An overhaul of the securities regulatory regime with the adoption of a common regulator, a move to more proportionate, principles-based regulation and a host of other changes designed to gain a competitive advantage for Canada in the global capital markets are called for in this year’s budget.

The topic of securities regulation is usually little more than a line item in the federal budget, but this year the government produced a separate booklet dedicated to the goal of creating a competitive capital markets advantage. Despite the newfound prominence of regulation on the agenda, the government is only trying to nudge the system toward greater efficiency; it is not proposing to seize jurisdiction or force the provinces into a new regime.

The government indicates that it is very much in favour of the sort of model proposed by the Purdy Crawford-chaired panel — a common regulator that is accountable to the provinces, and not dominated by Ontario, administering a single set of principles, backed by a single set of rules and charging one set of fees.

A Department of Finance official indicated the government intends to make the case for a single regulator and a more proportionate, principles-based regime, in the hope that the provinces will be convinced to move toward this sort of system. “It would be based on the willing participation of provinces and territories that recognize benefits for their investors and businesses as well as for the Canadian economy more broadly,” the budget notes.

It adds that such a model, “would cut red tape and reduce costs for market participants. The benefits of a common securities regulator would also include clearer accountability and more responsive decision-making in a rapidly evolving capital market, strengthened capacity for enforcement, and a stronger voice internationally.”

Indeed, the finance official indicates that a common regulator would not only lead to improved enforcement, but would also make it easier for the government to achieve one of its other aspirations — free trade in securities with the U.S. bilaterally and within the G7.

In addition to cajoling the provinces toward a more efficient, effective system, the government also plans legislative efforts of its own to enhance the country’s capital markets competitiveness. It pledges to review the provisions in federal statutes dealing with securities transfers to ensure that they are in line with provincial efforts to modernize transfer legislation and foreign jurisdictions’ modernization efforts. To that end, the department of finance will soon issue a consultation paper on the subject.

The government is also promising to modernize bankruptcy and insolvency rules in an effort to improve trading in the derivatives markets. The goal is to ensure full protection for collateral arrangements supporting these sorts of contracts. A department of finance official indicates that there is currently some uncertainty in the rules in terms of whether, and how quickly, a creditor can claim collateral if a counterparty goes bankrupt.

The U.S. and Europe have already made these sorts of changes to their bankruptcy and insolvency rules, the official notes, and the government intends to bring Canadian laws up to the same standard. This will also help the banks when new international capital adequacy rules come into effect in November.

The government also indicated that it intends to update the tax treaty with the U.S. to lower tax barriers to the flow of capital across the border.

Finally, it plans to promote financial literacy, particularly for young Canadians, by developing new financial education materials. Apart from the additional funding for the RCMP’s Integrated Market Enforcement Teams, this is the only part of the plan to improve Canada’s capital market competitiveness that is actually funded in the budget. This effort will get $1 million in fiscal 2008 and $2 million in fiscal 2009.

As for the possibility of achieving a common regulator, and setting off a full-scale overhaul of the regulatory regime, on that count, a department of finance official says that Finance Minister Jim Flaherty will be inviting his provincial and territorial colleagues to meet on the subject, but nothing is scheduled at this time. The missing ingredient for major regulatory reform has always been a lack of political will — it remains to be seen if this federal government has found that will.