Boardroom talk
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Around the world, a wind is blowing in favour of deregulation, as The Economist magazine recently pointed out. Canada is no exception. In the securities industry, voices are already being raised in support of this cause. While recognizing the importance of a periodic review of the regulatory framework, it is crucial not to lose sight of the goals of regulation, or the raison d’être of the regimes introduced over the years.

Let us start with the goals. Securities regulation pursues three main goals, namely to ensure: 1) the protection of investors; 2) market efficiency to promote an optimal allocation of financial resources; 3) financial stability. These goals are supported by a set of provincial legislative and regulatory regimes harmonized across Canada through the coordination of the Canadian Securities Administrators (CSA).

Securities regulation is often criticized for imposing a burden that limits access to public capital markets, and for being ill-calibrated, generating excessive costs for listed companies and initial public offerings (IPOs). The decline in the number of IPOs and the exponential growth of the exempt market are said to be signs of this problem. The conventional wisdom would be to reduce regulation, notably by easing disclosure requirements or stock exchange listing conditions.

While there is a decline in the number of listed companies, it would be simplistic to attribute this phenomenon to regulation. Factors such as interest rates, the abundance of private equity financing, the evolution of business models towards intangible assets, taxation and the rise of indexed funds all play a role in this trend which can be seen in other jurisdictions, including the United States and the United Kingdom.

Above all, it is essential not to lose sight of the goal of securities regulation, which is to reduce informational asymmetries between companies and investors. By requiring disclosure of material information, regulation facilitates the valuation of companies, thereby ensuring investor protection while contributing to the efficient allocation of capital. Admittedly, these obligations entail costs for companies, but without them, investors would apply a discount on companies’ valuation, thereby increasing their cost of capital. Moreover, the accounting scandals of the early 2000s should make us cautious about relaxing the rules that underpin the reliability and integrity of financial reporting. Beyond the financial sphere, transparency generates benefits for other stakeholders, governments and the public, by informing them about the impact of companies on the economy and society. All this is not to say that the status quo is to be preferred, but rather that reflections should not be based on the premise that regulation is the source of the decline in the number of listed companies in Canada.

Another frequently voiced criticism is the inadequacy of regulation in the face of innovation. From cryptoassets to artificial intelligence (AI), innovations are said to come up against regulatory obstacles. According to this logic, regulation is ill-adapted, hinders competition and affects the supply of innovative financial products and services to investors. The idea, therefore, would be to further liberalize the regulatory framework to encourage innovation and competition.

Undoubtedly, regulators need to adapt their rules to keep pace with innovation. However, promoting innovation should not take precedence over the fundamental goals of regulation.

Take cryptoassets, for example. Their opacity, the complexity of the products and platforms, the high level of speculation and gamification are all characteristics that raise significant risks for investors. And let’s not forget the risks of fraud, such as those observed with the collapse of the FTX and Quadriga crypto exchanges. The concentration of the cryptoasset market, its fluctuating liquidity and high volatility represent threats to financial stability and investor confidence that need to be taken seriously.

AI also raises issues of investor protection. These include algorithmic bias, model opacity and complexity, and lack of accountability. Other aspects of AI represent risks to financial stability. For instance, if many institutions use the same AI models and data, it could lead to similar decisions in transactions, loans, and pricing, making the system more connected and risky. The 2008 financial crisis should serve as a lesson in this respect.

Rightly so, Canadian regulators are putting in place a framework for cryptoassets, aimed at mitigating risks to investors. They are seeking to clarify the application of regulation to AI, while soliciting input on the need to revise or adapt current supervisory and regulatory approaches. Similarly, the CSA Financial Innovation Hub reflects regulators’ desire to support the capacity of innovative, investor-friendly business models.

Let us be clear. The current regulatory regime is far from perfect. There are still many areas of improvement to be addressed. However, in reviewing the regulatory framework, it is essential that Canadian regulators stay the course by working together to align their actions with the goals of the regulatory regime, and by relying on evidence rather than speculation.

Stéphane Rousseau is a professor of law and president the Observatory on Quebec Securities Law at Université de Montréal. With professors Jason Alcorn at Université de Moncton; Cinthia Duclos at Université Laval; Cristie Ford at University of British Columbia; Patrick Mignault at Université de Sherbrooke; Poonam Puri at York University; and Robert Yalden at Queen’s University.