The pending merger of the Ontario Securities Commission and the Financial Services Commission of Ontario promises to alter dramatically the way financial services are regulated in the province.

And while there are many benefits to the merger — such as “one window” access and shared resources — there are also some areas of concern.

A recent summit co-hosted by law firm Cassels Brock and Blackwell, the Peel Institute of Applied Finance and the Investment Funds Institute of Canada brought practitioners together to discuss the effects of the merger. Alexandra Raphael, a consulting partner with Cassels, provided a commentary on the draft merger legislation. In an interview after her presentation, Raphael expanded on what she thinks will be the concerns of those in the industry.

“One of the important issues is the composition of the merged commission, that there be appropriate industry representation,” she says.

The new commission, to be known as the Ontario Financial Services Commission, will be a single regulatory body, covering the regulation and oversight of pensions, insurance and securities. If each of these disparate areas of supervision is brought together under one tent, will each get the attention it deserves?

“Getting balance on the commission is an issue. We’re starting off with the chairman of the securities commission being the chairman of the merged commission. That in itself indicates a weighting,” says Raphael, herself a former OSC staffer and former lawyer with the Ministry of Finance. “My orientation is toward securities but, if I was in those other industry groups, that would be one of the things I’d be most concerned about.”

As well, the merger probably will result in cutting staff, and that presumably will affect service.

“This being a consolidation, one of the benefits will be a smaller group of people regulating all these industries, but that means you’re going to lose some specialization at the staff level,” says Raphael. “I would speculate that, if you’re going to this ‘one window’ regulation, you’re going to lose some expertise. You’re going to have people who are jacks of many trades.”

Raphael says there also could be concerns about changes to the fee schedule. As it is, the various commissions operate on vastly different funding models. The securities commission is self-funding, which means it keeps its own revenue, while FSCO sends its revenue to the Ontario government’s consolidated revenue fund and then receives funding at the discretion of the government. Although there is a provision in the legislation that allows the government to take any surplus, the merged commission will operate on a self-funding model, with the overall effect of putting the rest of the financial services sectors at arm’s length.

“That means the government has much less to do with the purse strings,” says Raphael.

The new commission will also see the OSC’s fee-setting model extended to FSCO’s areas of responsibility. That will mean pension and insurance regulators can establish their own fees and assessments again, without direct government oversight.

“The government is a very big, heavy-handed organization; the commission will be a much smaller, tighter group. But whether or not the commission, not having as many mouths to feed as the government, will recognize that it doesn’t need certain resources the way the government would … They’ll know what they need and they’ll know what they want and they’ll have the means to raise those funds,” says Raphael.

There are similar concerns when it comes to rule-making capabilities. The proposed legislation would see rule-making capability, which currently only applies to the OSC, applied to all sectors under the jurisdiction of the new legislative body.

The granting of rule-making power was a big issue when the securities commission received the right in 1994, so it probably won’t be as contentious an issue this time around. Nevertheless, it diverges from the usual system of regulation in which pension and insurance legislation is created by the legislature or cabinet. Raphael is careful, however, to point out that the legislation is a tradeoff. Under the new system, the people who know the system will be making rules, rather then cabinet ministers who may be occupied with issues as disparate as water testing and farm subsidies — and that’s clearly a good thing.

Nevertheless, Raphael thinks the experience in the securities industry has been mixed. While the securities commission has been able to look at some issues much more comprehensively (resulting in legislation that’s better thought out) there is a reduction of direct government oversight.

@page_break@”In our system of government, we have legislation created by the legislature, we have regulations established by cabinet. Rules established by a commission are a fairly novel development,” she says.

Another change to the industry, as a result of the legislation, will be the pay and compensation of regulators.

Currently, OSC staff is not governed by the Public Services Act, which exerts a range of restrictions on how much government workers are paid. Outside the act there’s much more freedom when it comes to compensation. For the OSC, the only way to attract employees to the commission and away from the highly compensated private sector was to step outside the Public Services Act. That same regime will now apply to the rest of the financial services industry.

As well, Raphael pointed to the use of SROs. There are broad powers under the proposed legislation to delegate to self-regulatory organizations, similar to how the securities industry regulates itself with the IDA.

“That same system does not exist under any of the statutes, other than the Securities Act and the Commodities Futures act. So that’s a big change,” says Raphael.

One other aspect that’s been added to the act that Raphael believes will attract attention is a provision in the enforcement part of the legislation that will allow investigators to enter dwellings. Under the proposed legislation, it will be possible to investigate homes, the justification being that home offices have become more common.

“That will attract some attention,” says Raphael. That particular provision illustrates a concern about the new legislation. Up until now, the regulatory regimes that have grown up around financial services industries have grown out of different philosophies. Securities regulation, and all the principles, concepts and practices that surround it, grew out of an anti-fraud perspective (a criminal perspective), while industries such as pensions and insurance grew out of a review or a supervisory process.

The new legislation marks a shift in the regulation of the insurance and pension industries, according to Raphael. “It’s a shift in focus from supervision to penalizing bad market conduct,” she says.

Again, it’s a tradeoff. Under the current setup, some would say not enough attention is paid to market conduct. On the other hand, the regulator has a responsibility to find out what’s going on and ascertain that the people who are administering pension plans and running insurance companies are doing the right thing. That responsibility now will be reduced.

“We’re sort of changing regulatory tools,” says Raphael.

Comments are due June 29, 2001. They should be submitted to John O’Toole, MPP and Parliamentary Assistant to the Minister of Finance.