A Bank of Canada official is calling for uniform securities rules in Canada, tougher enforcement, and regulations that foster competition and innovation.

In a speech to the Conference of the Association des économistes Québécois in Montréal today, David Longworth, deputy governor of the Bank of Canada, addressed the issue of regulation and its impact on economic growth. He noted that economic inefficiencies can be caused by both weak competition among financial services firms any market distortions created by poorly designed regulation. “If we want to bolster economic growth, we need to expose and correct these inefficiencies,” he said.

“Before a government agency considers imposing a new regulation, three tests must be passed: ensure that the regulation is targeted at correcting market failure; ascertain that the proposed solution is effective; and see to it that the cure isn’t worse than the disease,” he suggested. In satisfying these conditions, he proposed, regulators can increase the efficiency of the financial system by fostering competition in domestic and international markets, promoting efficiency by reducing informational asymmetries, and by promoting financial stability in general.

“The competitive capacity of the Canadian economy depends largely on the ability of its financial sector to compete on the world stage. Canada needs to follow best practices in regulation,” he stressed, adding that this does not mean blindly importing other jurisdictions’ rules.

“It is essential that the Canadian regulatory framework be guided by principles that are at least as good as, if not better than, those of other countries. However, our rules, and their implementation, must be adapted to domestic requirements and reflect the diversity in size and complexity of our publicly traded companies,” Longworth said. “So ‘Yes!’ to regulatory requirements that vary with size, but ‘No!’ to regulatory requirements that vary by province. At this time, I would like to welcome and encourage the harmonization efforts that are ongoing among provincial securities commissions, including Quebec’s Autorité des marchés financiers.”

He also called for tougher enforcement, noting, “Some research suggests than insider trading is not prosecuted with the same vigour here as in the United States, tainting the reputation of Canadian financial markets. It can even be argued that this less-than-stellar reputation results in higher financing costs for our firms.

“Thus, it is necessary that the behaviour of market operators be monitored and that violators be prosecuted and appropriately punished. A regulatory framework that ensures strict application of the law and that punishes dishonest players will reinforce the credibility of markets and investor confidence,” he said.

“Rising to this challenge will involve complementary and sustained action by several bodies at both levels of government: securities commissions, police forces, prosecutors, and the courts. It will also require that all stakeholders develop a solid expertise,” Longworth added. The RCMP’s Integrated Market Enforcement Teams are a step in the right direction, he said. “However, we must push for greater co-operation, since only in that way will we be able to mobilize the complementary expertise of all participants.

“The Canadian economy faces stiff international competition. To continue to prosper, it must be able to count on the support of an efficient financial system under a modern regulatory framework,” he suggested. “The Porter Commission provides good advice for legislators and regulators: The future of our financial system remains ever and always dependent on competition and innovation.”

“I submit to you that our financial system does not need a comprehensive, dramatic reform. There is, however, a genuine need for tenacious efforts from all financial system participants to bring about a long series of ongoing improvements — especially in the area of enforcement, competition, and innovation,” he concluded.