Regulation: Stuck in neutral?

So far, that seems a rather faint hope. Neither of the other two big provinces in the securities sector – Alberta and Quebec – has expressed much interest in joining.

Quebec’s finance minister, Nicolas Marceau, immediately was sharply critical of the announcement – threatening possible legal action to try to block the effort, which he characterizes as a bid to gut Quebec’s financial services industry. That province surely will not join the new effort.

Alberta has been more equivocal, indicating that it will evaluate the proposal before deciding whether to join. But the optics are not good. Alberta’s finance minister, Doug Horner, suggests Alberta was surprised by the announcement. Yet Flaherty had indicated that Alberta had been invited to sign the deal but had rejected that invitation last December.

Since then, Alberta has been leading the rival effort in regulatory reform through the Provincial-Territorial Council of Ministers of Securities Regulation, which aims to strengthen the current system.

That group was scheduled to meet in Quebec City on Sept. 23 to finalize an agreement to establish its own approach to co-operative regulation – including harmonized securities laws, formalized decision-making and improved co-operation between both governments and regulators. However, the deal between B.C., Ontario and the feds was sprung on the rival group just before the September meeting. So, instead, the finance ministers of B.C. and Ontario – Michael De Jong and Charles Sousa, respectively – presented their proposed new model, which generated a lukewarm response from the other provinces.

Following that meeting, the council announced that the individual provinces will conduct their own due diligence and make their own decisions about whether to sign onto the new federal-backed proposal. The council also pledged to continue developing its own reform initiative, indicating that the member provinces are less than fully swayed by the initial pitch from B.C. and Ontario.

On its face, it’s hard to see how the other provinces could object. The proposed federal model largely appears to conform to their vision for improved provincial regulation, visualizing that the provinces would retain jurisdiction for securities regulation; there would continue to be regulatory offices in each participating province; and the provinces would have a voice in both the executive management and the governance of the new authority. The proposed regulator would administer a single set of rules under delegated authority from the provinces. And the federal government also is still promising to compensate provinces for any revenue they’d give up by signing on with the new self-funded body.

Ultimately, the proposal doesn’t ask the provinces to give up much, other than agreeing to the symbolism of submitting to an executive office in Toronto and to accepting a role for Ottawa in securities regulation.

Under the proposed model, the feds would serve as one of two co-chairs of the proposed regulator, with the other position being filled by a representative from one of the participating provinces (initially, B.C.). The feds also would get a role in the proposed regulator’s governance; a say in any proposed changes to securities legislation, rules and the regulator itself; and a vote on any major appointments to the regulator’s board and the adjudicative tribunal. There also would be federal legislation for the proposed regulator to administer that would deal with “national issues” such as systemic risk, criminal enforcement and national data collection.

Obviously, accepting a new role for the federal government in securities regulation will be harder for some provinces than others. For some, the biggest issue will be whether the feds agree to offer enough compensation to replace lost revenue. For others, maintaining jurisdiction is paramount.

Regardless, the provinces may have little choice but to accept some federal role in securities regulation. If this deal with B.C. and Ontario hadn’t been reached, Flaherty had threatened to develop a federal regulator to take responsibility for areas of regulation that the Supreme Court of Canada’s December 2011 decision had suggested in may represent national issues.

Indeed, the one certain benefit of the agreement between B.C., Ontario and the feds is that it avoids the prospect of the creation of an additional federal regulator. As De Jong said at the deal’s announcement, the provinces also have to consider the impact of not reaching this agreement: “There are impacts for not taking this step. And we all know what they are. There are consequences associated with the creation of a federal securities commission… another layer. This precludes the need for that.”

From the financial services industry’s perspective – and for the provincial regulators – this deal avoids the creation of yet another regulator. But there’s no promise that regulation will be dramatically streamlined or become much cheaper, which may be good for the regulators but bad for the industry.

Moreover, unless all of the provinces sign up, the benefits that are being touted by the feds, such as a single-fee structure, simplified decision-making and more effective enforcement, will not be fully realized. There still will be more than one authority for the sector to deal with across the country, the remaining regulators still will have to interact with the new authority and there will be distributed power within the proposed regulator (which may represent little improvement on the existing Canadian Securities Administrators).

For the next several months though, the focus will be on whether any other provinces sign on to the federal-backed deal. The agreement contemplates getting willing participants on board by the end of January 2014.

At this point, that remains uncertain. A spokesperson for Alberta’s finance minister says that the province continues to study the federal-backed proposal while also working on reforms to the existing passport system with the other provinces. Similarly, a spokesperson for the Manitoba government stresses that that province continues to work to improve the passport system.

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