Ottawa plans to establish a national securities regulator more limited in scope than it would like if it can't win full provincial support for a common approach so long out of reach in Canada.
Based on comments from some of the provinces, that's the route Finance Minister Jim Flaherty will have to take.
The Harper government is serving notice that it will impose a federal regulator on Canada's securities markets if it can't win sufficient backing from provinces for a jointly-run approach.
This regulator would have to be weaker than Ottawa would prefer because of a 2011 Supreme Court decision that recognized it shares power over the securities markets with the provinces.
The ultimatum, delivered in the federal budget Thursday, comes after six years of efforts by Mr. Flaherty to build support for a common regulator among mostly hesitant premiers.
A government source said Mr. Flaherty could be making a decision on which way to proceed as early as late spring or summer.
The government wants to replace the patchwork oversight of 13 separate provincial and territorial regulators with a single system run jointly by the provinces and Ottawa, one that could reduce costs for businesses and more efficiently police the markets.
"Canada is the only industrialized country without a national securities regulator," the budget notes. "By pooling provincial, territorial and federal jurisdiction and expertise, Canada could have a world-leading securities regulatory regime."
Only Ontario and British Columbia have publicly endorsed Mr. Flaherty's push. Many other provinces, such as Quebec, have balked at what they consider an intrusion into their jurisdiction. Ontario represents close to 50 per cent of the markets in question and B.C. about 14 per cent.
The government says in the budget that it's confident it can act alone, if necessary, because of a December, 2011, Supreme Court ruling that laid to rest questions of how much power Ottawa holds when it comes to regulating the markets. The Conservatives had asked the court to pronounce on the matter.
Citing the decision, the government says the top court has confirmed Ottawa has the authority to act to maintain the "integrity and stability of the financial system and preserving fair, efficient and competitive national capital markets" across Canada.
"The government's preferred approach to improving the regulation of Canada's capital markets is through a common securities regulator established co-operatively with provinces and territories," the budget states.
"If a timely agreement cannot be reached on a common regulator, the government will propose legislation to carry out its regulatory responsibilities consistent with the decision rendered by the Supreme Court of Canada."
The high court, it says, has "found that Parliament has a role in securities regulation regarding matters of genuine national importance and scope, including maintaining the integrity and stability of the financial system, preserving fair, efficient and competitive national capital markets, and preventing and responding to systemic risks, such as those posed by over-the-counter derivatives."
But this ruling also placed limits on what Ottawa could do alone, and any regulator envisioned by Mr. Flaherty would be inferior to what the Tories are trying to get the provinces to jointly run.
"This will include the capacity to monitor, prevent and respond to systemic risks emerging from capital markets," the budget says. "A federal capital markets regulatory framework would be applied consistently on a national basis and would not displace provincial securities commissions, which would still manage the day-to-day regulation of securities activities."
In this carrot-and-stick approach, Ottawa is asking for more provinces to sign on to a collaborative regulator or prepare for a federal watchdog. "The government would be prepared to delegate the administration of its own securities legislation to a common securities regulator if a critical mass of provinces and territories were willing to do the same," the budget adds, though officials would not say what would constitute that critical mass.
Sources, however, said Ottawa would forgo creating a federal regulator if Ontario, B.C. and Alberta agree to collaborate on a common system.
"The Ontario Securities Commission is the largest, and I would presume the federal capital markets regulatory framework would apply consistently on a national basis but it would not displace the commission here," said Ontario Finance Minister Charles Sousa.
"And for that reason we would hope that Ontario would be a primary provider of the service necessary. A common regulator makes a lot of sense to me and it would make more sense for it to be done through our province."
The federal government has been negotiating with Alberta, but officials in Ottawa say Premier Alison Redford's administration is concerned about supporting a move that the opposition Wild Rose party might attack as a giveaway of provincial power.
Alberta Finance Minister Doug Horner said he was optimistic provinces could "create a better collaborative model" that would avoid the need for a federal securities regulator, but that Alberta still believes it's an area of provincial jurisdiction.
Ministers are scheduled to meet Monday to discuss the issue.
"What I'm talking about is an evolution of the passport system, and to deal with Mr. Flaherty's systemic risk issues," Mr. Horner said.
"I think we can do that. I think there's a role for the federal government. I think the other ministers believe there's a role for the federal government in some areas. But the sovereign ability of the provinces to make those securities decisions is something we still protect."
Manitoba Finance Minister Stan Struthers also rejected a national regulator, saying he prefers "any changes we do would be an enhancement of the passport system that already exists."
Mr. Flaherty regularly points to the 2007 Canadian financial crisis caused by problems with asset-backed commercial paper.
The provinces turned to Ottawa to solve the problem – a turn of events the Finance Minister said demonstrates the need for a stronger national approach to securities regulation.
Ian Russell, president and CEO of the Investment Industry Association of Canada, applauded Mr. Flaherty's efforts to enact a common securities regulator.
"We are pleased the government has taken this decisive action. In an era of global regulatory reform, our country needs a strong national voice to ensure the interests of Canadian market participants are properly heard," said Russell.
Ian Russell, head of the Investment Industry Association of Canada, welcomed the move.
"It might be enough to drive the participants to do a deal," he said. "After a long time, others would have given up. He's turned the dial up trying to get a deal done. That's gratifying for us."
B.C. Finance Minister Mike de Jong said he wasn't surprised at Mr. Flaherty's moves to plan a national securities regulator over provincial objections.
"It's consistent with what I have heard from Mr. Flaherty in the past that absent an agreement amongst the provinces, the federal government will take steps to address what it perceives to be its constitutional responsibility," he said.
He called on the provinces to get ahead of the federal initiative, and negotiate a deal.
"I think it is far preferable for all of the jurisdictions to get together and negotiate something that makes sense for Canada. If there is unilateral action federally, I can tell you who is going to be happy – a whole bunch of lawyers who are going to make millions of dollar arguing esoteric constitutional points that most people could care less about," he told reporters outside the Vancouver cabinet offices of the B.C. government.
"So sitting down, negotiating an agreement between the provinces and federal government that makes sense is a far preferable way to proceed and, I think, something that Minister Flaherty would like to see happen."
With reports from Boyd Erman and Jacqueline Nelson in Toronto, Josh Wingrove in Edmonton, and Ian Bailey in Vancouver