After 80 years of on-and-off efforts to create a pan-Canadian securities regulator, the country’s top court has finally cleared the way for Ottawa and a coalition of willing provinces to move ahead with their plan for a Cooperative Capital Markets Regulatory System.
For Quebec, the Supreme Court of Canada’s unanimous ruling is a worst-case scenario that leaves the province in a significantly weakened bargaining position as it seeks to counter the centralization of financial markets expertise and decision-making authority in Toronto.
Quebec Finance Minister Éric Girard insisted, after Friday’s Supreme Court decision, that his government has no intention of facilitating what it sees as an intrusion by Ottawa into its jurisdiction over securities regulation. But his task just became a lot harder.
The Supreme Court not only upheld the Quebec Court of Appeal’s previous ruling that Ottawa’s proposed Capital Markets Stability Act (dealing with systemic risks and financial offences) is constitutional. It also ruled that the Quebec appeal court erred in declaring the “model” securities act that five provinces and Yukon had undertaken to pass had “the effect of fettering the sovereignty of the participating provinces’ and territories respective legislatures.”
On the latter issue, the Supreme Court declared: “The Cooperative System does not entail an impermissible delegation of law-making authority. Parliamentary sovereignty also means that the legislature has the authority to enact laws on its own, as well as the authority to delegate to some other person or body certain administrative or regulatory powers.”
That amounts to a win on all counts for Ottawa and the five provinces – Ontario, British Columbia, Saskatchewan, New Brunswick and Prince Edward Island – that signed on to late Conservative finance minister Jim Flaherty’s initiative to create a de facto national securities commission in which provincial participation is voluntary. The move came after a 2011 Supreme Court ruling that declared unilateral action by Ottawa violated provincial jurisdiction over securities matters.
It remains to be seen how swiftly Finance Minister Bill Morneau moves to act on the ruling. But the court removed all the legal roadblocks in his way. Indeed, the Supreme Court judges concluded that the only remaining impediments to a national commission are political ones.
“When and whether to relinquish a degree of autonomy over the regulation of securities for the purpose of achieving national uniformity is entirely a matter of political choice. This too is a valid exercise of parliamentary sovereignty,” the court ruled. “The various jurisdictions have an unquestioned and equally sovereign right to join or to reject the Cooperative System.”
Quebec would be smart to salvage what it can by signing on to a pan-Canadian regulatory authority in exchange for ensuring that Montreal, home to the country’s only derivatives exchange, remains the locus for the regulation of the derivatives market and a guarantee that a national regulator would operate in both official languages. The political price for doing so is not what it might have been several years ago, when any federal intrusion was seen as a threat to Quebec’s autonomy.
For now, Quebec’s business sector remains resolutely behind the provincial government in its opposition to a national regulator. But it now may be only a matter of time before cracks start to form in that common front, especially if Alberta – the only other major holdout – signs on.
Quebec’s arguments in favour of the status quo have been weakened by the globalization of financial markets – Canada remains the only Group of 20 country without a national securities regulator – and the increasing tendency of Canadian companies going public to bypass the province. What’s more, start-ups in Quebec as elsewhere have greater access to venture capital for early-stage financing and are less reliant on provincial incentives.
The Quebec government’s main objective, other than jealously protecting its constitutional powers, is to ensure that a critical mass of investment banking activity remains centred in Montreal. But a national commission need not interfere with that goal, especially if a pan-Canadian authority centres its derivatives regulation activities in Montreal.
With the Supreme Court clearly recognizing Ottawa’s pre-eminent responsibility for managing systemic risks in the financial system, it cleared the way for a pan-Canadian regulator to oversee derivatives markets. Quebec should carve out a niche for itself in a national regulatory system before it’s too late.