Abandoning the idea of a national securities regulator would be the easy way out.
To his credit, Finance Minister Jim Flaherty has made it clear he isn't ready to let the issue die, even after the Supreme Court slapped down the federal government in December for constitutional "overreach."
The court, he pointed out, recognized that Ottawa still has a legitimate role in setting national standards, collecting data and mitigating risks that threaten financial markets.
Mr. Flaherty isn't saying so explicitly, but he appears to be working up to the idea of proposing a systemic risk regulator – an independent watchdog with broad powers to monitor and enforce safe practices throughout the financial services industry. Stay tuned.
Instead of fighting the recalcitrant provinces, led by Quebec and Alberta, Mr. Flaherty is now pitching co-operation. "We need to talk to each other," he said recently.
Whether anyone will listen is another question. The reason opponents don't want a national regulator has little to do with creating a more effective regulatory regime. It's largely about protecting turf and jobs, which would naturally drift to Toronto, the country's financial centre.
The Supreme Court's December ruling notwithstanding, the reasons for creating a national watchdog are as compelling as ever. The Swiss-based Financial Stability Board (headed by Bank of Canada Governor Mark Carney) concluded in a peer review last week that Canada's embrace of "a single national securities regulator would bring clear economic benefits – a simpler regulatory infrastructure, easier coordination and information sharing in the event of market distress, and improved cross-border co-operation."
Canada stands alone among the G20 industrialized countries in not having a single national capital markets regulator.
In the absence of a national regulator, the provinces have set up a "passport" system, in which regulatory approvals of investment offerings in one jurisdiction are recognized in others.
The flaw, as the FSB points out, is that Ontario – the most important jurisdiction – doesn't belong. And the umbrella organization of provincial regulators, the Canadian Securities Administrators, is "not a legal entity and has no authority."
In this volatile, complex and increasingly global financial marketplace, having no authority isn't good enough.
The soundness of the financial system is more important than protecting turf.
But to argue – as critics of a national regulator frequently do – that the past justifies doing nothing is short-sighted and naive.
Canada's financial system may have held up relatively well during the recent recession and financial crisis.
But regulation is not what saved the system. Structure did. With a clutch of large national financial institutions, there was less incentive to get into the kind of risky subprime lending that brought down the U.S. housing market.
That doesn't mean Canada is immune to future regulatory failures. Bre-X, Sino-Forest and a spate of scandals involving small investment companies are stark reminders that significant regulatory gaps persist.
The current patchwork of 13 provincial and territorial securities regulators also makes the industry particularly vulnerable to fraud and organized crime, according to a report commissioned recently by the Public Safety department and obtained by The Canadian Press under the Access to Information Act. "Complicated multi-jurisdictional regulatory systems" make the industry vulnerable, the report found.
Much to Mr. Flaherty's frustration, Canadians don't seem to care much about the issue. The Supreme Court ruling will no doubt embolden Quebec and Alberta to dig in their heels.
The ruling addressed the question of constitutional jurisdiction. But that's not the same as determining what's in the best interests of Canadians. The court wasn't asked, for example, to recommend a regulatory structure that would best protect investors in an increasingly complex, fast-moving and global financial marketplace. If they had, it's doubtful they would have endorsed the muddled and inefficient status quo.
It would be sad if Canada waited for a major financial calamity to force the creation of a more rugged regulatory architecture.
The Constitution isn't standing in the way of doing what's right. Regional jealousies and small-minded parochial thinking are.