Regulation: Lacking appeal

Although there still is broad support for the notion of a co-operative national regulator, the reality of what’s being proposed is proving to be much less appealing. Various comments complain that the proposed legislation is too vague and the powers sought are too broad; some comments express worry that the resulting regulatory system would be worse than the current one.

For example, the comment from the Calgary-based National Exempt Market Association warns that the proposals ultimately will harm the capital markets: “This proposal is a systematic threat to Canada’s capital markets at a time when we need to be more innovative to compete globally. The political, regulatory and industry costs of this proposal could be insurmountable and possibly irreversible at a time in Canadian history that could not be more critical.”

Most of the other comments convey widespread concern about the proposal as it stands. To start, there are worries about a lack of detail in the proposals. The model outlined for the CCMR envisions a “platform approach” to securities regulation, which means that more of the detail resides in the rules administered by the regulator and less in the legislation itself. However, those rules have yet to be published. Initially, they were due to be released on Dec. 19, 2014, but have been pushed back to the spring.

Several comments complain that without these rules, it’s difficult to analyze the proposed regime properly. That difficulty is compounded by the fact policy-makers say that when those rules do come out, they won’t include any rules that are to be made under the federal part of the proposed new legislation, the Capital Markets Stability Act (CMSA).

Moreover, the investment industry isn’t clear about how the various parts of the new regulatory system would fit together. There are worries about: the interaction between federal and provincial rules and legislation; lines of accountability and authority; and the interfaces between the new authority, the provincial regulators that remain outside the CCMR (particularly those in Alberta and Quebec) and other authorities, such as the industry’s self-regulatory organizations, the Office of the Superintendent of Financial Institutions and the Bank of Canada. “Uniformity is essential to the co-operative system. And without a plan, a new regime could result in a system that’s more fractured than the current one,” warns the comment from the Ottawa-based Canadian Bar Association.

There also are concerns about the details of the proposed framework that are available. As well, there are worries that the draft federal legislation simply promises to impose a new tier of regulation on the industry while the proposed provincial laws would usher in a series of changes that could fundamentally alter the regulatory environment for the worse.

For example, Calgary-based Walton International Group Inc.’s comment states: “The CMSA adds a completely new layer to capital-markets regulation. Additionally, the [Provincial Capital Markets Act] is not a simple recreation of the current provincial legislation, but contains many significant changes … [that] clearly have a broader reach and place more limits on the rights of capital-markets participants than provisions in the current legislation.”

Indeed, the CCMR initiative does envision added oversight – that’s a function of how the CCMR came about. When the Supreme Court of Canada (SCC) scuppered the federal government’s most recent stab at creating some form of national regulation in a December 2011 decision, the SCC ruled that securities regulation falls under provincial jurisdiction. However, the SCC also ruled that some issues, such as systemic risk, are genuinely national and that a more co-operative approach could be devised that would incorporate both traditional provincial jurisdiction and new federal authority over national issues.

Proponents of national regulation saw the SCC’s decision as a possible road map to a compromise solution, but that’s a vision that requires an effort to address systemic risk on top of the existing framework. Support of national regulation within the securities industry is based on the idea that this concept would mean more efficient, less costly regulation.

However, the assumption underlying the co-operative model that the SCC imagined is that federal involvement would introduce measures to address systemic risk in addition to the existing rules. But the reality portrayed by the proposed CCMR model raises concerns about the impact of efforts to monitor for, and mitigate, systemic risk. In fact, several comments – including those from advocates for pension funds, credit-rating agencies and asset-management firms – argue against the designation of these entities as “systemically important.” Other worries include the effort to regulate systemic risk may bring the new regulator into conflict with the provinces that aren’t participating in the CCMR initiative – because a national law would apply in every jurisdiction, not just the provinces that are part of the CCMR.

Ultimately, all of this concern is undermining the hope that a co-operative regulator would usher in more cost-effective oversight. “We wonder where the efficiencies will be found for the financial services sector,” says the Toronto-based Federation of Mutual Fund Dealers‘ comment.

At the same time, the accompanying changes to the existing provincial securities law are sparking their share of concern. For example, the insurance industry and its regulators are worried that the draft legislation would allow securities regulators to extend their reach to the oversight of segregated funds. The Canadian Council of Insurance Regulators‘ comment argues that the proposed provincial law should be amended to exclude explicitly the possibility that seg funds could fall under the law’s jurisdiction.

Some comments also express concern that a raft of other changes, both big and small, in the proposed provincial law could have wide-ranging implications for capital markets. Amid this heightened legal and regulatory uncertainty, some comments call upon policy-makers to slow down.

“We urge the governments and the authority not to rush into completion of any of these initiatives, including the establishment of the authority and the finalization of the consultation drafts,” says a comment from a handful of lawyers with Borden Ladner Gervais LLP. Instead, the comment calls for further consultation.

If the CCMR initiative is to succeed, more consultation is likely, given these widespread concerns – meaning the launch of a new regulator this autumn is not.

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