Industry protests

In comments submitted on the OSC’s proposals, the sector has complained that: these rate hikes are coming at a particularly bad time; the hikes are unfairly allocated among different sector segments; and that there is little oversight of the regulator’s rising costs.

There’s no question that the proposed fee increases do come at a bad time economically. The latest statistics from the Investment Industry Association of Canada (IIAC) indicate that overall revenue and profits in the sector are declining, and that it’s really only the large, integrated dealers that are making money. Many small- and mid-sized firms are in the red or just breaking even.

Prolonged [market] weakness “will force some of these firms out of business,” warns the comment from Toronto-based Raymond James Ltd. “Your proposed fee increase, on top of the heightened regulatory cost burden, is compounding the challenge faced by these firms.”

But the sector is not upset about just the prospect of higher regulatory fees in tough economic circumstances. There also are concerns about the allocation and oversight of the regulator’s rising costs.

For example, Toronto-based Cormark Securities Inc.’s comment points out that one of the reasons for the growing demands on regulators is the proliferation of alternative trading systems (ATSes) – particularly “dark pools” – which are designed to reduce transaction costs and are a source of dealer revenue. In other words, the OSC’s proposed increases add insult to injury, in that they are needed to cover the additional oversight required for firms that are out to undermine other dealers’ business.

The ATSes and exchanges also argue that their fees are to be hiked substantially, too. For instance, Toronto-based Perimeter Markets Inc. reports that its regulatory fees will effectively double under the proposed new fee structure.

The comment from Winnipeg-based ICE Futures Canada Inc. says the proposed fees to obtain exemptions would be among the highest in the world for foreign exchanges and clearinghouses, and that they are excessive – to the point that they could drive such firms out of Canada altogether.

And the comment from Toronto-based CNSX Markets Inc. argues that proposed new fees for exchanges, ATSes, clearing agencies and trade repositories are not being fairly allocated. In particular, the CNSX comment points to a disparity between the new fees facing ATSes vs those facing exchanges.

In general, there’s a concern that the OSC’s higher fees don’t necessarily represent commensurate benefits for the firms that are being asked to pay these costs. For example, Cormark’s comment notes that some of the other reasons for increased regulatory responsibilities come from global pressure for reform in the wake of the financial crisis to step up surveillance of systemic risk and ramp up regulation of over-the-counter derivatives markets.

Several comments suggest the OSC should reconsider the mix of participation fees and activity fees that make up its revenue. The IIAC, for example, recommends that the OSC draw a larger share of its revenue from activity fees, which are triggered by specific sources of regulatory expense, and rely less on the participation fees, which are the basic toll that firms pay simply to play in the markets.

Moreover, the IIAC comment suggests that the OSC consider whether there are other sources of revenue it should tap. For example, the comment points out that some sector members have suggested that regulators consider imposing a tax on high-frequency trading (HFT) as a way of possibly curtailing harmful HFT.

The IIAC comment stresses that association doesn’t support such a tax at this point, but notes that this is the sort of thing that regulators could do to bolster their budgets rather than simply hiking fees for member firms.

And the firms also want to be sure that the OSC’s fees are being used properly. Toronto-based Chi-X Canada ATS Ltd.‘s comment is supportive of some of the changes to the OSC’s fee model despite the fact that this will raise Chi-X’s fees. But Chi-X wants to ensure that this revenue is being directed where it is needed most within the OSC – namely, to the market-regulation branch: “This branch is of critical importance to the commission and to the markets, as decisions made regarding market structure direct the course of the capital markets in Canada.”

The Chi-X comment adds that while the market-regulation branch’s responsibilities have grown significantly in recent years, its staffing has not kept pace. Therefore, Chi-X suggests that more resources are needed.

There’s a demand for greater transparency and more accountability from the OSC regarding its fees and expenses. In particular, the IIAC comment calls for closer oversight of the OSC’s budgets and its performance, through both the finance minister and a legislative standing committee that would review its operations.

Legislative oversight of the OSC has been lacking in recent years – not just in terms of its budgets, but also its efficacy as a regulator. If the fee issue finally gets the provincial government’s attention, both the investment sector and investors may benefit.

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