With the launch date for the proposed new national co-operative securities regulator more than two years past the original deadline and a revised launch date slightly more than a year away, critics such as the C.D. Howe Institute now question whether the initiative should go forward at all.
A paper from the Toronto-based, independent think-tank calls on policy-makers to put the brakes on the Capital Markets Regulatory Authority (CMRA) project. The recent paper argues that the proposed regulator may not improve the current system as envisioned. The paper adds that the proposal actually could be a step backward by disrupting the ongoing efforts at harmonization among the existing provincial securities regulators.
In theory, the CMRA is supposed to launch some time next year. The passage of new federal and provincial legislation required to make that happen is targeted for June 30, 2018. Yet, the project still faces its share of legal and political uncertainty.
More than four years have passed since the federal government, along with the governments of Ontario and British Columbia, announced plans for a new co-operative regulator that would be crafted to comply with an historic Supreme Court of Canada (SCC) decision in 2011. That decision declared that the day-to-day business of securities regulation is under provincial jurisdiction, but certain issues, such as systemic risk, could be considered a federal prerogative.
That SCC decision imagined that a single, national regulator could be created through some form of federal/provincial co-operation. In September 2013, the CMRA project was devised as the solution. It was initially supposed to début in July 2015.
Since then, the project has moved in fits and starts. A couple of drafts of proposed legislation and some rules for the proposed CMRA were released for public comment. These efforts have attracted a handful of other provinces and territories to join, but still haven’t won the support of Alberta and Quebec. The CMRA also faced a court challenge in Quebec this year, which found that certain elements are unconstitutional. That decision surely will be appealed to the SCC. In the meantime, the CMRA remains on uncertain legal footing.
But the recent paper from C.D. Howe – written by Harvey Naglie, a financial services sector veteran, formerly a senior policy advisor with Ontario’s Ministry of Finance – now casts doubt on the wisdom of the whole CMRA exercise.
“The expectations associated with the new regulator is likely to lead to disappointment,” the C.D. Howe paper states. “Constitutional exigencies and political realities have so compromised the version of the new regulator that it does not have the capacity to deliver the anticipated efficiency and effectiveness dividends.”
In particular, the CMRA’s proposed operational and governance structure will weigh against it being any less bureaucratic, or more efficient, than the current system, the paper argues: “The prospect that the co-operative regulator will produce modern, innovative, responsive and flexible regulation seems at odds with the actual draft legislation and [proposed] regulations that have been published.”
Moreover, the paper adds, the proposed structure for the hybrid federal/provincial co-operative structure for the CMRA is a novel, untested model for securities regulation. In addition, this new authority will need to work in harmony with regulators in the provinces that aren’t participating, undermining the CMRA’s ability to function efficiently: “The [CMRA] is a compromised ‘Plan B’ alternative that will lack the ability to unilaterally impose its regulatory authority across the country, a fundamental feature of a single national regulator.”
At the same time, the paper adds, the proposed model will mean losing the flexibility of the current system, which allows provinces to innovate. As an example, the paper cites initiatives – such as the Ontario Securities Commission‘s (OSC) LaunchPad, which aims to facilitate the development of the fintech industry – as the type of project that will be harder to develop under the CMRA structure.
According to the C.D. Howe paper: “This unfettered capacity of individual provincial regulators to develop rapid and targeted regulatory responses to changing circumstances in their local securities markets will no longer be available to jurisdictions participating in the co-operative regulator.”
Furthermore, the paper questions the assertion that the CMRA will bolster enforcement or lead to improved investor protection. Although the CMRA model had the potential to improve investor protection meaningfully at the outset, the paper states, “it now appears to be an opportunity lost.”
For investors in Ontario, the CMRA would be a step backward, the paper notes, as they would lose recent OSC initiatives, such as that regulator’s independent Investor Advisory Panel and its in-house Investor Office. As well, the CMRA’s structure is likely to inhibit efforts to enhance investor protection, which typically are led by regulators in either Ontario or Quebec.
“Notwithstanding the repeated assurances that the co-operative regulator will enhance investor protection, the available evidence is not reassuring,” the paper states.
Finally, regarding oversight of systemic risk – an area in which the provincial regulators have little history – the C.D. Howe paper argues that the CMRA represents a second-class approach: “The proposed approach does not conform with international best practice and could compromise Canada’s ability to monitor and mitigate systemic risk effectively.”
Given these concerns, the CMRA should be subjected to an independent review and cost/benefit analysis, the C.D. Howe paper argues: “The [CMRA] may not be ready for prime time, and [making] this determination before rather than after the launch [will be far more effective].”
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