The Canadian securities industry has certainly seen its share of proposals for a single regulator, but never in the midst of a financial crisis as acute as this one. The latest proposal attempts to take advantage of this unprecedented situation to win approval for a reform that has been sought for decades.

The Expert Panel on Securities Regulation, chaired by industry veteran Tom Hockin, is the latest in a long line of panels, committees and task forces that have recommended a single, national securities regulator for Canada. Previous efforts have faltered, however, thanks to provincial reluctance to give up jurisdiction and a lack of political will on the part of the federal government to confront the provinces and force the issue.

This time around, it’s not clear how much has really changed. Opposition to a single regulator remains entrenched in at least two of the four larger provinces, and this latest report doesn’t change that. Both Alberta and Quebec remain staunchly opposed to the idea.

Following the report’s release, Quebec’s Minister of Finance, Monique Jérôme-Forget, has insisted that Quebec will continue to defend its turf: “Securities regulation is a matter of provincial jurisdiction, and Quebec will go to court to oppose any federal bill seeking to govern securities.”

This warning has been echoed by Alberta’s finance minister, Iris Evans, who suggests Alberta also is prepared to go to court to defend its jurisdiction.

As for the rest of the provinces, Ontario has long been in favour of a single regulator. Both Manitoba and New Brunswick have expressed resistance to the idea. British Columbia historically has been opposed, but has now seemingly softened its stance. And the rest have yet to be heard.

The B.C. government’s apparent shift is, perhaps, the most surprising, particularly when one recalls the virulent opposition expressed by the B.C. Securities Commission in its submission to the panel last summer. The BCSC’s submission warned: “A move to a single regulator entails great risk, yet the benefits are far from certain. It is not likely to improve enforcement. The governance structures proposed to date are unwieldy. It is likely to be more costly and no more (probably less) efficient. There has been no case made as to how policy development would improve … The only apparent benefit is that it would be easier to explain to those outside Canada, which seems a small star to shoot for, given the risks of change.”

The BCSC’s submission had conceded that there may have been a case for a single regulator in the past, but the passport system has now resolved the major weaknesses of the provincial system. What really needs to happen, it had noted, is for Ontario to join that effort: “If Ontario joined Passport, we would have all the benefits of a single regulator without facing the risk and disruption of a complex structural change.”

As for the feds, Finance Minister Jim Flaherty has been the driving force behind this initiative, and he remains committed to the idea. Flaherty has promised to include measures in his Jan. 27 budget to “move toward a federal securities regulator and single securities act.”

Yet, Flaherty has also maintained a consistently conciliatory tone, suggesting that the feds will move ahead with provinces that are willing to participate in a national regulator rather than claiming jurisdiction and forcing a regulator upon dissenting provinces. This stance was echoed by Prime Minister Stephen Harper at the recent first ministers’ meeting. “[The government plans to] move forward with a common securities regulator on a voluntary basis,” Harper told the premiers, “that respects constitutional jurisdiction, regional interests and expertise.”

In the past, such an approach has not been enough to get the provinces on board. This time around, the hope appears to be that the financial crisis will persuade at least some of the provinces that a single regulator is necessary. Both Flaherty and Hockin point to the financial crisis as justification for major regulatory reform.

“The seriousness of the current financial and economic crisis requires bold action,” Flaherty said following the release of the Expert Panel’s recommendations. “Canadians expect improved regulation of their capital markets.”

It’s not clear, however, that this line of reasoning holds much water. For one thing, the crisis is largely a banking crisis; there’s not a great deal of blame attributable to securities regulators. The biggest regulatory flaws exposed by the crisis relate to the capital adequacy regimes imposed by banking supervisors, weaknesses in risk management and stress testing at banks, and unintended consequences flowing from certain accounting rules. Blame attributable to securities regulators is relatively scant.

@page_break@Moreover, the crisis has been most acute in countries that have national securities regulators — namely, the U.S. and Britain. Indeed, to the extent that securities regulators are implicated in the financial crisis, the biggest target is the world’s premiere authority, the U.S. Securities and Exchange Commission.

A recent report from the Paris-based Organization for Economic Co-operation and Development traces one of the four main causes of the credit crisis back to the SEC — specifically, its decision to allow investment banks to opt for a supervisory regime that enabled them to expand their leverage to 40 times equity from 15 times. This decision, combined with other factors, had led to a massive increase in off-balance sheet mortgage securitization, the implosion of which lies at the heart of the financial crisis.

Exacerbating factors that can be pinned on securities regulators, such as weak oversight of the credit-rating agencies and tremendous uncertainty in the derivatives markets (particularly, the credit-default swap segment), are failings that exist throughout global financial markets — and the solutions certainly lie in the world’s primary market centres, New York and London.

The only part played by securities regulators at the height of the financial crisis this past fall was adopting a short-lived ban on short-selling financial services stocks. Canadian regulators participated in that questionable initiative to the extent that many large domestic financial services companies are interlisted on U.S. exchanges. Arguably, the only way in which Canada’s provincial system failed markets in this episode is that they all went along with the U.S.-led ban.

Indeed, Canada has weathered the financial crisis far better than many countries. So, drawing a connection between the peculiarities of the Canadian regulatory system and the relative severity of the financial crisis could lead an objective observer to conclude that the present crisis doesn’t provide much justification for reforming Canada’s regulatory structure.

That being said, the single-regulator debate has long since stopped being about wise regulatory policy; it is now almost completely a question of politics. Proponents of a single regulator are surely hoping provincial governments will want to be seen to be doing something about the financial crisis and thus take action.

The model proposed by the Expert Panel will allow the federal government to go ahead with only a handful of participants, which will adopt a common securities act. The model also proposes a feature that would allow market participants based in provinces that don’t join to choose to be regulated by the federal regime.

This “opt in” feature is one of the genuine innovations proposed in this report. The idea of allowing the provinces to opt into a single regulator has been kicking around for some time, but this approach would give the choice of regulator to market players.

The idea of allowing market participants to opt for federal regulation was advanced by theInvestment Counsel Association of Canada in its submission to the panel this past summer. Not surprising, it is pleased that the recommendation has found its way into the final report.

“We have been in a constitutional quagmire on this issue for decades,” says Katie Walmsley, president of the ICAC. “We believe the ‘opt in’ approach recommended by the Hockin Report is the only way this is going to move forward.”

If the provinces choose not to opt in, the panel recommends that the federal government consider unilaterally imposing a national regulator.

The opt-in feature isn’t the only innovation in the report. It also recommends that the federal model include an independent adjudicative tribunal to hear enforcement cases. The proposed national securities commission would still hear matters such as exemption requests and takeover bids.

Additionally, the report calls for a more proportionate, principles-based form of regulation that would limit the compliance bur-den on smaller firms and reduce reliance on detailed rules.

The concerns of small investors also get a great deal of attention in the report, which recommends that the national regulator be empowered to order compensation to harmed investors; that it establish an industry-financed compensation fund that could give victimized investors back their money; and that it create an investor panel that will represent investors’ interests to the regulator.

Stan Buell, president of the Markham, Ont.-based Small Inves-tor Protection Association, calls the report “the best thing that has happened for investors, ever.” He particularly applauds the idea of an investor compensation fund and the ability of the regulator to order restitution.

Also, Buell believes principles-based regulation can be more effective than prescriptive rules and that investors will benefit from the improved enforcement, increased input on policy and better oversight — all things that are recommended in the report.

Buell is optimistic that Canada will ultimately have a single national regulator. And while there’s no reason such investor-friendly improvements couldn’t be made by the provincial authorities, he doesn’t believe that will happen. He sees provincial regulators as being captive to the industry.

This latest effort at forming a single securities regulator has its share of good ideas. But whether they get adopted is now a matter of political gamesmanship. IE