In the January 2009 federal budget, the government formally adopted the recommendation of the Expert Panel, chaired by Tom Hockin, to establish a Canadian securities regulator. In particular, a transition office will be established and funded with $154 million to manage the process, and later in the year, the Government will table a Federal Securities Act for Canada.
The many benefits of a single Canadian securities regulator include greater regulatory efficiency, uniformity of standards, more robust enforcement and better co-ordination with international regulators and organizations. Apart from achieving the foregoing benefits, the prospect of a national securities regulator’s becoming a reality raises two important considerations that will affect the structure and success of the organization. First, the constitutional considerations have been extensively studied and discussed, but the practical resolution of the issues will likely influence how the organization is developed and operated. Second, the role of a national securities regulator in the broader context of the regulation of financial markets in general deserves consideration.
In the Budget Speech, the government was clear that it would “respect constitutional jurisdiction” and that participation in the Canadian securities regulator would be voluntary.
The voluntary concept includes two aspects: the option for provinces to participate and, later, the ability of regulated entities in nonparticipating provinces to directly opt into the national system. At least two provinces, Alberta and Quebec, have strongly indicated that they expect to challenge the authority of the federal government to proceed with a national regulator. As to whether such a legal challenge to the material aspects of the proposal would be successful, the preponderance of opinion is that the federal government would be acting within its constitutional authority and could proceed. There may be some specific residual areas that are properly the exclusive jurisdiction of the provinces, but it would not be expected that these limitations would detract from the overall initiative.
It must be remembered that the federal government is already active in important aspects of securities regulation in several areas. For example, the federal Clearing and Settlement Act explicitly recognizes that it is desirable and in the national interest to promote the efficiency and stability of the Canadian financial system, including the clearing and settlement of payment obligations and the control of systemic risk. In light of the current upheaval in financial systems around the world, including Canada, the role of federal governments is critical, and addressing systemic risk would be expected to include regulation of important market participants such as issuers and securities dealers. The draft Federal Securities Act that the Expert Panel has proposed articulates that the new regulator’s role will be governed by principles that include the reduction of systemic risk.
With respect to the development and structure of the Canadian securities regulator, it can also be expected that resolution of constitutional issues will include concessions on where the regulator, its main components and staff are located and sensitivity to maintaining experience in regions to address regional market requirements. The implications of a decentralized regulator (which is the vision of the Expert Panel) will be relevant to market participants as well as regulatory effectiveness. Market participants will be faced with dealing with regulators within and without the national system and, within the system, will likely be dealing with more than one administrative location. A great effort will be required to co-ordinate internally the functions of the Canadian Securities Regulator – the prospect of a virtual regulator comes to mind.
In the broad context of financial regulation in Canada, the relationship between securities regulation and the regulation of financial institutions and debt markets will be important to determine. In the international context, the trend has been to put all of the sectors relating to financial markets under one regulator, the Financial Services Authority (FSA) in the UK being an example, as well as regulators in other European Union jurisdictions. Recent events in the United States are evidence that this trend may be expected there as well, as closer integration of federal securities and banking authorities have been encouraged, and a number of the largest securities dealers have reorganized themselves as bank holding companies subject to the jurisdiction of banking authorities rather than the SEC. The likelihood of this trend developing in Canada has to be considered.
On the one hand, Canada’s financial markets have weathered the recent financial storms better than the markets in jurisdictions where there is a central regulator. In this regard, regulators in the United States, the UK and other central economies have been subject to serious criticism. The FSA has also recently called for a more global approach to regulation of financial markets, including the establishment of a world regulatory body. On the other hand, the integration by the market of activities that are traditionally the subject of securities regulation with banking activities drives the conclusion that the regulation of these activities should also be integrated. The initial model recommended by the Expert Panel is to maintain the separate regulatory functions, but it is fair to consider how long that division will remain.
If a more global approach to systemic financial risk does emerge from international co-ordination in response to the credit crisis, such as the continuing meetings of the G20 group of finance ministers and central bank governors, there could be greater domestic support for replacing the various provincial and territorial securities regulators with a single regulator that could represent Canada abroad.
The level of commitment by the federal government indicated in the Budget Speech suggests that the current proposals may have a greater potential for results than the other recent efforts to reform securities regulation in Canada.