Investment professionals in Canada have much less confidence in the effectiveness of Canadian regulatory and investor protections than do those outside the country, according to the 2008 Financial Market Integrity Index.

The CFA Institute’s index, which gauges investment professionals’ perceptions of ethics and integrity in financial services markets, gave Canada a score of 3.0 on a five-point scale among domestic professionals, and 3.3 among respondents outside of Canada.

The index is equally weighted between two evaluation factors: the ethics of market participants, and the effectiveness of market systems in ensuring market integrity. It surveyed 2,000 professionals in six countries who hold the CFA, FSIP or ASIP designations, in April and May.

The score reflects low ratings of Canada’s regulatory system, which earned a score of 2.6. Professionals outside Canada gave the system a score of 3.2.

Widespread concerns were cited about Canada’s regulatory authority being spread across the 13 provinces and territories, and some respondents cited the need for a more streamlined regulatory process.

Concerns were also cited about a lack of transparency in financial markets and executive compensation, and enforcement of regulation, which earned a score of 2.5.

Those outside Canada, which included professionals in the United States, the United Kingdom, Hong Kong, Japan and Switzerland, rated every aspect of capital market systems “materially higher” than those in Canada, according to the index report.

“It may be that high returns in recent years from a commodities- and currency-fueled Canadian boom have blinded outside investors to the regulatory and investor protection issues that Canadians must contend with daily,” the report says.

The CFA Institute attributes the low market systems score to the subprime meltdown’s impact on perceptions of global financial markets, and the asset-backed commercial paper crisis in Canada. The institute also suggests that the score could be a result of the bear market and the financial crisis exposing weakness in regulation that might have gone unnoticed in a stable market.

Ratings on the ethics of market participants earned higher ratings than market systems in Canada, with all types of market participants earning scores of at least 3.0—except for hedge fund managers.

“Hedge fund managers hold the dubious distinction of being seen as least ethical in nearly all jurisdictions surveyed,” the report says, noting that they also garnered the lowest ranking last year.

The integrity of buy-side analysts and pension fund managers earned the highest rankings.

The top ethical concern among financial professionals is conflicts of interest, particularly pertaining to innate conflicts in relationships between investors and financial advisors.

Interestingly, despite the favourable view of Canada’s market integrity outside the country, fewer out-of-market respondents recommend Canadian investments. Based on ethics and integrity alone, about 79% of in-market respondents were likely to recommend investing in Canadian markets, compared to 63% of those outside Canada.

The enthusiastic response from Canadian professionals could be an indication that ethics and capital control market systems are not issues significant enough to “prevent investment in what is generally considered to be one of the most liquid, stable, and diverse markets in the world,” the CFA Institute says.

Still, respondents’ confidence in the Canada’s market systems has fallen from last year and the institute says this reflects a need for improvements in their effectiveness.

IE