National regulator debate heats up

Back in June, the Provincial-Territorial Council of Ministers of Securities Regulation – that is, all of the provinces except Ontario – announced that its various members had agreed to negotiate a deal that would establish a “network-based co-operative regulatory model.” This model would include common securities legislation and rules, a bigger role for ministers in policy development and oversight, and an approach to managing systemic risk, among other things. The council set the September meeting as the date to finalize that deal.

The council also extended an invitation to the key province that has not been on board with its efforts – Ontario – to participate in the process. The federal government also was invited.

Both Ontario and the feds have, of course, long favoured a national solution – and have resisted efforts to entrench the existing provincial system. That position still appears to hold, as neither Ontario nor the federal government is expected to participate in the council’s meeting.

Earlier this year, Ontario indicated that it would be willing to attend the meeting if the council would put forward a proposal first that meets Ontario’s demands for regulatory reform, as outlined in Ontario’s provincial budget this past spring.

Ontario’s Ministry of Finance indicates that it remains committed to its long-standing demand that a national regulator be based in Toronto. Ontario also wants a governance structure that gives more power to provinces with bigger markets – a stance that provokes fear in some of the other provinces that a national regulator would just amount to an enlarged Ontario Securities Commission.

The federal government, for its part, continues to insist that there will be either a co-operative national model agreed upon among willing provinces or the feds will claim jurisdiction for the aspects of securities regulation that could fall under its jurisdiction according to the Supreme Court of Canada’s decision in December 2011 (which ruled on the federal bid to create a national regulator). For the most part, that jurisdiction involves systemic risk.

But the prospect of a new regulator to deal with systemic risk appearing on the already crowded regulatory field is not something that existing regulators want to see.

Since the global financial crisis, the Canadian Securities Administrators (CSA) has made its own efforts to address systemic risk, primarily by developing a new oversight regime for over-the-counter derivatives markets.

One of the goals of the provincial-territorial council’s work is to enhance the provinces’ ability to manage systemic risk. Pending efforts to develop a co-operative common regulator, Ontario also has said that it will look at ways to work with the federal government “to ensure the effective and efficient regulation of systemic risks.”

Of course, addressing systemic risk is important in its own right – for both the continued health of financial markets and, ultimately, the economy. But the suggestion in the Supreme Court’s decision that this type of risk could be claimed as federal jurisdiction has put the issue of systemic risk and how to regulate it at the heart of the ongoing turf war among the provinces and the feds.

To avoid adding yet another regulator to the landscape – i.e., some sort of federal authority to oversee systemic risk – the feds are calling for a “critical mass” of provinces to agree to create a co-operative regulator instead. The federal government has declined to specify just what amounts to critical mass or what the deadline is for such a deal.

One theory is that if Ontario, Alberta and British Columbia were to join together to form a co-operative regulator, their combined heft – they represent three-quarters of the market capitalization of Canada’s equities markets – would be enough to start the process.

The hope then would be that most of the other provinces would eventually join the new format for national regulation.

Of course, Ontario has long supported almost any effort aimed at developing a national regulator. On the other hand, Alberta traditionally has been dead set against a national regulator and is leading the current effort to strengthen the existing provincial model.

Recently, B.C. has flip-flopped back and forth. The province initially supported the most recent federal effort to create a national regulator – the first sign that a province other than Ontario was on board with that idea – but, ultimately, B.C. turned against the model that the feds proposed to the Supreme Court.

Now, regulatory sources indicate that Ontario and B.C. are at least talking about a possible agreement between them.

B.C. Finance Minister Michael De Jong was unavailable to comment on his province’s current position. Jamie Edwardson, a spokesman for the ministry, says: “B.C. continues to pursue a common securities regulator for Canada that protects B.C.’s interests and ensures the B.C. securities industry is not negatively impacted by a new regime.”

However, Edwardson adds, the province also is part of the passport system – and intends to continue working to improve that system.

“B.C. supports the concept of a co-operative securities regulatory system,” he says, “that respects constitutional jurisdiction, builds on the strong foundation of the current system, improves enforcement and is responsive to regional economies such as B.C.’s venture-capital markets.”

The province doesn’t want to appear wedded to any particular model, Edwardson says, adding that it would be “willing to consider any other co-operative initiative that could improve the regulatory system or lead to the development of a common securities regulator.”

The provincial-territorial council, for its part, has said it will explore formalizing the legal structure of the existing CSA, which operates the passport system, along with its ambition to agree on a more harmonized, co-operative model of regulation.

In the meantime, Doug Hyndman, chairman of the Canadian Securities Transition Office, which was set up by the federal government in 2009 to help to bring its planned new federal regulator to fruition, says that his office is preparing for both possibilities.

That means either a co-operative provincial deal that meets the feds’ objectives or, failing that, the development of a new authority to take care of aspects of securities regulation that could be claimed as federal jurisdiction.

Hyndman declines to try to predict which path will prevail – or when the choice between them will be made. But, he says, “I’m hopeful things will become clearer this fall.”

The feds are still hoping that a co-operative deal will be reached among the provinces. “We continue working on it,” says Jack Aubry, chief of media relations and consultations for the Department of Finance Canada.

“The government’s preferred approach,” Aubry says, “is to improve the regulation of Canada’s capital markets through a co-operatively established regulator that respects provincial and federal spheres of jurisdiction.”

However, Aubry reiterates the federal government’s position that “if a timely agreement cannot be reached on a common regulator,” the feds will step in and propose legislation that would seek to give the federal government jurisdiction over matters consistent with the Supreme Court’s decision.

Absent a clear deadline for making that decision, the next definitive step will be the September meeting of the provinces that want to keep trying to enhance the current system.

“The council continues its work toward a common regulatory environment, common legislation and improved ability to manage any systemic risk within the system,” reports Jessica Jacobs-Mino, assistant to Doug Horner, Alberta’s finance minister and president of the Alberta Treasury Board. “It is closer to reaching these goals than ever in the past.”

Given the long and tortured history of the debate over Canada’s regulatory system, that may not be saying much.

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