The financial industry will still face higher fees from the Ontario Securities Commission (OSC), but the hit will not be as severe as initially expected.
The OSC published final amendments to its rules Thursday that establish the OSC’s funding model for the next three fiscal years.
The commission proposed an overhaul of its fee model back in August that would have seen participation fees rise by almost 8% on average for registrants and 15.6% for issuers annually.
The proposals sparked widespread complaints from the industry, which said that the increases could be crippling for many firms that are already struggling to break even amid low volumes and widespread market uncertainty.
On Thursday, the OSC indicated that, in response to the comments, it has revised its proposals. As a result, registrants are facing an average annual increase of 4.7%, while issuers will see a 11.65% hike. Additionally, certain market fees have been removed or capped, it notes. The lower increases will mean that the regulator won’t be able to rebuild its surplus to $30 million, which it has run down in recent years to avoid further fee increases in the wake of the financial crisis.
“The OSC has reflected on the comments to the proposed rule and has taken steps to respond to these concerns,” it says. “We have now proposed in the final amendments to minimize the proposed fee increases and to respond to specific areas of concern highlighted in some comments.”
However, the decision not to build a larger surplus also exposes the OSC to greater liquidity risks, and it means that it may have to borrow to fund its operations if its revenues continue to decline from original forecasts. If that results in higher interest costs, this may be passed on through higher future fees, it notes. Nevertheless, the proposed fee increases will allow the OSC to maintain its operating reserve of $20 million as a contingency.
In addition to the fee hikes, the OSC is introducing two additional categories of participation fees. One for regulated entities, such as exchanges, alternative trading systems, clearing agencies and trade repositories; and, one for credit rating agencies. However, it has modified the operation of the ATS fees, and cut the proposed fees for trading unlisted debt and exempt exchanges and clearing agencies.
Also, in response to comments, the proposed variable cost-based activity fee that would apply in special circumstances has been removed from the final rule.
However, it is sticking with its plan to shift from setting fees based on current revenue and market capitalization data to setting fees with reference to historical data — a move designed to make the commission’s revenues more predictable. It also rejects the industry’s criticism of its lack of accountability to the legislature.
The commission maintains that the new fee model better aligns the fees paid by market participants with the resources employed by the OSC in regulating their activities. And, it stresses that, under the new fee model, fees will remain unchanged or decrease for 45% of issuers and 55% of registrants.
“The OSC’s new funding model strikes the right balance between feedback from market participants and the commission’s responsibility to respond to evolving capital market demands,” said Maureen Jensen, the OSC’s executive director and chief administrative officer. “We have responded appropriately with a funding model that will enable us to continue to carry out our important regulatory work for the benefit of investors, while recognizing the difficult environment for market participants.”
The rule amendments have been delivered to the Minister of Finance for approval. If approved, by February 19, 2013, they come into force on April 1, 2013. The new model is expected to be in effect for a three-year period, starting April 1.
Industry reaction mixed
The Investment Industry Association of Canada (IIAC) says it is pleased that the OSC has eased its planned hikes in recognition of the tough market conditions.
However, the IIAC expressed disappointment that the OSC is sticking to its plan to use a fixed reference year for calculating participation fees — the IIAC called for the use of a rolling average, which the OSC rejected out of concern that this approach would undermine its desire for revenue predictability
Additionally, the IIAC maintains that regulatory accountability must be improved.
“The industry continues to believe a more accountable regime is needed to promote vigorous dialogue on the methods and approaches to improve rule-making and compliance standards that contribute to more competitive and efficient markets,” it said in a statement.