Covering this country's watchdogs can be maddening. Canada is a quiet society, so outspoken people are often outliers, but somehow our regulators take our national reservation to a new level. Their reticence to say anything colourful is off the charts.
Which is why Howard Wetston was such a refreshing choice to be chair of the Ontario Securities Commission, the country's largest provincial securities regulator, in 2010. A former federal judge, he had a reputation for speaking frankly. Five years running the OSC gradually made him more tight-lipped, but last week he sat for an unfiltered preretirement interview, offering a candid take on what it takes to be a successful regulator.
The first rule: "You have to have a high tolerance for frustration." Canada has a patchwork quilt of regulators – 13 different provincial and territorial securities bodies, a separate banking body in Ottawa, as well as individual industry groups such as the Mutual Funds Dealers Association, among others. In public, these regulators often say they happily work together; in private, they admit there are far too many territorial games.
Mr. Wetston doesn't sugar-coat what it takes to navigate this complex system, and he said it helped knowing what he was getting into. Before taking over as OSC chair, he had decades of experience in other high-profile roles, including leading the federal Competition Bureau and serving as an OSC vice-chair from 1999 to 2003. He learned long ago some things cannot be rewritten, no matter how much sense it would make for regulation.
"I know I'm not going to change the Constitution; I know I'm not going to take banking out of the BNA Act," he explained. Federalism dictates that provinces are always going to have their own power and banking is always going to be federally regulated. Any watchdog with an agenda for change must embrace this.
That doesn't mean that things can't be improved. When he got to the OSC, Mr. Wetston found the lines of communication between regulators had largely broken down. People at his shop used to ask what was happening in Ottawa, as if it took investigative work to find out. His response: "Pick up the phone and ask." Over his five-year reign, he's constantly pushed for more collaboration, advocating for a national securities regulator from the first day he took the job.
In Canada, very little can be accomplished by being walled off from other agencies. Technically, the OSC regulates investment dealers, and the federal Office of the Superintendent of Financial Institutions regulates the banks, but that division of labour doesn't mesh with the 21st century, as the Big Six banks now own the six biggest dealers. Mr. Wetston once asked a financial institution if a derivative trade occurred at its bank level or at its investment dealer. The reply: We don't think of it that way.
For Mr. Wetston, the financial crisis of 2008 proved the need for greater collaboration. Who's responsible for derivatives, or for credit agencies, or for shadow banking, or for benchmarks such as the London interbank offered rate (Libor)? There are too many grey areas that don't fall under one regulator's purview.
This complexity has morphed the OSC's mandate, Mr. Wetston argues. "The bottom line today is the OSC is no longer a securities regulator. What we are today is a financial regulator," he explained, arguing that other agencies are in the same boat.
But the OSC has had to take the lead on hot-button issues since 2010, including a potential crackdown on mutual fund trailer fees, the proposed takeover of the Toronto Stock Exchange and the rise of shareholder activism. Through all these campaigns, the OSC has faced criticism that the country's largest financial institutions largely get their way, because they have the deepest wallets to co-ordinate lobbying efforts.
Mr. Wetston doesn't deny their power, which is why he's pushed hard to build the OSC's research team and now commissions independent studies – such as the one the OSC just released on mutual fund fees – to use data to push back. "We need to move away from just submissions," he said of the long history of asking for public comments. "We need to get the facts."
The tough thing about this method is that it takes time. The OSC launched its trailer fee review three years ago, which has kept everyone in limbo for far too long. One option to shorten wait times is to experiment with trial and error. Make something a rule, see how it plays out and then adapt accordingly.
Mr. Wetston isn't so fond of that. "I don't think the public would accept a regulator trying something to see if it works." As frustrating as drawn-out rule making can be, he's learned to embrace it. Every regulator has to.