Regulation: Not ready for prime time?

The CCMR project already has the dubious distinction of scrubbing several planned launches. The original members of the initiative hoped to get the CCMR off the ground in July 2015. That was pushed back to the autumn of 2015, before again being delayed to the autumn of 2016.

The latest deadline also is looking increasingly unlikely to be met, as several fundamental aspects of the new regime have yet to be announced publicly; and those that have been continue to raise serious concerns in certain quarters. The whole project seems far from ready for prime time.

In the meantime, the existing regulators are incurring costs in anticipation of the transition to the new authority.

Insight into these costs is revealed in the British Columbia Securities Commission‘s (BCSC) latest service plan, which was released alongside the B.C. government’s latest budget in mid-February.

The BCSC’s service plan reveals that the regulator spent about $800,000 on the CCMR project in fiscal 2016 (which ends March 31); and, the BCSC expects this to rise to $3.2 million in fiscal 2017, pushing the agency into a forecast $6.5-million deficit in fiscal 2017.

The service plan report cautions that these estimated costs are preliminary, but suggests that the risk to the estimates is on the upside: “The actual effort required for the project could be higher, which would increase BCSC deficits.”

Notably, the BCSC report points out that estimates don’t include any provision for expenses associated with winding up the existing regulator and folding it into the new co-operative authority.

These costs will not be known “until shortly before the BCSC’s integration into the [CCMR],” the report states, adding that these costs will increase the BCSC’s ultimate budgetary shortfall further.

The big jump in spending forecasts for the CCMR for fiscal 2017 is largely the result of the cost of hiring temporary information-technology staff to “facilitate systems changes,” says Richard Gilhooley, media relations officer at the BCSC.

In addition, travel costs are expected to increase, as are professional expenses.

The report states that the BCSC expects to have more precise estimates of the true costs of the CCMR project by June.

For now, though, given the BCSC’s projected revenue, the report states the regulator expects to “face continuing structural deficits annually until the [CCMR] launch.”

The projected deficits for fiscal 2016 and 2017 “will erode the BCSC’s unrestricted surplus,” the report states. That surplus sat at $26.6 million in fiscal 2015, and is projected to decline to $13.5 million in fiscal 2017.

Moreover, the report adds, the expected deterioration in its balance sheet will, “[leave] the BCSC more financially vulnerable, particularly if BCSC costs increase or if the [CCMR] initiative is deferred further.”

For the other big player in the CCMR initiative – the Ontario Securities Commission (OSC) – the financial impact of the transition to the new regime is less clear.

The OSC has reported that it recorded about $500,000 in CCMR costs in fiscal 2014, and that this rose to about $1.8 million in fiscal 2015 – but the OSC doesn’t have any estimate of the final costs for fiscal 2016 yet, nor is there a projection for fiscal 2017.

However, the OSC’s latest business plan, released last December, does forecast that the regulator will record surpluses in both fiscal 2016 and fiscal 2017.

Looking further down the road to fiscal 2020, the OSC anticipates adjusting its fees to a level that would balance costs and revenue and gradually eliminate the surpluses – although, at that point, the OSC presumably would be part of the CCMR anyway.

The BCSC report also details the work that the CCMR’s would-be member regulators are doing to prepare for the transition to the new authority. The report says that staff from both the BCSC and OSC are co-leading teams working on CCMR-related issues, such as administering the new regulator’s legislative framework, developing new enforcement processes, educating the securities industry and investors about the new structure, and dealing with internal transition issues.

A couple of the smaller regulators that are involved with the CCMR project are in a somewhat different situation from the BCSC and the OSC.

Both Saskatchewan and New Brunswick have integrated financial regulators that are not just responsible for securities markets, but which also regulate insurance, pensions and other financial entities.

For those agencies, the transition to the CCMR will spell the loss of their single biggest revenue source.

For example, New Brunswick’s Financial and Consumer Services Commission’s (FCNB) latest annual report indicates that about 80% of the regulator’s revenue comes from regulating securities markets. The loss of this revenue would leave the FCNB with a structural deficit that is expected to exceed operational reserves.

So, in fiscal 2015, the FCNB created a $10-million “restructuring reserve” funded by a one-time charge against that regulator’s retained earnings, which will give the FCNB the capacity to survive while it adjusts to the loss of its securities-sector revenue.

The FCNB report indicates that the reserve will be wound down by either the end of fiscal 2022 or five years after the CCMR launches (whichever comes later).

For now, though, the FCNB has budgeted for a surplus of $8.4 million for fiscal 2016, which would be paid into general provincial coffers after the end of the year.

Similarly, the securities regulation business is a source of revenue for the provincial government in Saskatchewan.

According to the latest annual report of the province’s Financial and Consumer Affairs Authority (FCAA), the agency produced a surplus of $15.5 million in fiscal 2015,, of which slightly more than $15 million came from the securities sector.

The FCAA also stands to lose this revenue once the CCMR comes into being.

The FCAA’s annual report indicates that the regulator’s securities division would initially work for the new co-operative regulator on contract and, after three years, could then be folded into the CCMR entirely.

For now, however, the launch of the CCMR and the transition to that regime seem far from certain.

Yet, the timing of the launch appears critical to the finances of several of the regulators that will be involved.

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