sophisticated securities sector does not serve the national interest and is an obstacle to the smooth functioning of the Canadian economic union. And given that the securities industry is clustered in Toronto, that five of six of the largest dealers (representing 70 per cent of sector profits) are there and that it is home to Canada's senior stock market and its banks, Toronto should be the headquarters of a national regulator.
Yet, it looks like Canada's regional politics will trump this obvious choice. Instead, the federal government will opt for a "virtual" headquarters with the regulator's powers and decision-makers dispersed across the country. This is more than an insult to Toronto and Ontario - it is bad public policy.
The common securities regulator needs a legitimate head office, where the majority of decision-makers and staff are housed under one roof and are responsible for co-ordinating regional offices. This arrangement is more efficient than the existing model, with 13 different regulators enforcing 13 different sets of rules. The virtual model, with provincial offices still intact, is only a modest step forward in terms of efficiency and cost savings.
One of the key findings of the federal government's Wise Persons' Committee in 2003 was that "Canada cannot respond as effectively or innovate as quickly as it should in the fast-changing global marketplace" because decision-making is dispersed.
A regulator that is far removed from the entities it regulates, or a regulator where decision-making is spread across the country, would likely result in unco-ordinated and slow responses to regulatory emergencies. Someone has to be able to make decisions, and that person has to be where the large and systemically important players are - namely Toronto.
A head office based in the hub of market activity has other advantages. A Toronto-based regulator could more easily tap local knowledge networks that are clustered in the city, exchange information with the sector about risk, stay on top of product innovations, and monitor the behaviour of market participants. This would ensure better oversight of increasingly complex financial services and products.
A Toronto-based regulator also would have access to a much deeper talent pool. There are more people employed in the securities sector in Toronto than in Canada's other major cities combined.
Canada's banking regulations were hailed by international organizations as an important reason why Canada avoided the worst of the global financial crisis. Yet, these same organizations are critical of our fragmented regulatory landscape in securities. So why is the federal government ignoring the obvious policy solution?
It could be that the federal government doesn't want to appear to give "too much" to Toronto or Ontario. As Prime Minister Stephen Harper bluntly put it, "As an Albertan, I have no interest in seeing this sector centralized in Toronto." Imagine a prime minister from Ontario saying he had concerns about the oil and gas sector being too concentrated in Alberta!
Despite Mr. Harper's musings, the reality is that the trade in financial services has clustered in a small number of global financial centres. Toronto is the only Canadian city that can realistically aspire to be among them. It is ranked 12th in the Global Financial Centres Index - and is one of three North American Global Leaders, along with New York and Chicago.
All of Canada has an interest in Toronto's building on its position. A legitimate global financial centre enhances the prospect of Canada's capturing a larger share of the global trade in financial services and the ability to project Canadian leadership in global finance.
The federal government has acknowledged the strategic economic importance of enhancing Canada's standing in the financial services industry. The decision to opt for a virtual headquarters undermines this objective.
Fortunately, there is still time to get the administrative structure right. The legislation will not be considered by the House of Commons until next year. The federal government should take advantage of this opportunity. The stakes for Canadian business and consumers are too high to allow the politics of region to trump the obvious policy choice.
Josh Hjartarson is policy director of the Mowat Centre at the University of Toronto. Its analysis of the common securities regulator, One Economic Market or a Collection of Jealous Rivals?, can be found at www.mowatcentre.ca.
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