Little clarity on national regulator

The budget indicates that if that agreement doesn’t materialize in a “timely” fashion, then the government will move forward with legislation to take charge of the aspects of securities regulation that the Supreme Court of Canada (SCC) suggested fall within national jurisdiction (such as systemic risk) in its December 2011 decision. That decision denied the federal government’s most recent bid to create a national regulator.

The budget remains vague on what would constitute a timely agreement. Speaking on background, a Department of Finance official indicates that the government is neither prepared to wait forever, nor setting a hard and fast deadline.

Essentially, the government imagines two possible futures for securities regulation. In the first, a new common regulator is established, with the feds and the participating provincial governments delegating their authority to it. If that fails to materialize, the backup plan is to leave the current provincial structure untouched, but with the feds taking charge of the aspects of regulation that the SCC decision suggested could be considered a federal responsibility.

Based on the court decision, the government suggests this would include, “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.”

For the first scenario to materialize, the government says, it needs a “critical mass” of provinces to agree. But, again, it does not define what that means. A Finance official declines to be any more specific, other than to say that it doesn’t require unanimity.

“If we didn’t think [an agreement on a common regulator] was possible, we wouldn’t still be talking about it in [the budget],” the official says. However, he adds, if the government was confident it will happen, it wouldn’t now be discussing an alternative.

In view of the ongoing fluidity of the situation, the budget also notes that it plans to further extend the term of the Canadian Securities Transition Office (CSTO), which was established to create the common regulator envisioned in the most recent federal effort.

The CSTO, which is headed by former British Columbia Securities Commission chairman Doug Hyndman, has already received the extension that was provided for when it was established. It will require a legislative measure to further extend its term. But, again, the government doesn’t say how much longer the CSTO will be given.

If the government does ultimately have to give up on its aspirations for a common regulator, it’s not clear how it would draw the line between federal and provincial jurisdictions. Likely, enabling legislation would sketch out a relatively vague authority, and the details of specific rules would have to be worked out.

However, an agreement with the provinces remains the government’s clear preference, and the budget outlines the sort of common regulator it imagines: administering a single set of rules; operationally independent and self-funded; and with oversight from a board of directors with broad capital markets expertise. It would also “preserve the elements of the current system that work well, such as maintaining regulatory offices in each participating jurisdiction.”