Canada’s regulatory landscape faces a transformation as politics, shifting priorities and new legal realities push the investment industry’s overseers in new directions.
Most obviously, the prospect of a fundamental reshaping of the regulatory framework in Canada now is, at least, a possibility – given the Supreme Court of Canada’s (SCC) long-awaited decision on Nov. 9, which reversed a lower court’s ruling in Quebec, that declared that a proposed federal/provincial model for a co-operative capital markets regulator is constitutional.
But while this decision knocks down a basic legal obstacle for the new model for overseeing the securities industry, that doesn’t mean that the adoption of a co-operative regulator is imminent – or even inevitable. Indeed, the SCC’s decision hints at the significance of the hurdles that still must be cleared before the proposed Capital Markets Regulatory Authority (CMRA) can become a reality in Canada.
Although the SCC has found that the proposed CMRA model is constitutional, that doesn’t necessarily mean it is a good idea. “It’s up to the provinces to determine whether participation is in their best interests,” the SCC’s decision states.
And even though several provinces have signed on to the proposed initiative, in theory, actually going through with adopting the new system, in practice, may be another matter.
“For example,” the SCC’s decision states, “the participating provinces will be required to effectively dissolve their existing securities commissions and to merge the administration of those commissions into the [proposed] authority’s organizational structure. Once this has been done, it would undoubtedly be impractical for those provinces to extricate themselves from the co-operative system at a later date.”
The SCC’s decision also points out that the legislation required to enable the proposed CMRA has not been published yet. And, once the required legislation is proposed, “it will have to be carefully drafted so as to respect the limits on overlapping, yet distinct federal and provincial authority.”
Indeed, poorly drafted legislation could prompt further challenges in court.
Certainly, policy-makers in Quebec are not ready to concede that some form of national regulation is inevitable now. Following the release of the SCC’s decision, Éric Girard, Quebec’s finance minister, said that the province intends to retain its autonomy and expertise regarding securities regulation. The Autorité des marchés financiers (AMF) is not in jeopardy of being absorbed into the CMRA if and when the new agency comes into being.
Girard also highlighted the SCC’s reminder that the CMRA’s enabling legislation must continue to respect provincial jurisdiction, and he hinted that Quebec will be keeping a close eye on this. “We reaffirm our resolve with regard to defending both the interests of Quebecers and Quebec’s jurisdiction from any eventual encroachment,” he said.
Even longtime supporters of national regulation don’t view the CMRA as a done deal, given the amount of political spadework that still needs to be done. Ian Russell, president and CEO of the Investment Industry Association of Canada, for example, notes that although the SCC decision removes one stumbling block to the “eventual launch” of a co-operative regulator, there are numerous others.
Not only will all of the participating provinces need to pass legislation to enable the CMRA and to delegate their authority to the proposed agency, they may have to amend other laws, such as privacy and labour laws, to be in accord with the new regulator, Russell points out: “This will contribute to continued delay, as the pending legislation has low priority in provincial governments beset with difficult economic conditions. The approval process is further handicapped by the lack of a champion at the political level.”
Moreover, the SCC’s decision on its own isn’t likely to win over any of the provinces that currently aren’t part of the initiative, Russell suggests: “This means significant further delay, given the need to establish a regulatory interface between the participating and non-participating provinces to ensure integrated national capital markets. The participating and non-participating provinces also will have to establish an umbrella arrangement to achieve a uniform rule framework.”
The one positive sign for supporters of the CMRA model is that the new Progressive Conservative government in Ontario backs the plan despite the fact that support for the idea of a co-operative regulator is a holdover from the previous Liberal government.
Although Ontario’s new government actively repudiates many of the previous administration’s policies, the Tories are casting the CMRA initiative as being in line with the party’s goal of curbing regulation. (See accompanying sidebar story.)
Reacting to the SCC’s ruling, Vic Fedeli, Ontario’s finance minister, said, “Ontario is committed to working with the other participating jurisdictions toward the launch of the system … the co-operative system would support businesses and investors by helping to streamline regulation and reduce red tape.”
Ontario’s government also reiterated its support for the CMRA initiative in its first-ever autumn economic update, noting that the government believes a co-operative regulator would help “businesses raise capital more efficiently and better protect investors.”
Nevertheless, launching the CMRA remains a distant prospect at this point. In the meantime, the fact that the SCC validated one of the CMRA’s core purposes – better monitoring of systemic risk – shifts the spotlight to the existing members of the Canadian Securities Administrators (CSA).
To be sure, systemic risk is on the agenda of both the CSA and the existing provincial securities commissions already, but the SCC ruling highlights that their efforts in this area are limited: “While provinces have the capacity to legislate [with] respect [to] systemic risk in their own capital markets, they do so from a local perspective and therefore in a manner that cannot effectively address national concerns.”
Indeed, in 2011, the SCC first ruled that the monitoring of systemic risk is an area in which the federal government could claim jurisdiction in the traditionally provincial realm of securities regulation. And the proposed federal legislation that would be adopted as part of the CMRA focuses largely on dealing with systemic risk.
“The heart of this is data collection. In the current Canadian financial regulatory regime, there is a gap in data collection because there is nobody charged with the authority to collect data relating to systemic risk threats on a national basis,” explained Kevan Cowan, CEO of the Capital Markets Authority Implementation Organization (which was established to help create the CMRA), at a hearing before the Standing Senate Committee on Banking, Trade and Commerce in early November.
At the same hearing, Cowan said that because the CMRA would carry out both day-to-day regulation and systemic risk monitoring under one roof, there could be synergies realized in this model that don’t exist in the current system.
Nevertheless, the CSA maintains that it stands ready to meet the ever-changing and evolving demands on securities regulators.
“While provincial governments will determine the nature of future relationships among all Canadian securities regulators, I am confident that our member jurisdictions will continue to work collaboratively to deliver on their core mission, which is to protect investors and promote fair, efficient and transparent markets,” says Louis Morisset, chairman of the CSA and president and CEO of the AMF.
Morisset adds: “If the CMRA initiative ever moves forward,” the members of the CSA will work together to “implement an interface” among provinces that are in the new arrangement and those that are not.
“In the meantime,” Morisset adds, “we are working on delivering on the initiatives of our 2016-19 business plan and will work on the development of a new business plan in the year to come.”
OSC to explore way to reduce the regulatory burden
Along with the shifts occurring in Canada’s overall regulatory framework, the Ontario Securities Commission (OSC) is facing its own pivot in its agenda, moving toward slashing the regulatory burden while still driving investor protection.
Maureen Jensen, the OSC’s chairwoman and CEO, announced the launch of an internal task force that’s charged with looking for ways to “lighten the load” on the investment industry. The announcement was made during the OSC’s annual policy conference in Toronto on Nov. 8.
Through this initiative, the OSC will be looking for ways to do things differently in order to curb the costs of compliance – such as reducing filing demands and collecting data electronically – while still achieving the underlying objectives of investor protection and ensuring fair and efficient markets, Jensen said.
The announcement came in the wake of a change in Ontario’s provincial government that brings its own set of new priorities – among them, the goal of cutting regulation in general and not in just the securities industry.
Indeed, the OSC’s announcement foreshadows the Ontario government’s pledge to slash regulation, which was delivered as part of its autumn economic update on Nov. 15. To that end, the provincial government set a target of cutting regulation overall by 25% over the next four years.
This basic objective received immediate endorsement from the Investment Industry Association of Canada in a statement: “This will alleviate a significant burden on business, boost confidence and contribute to increased business spending.”
On the securities front, just what the OSC’s task force will mean for the industry is too early to call, but the OSC’s focus clearly is shifting to be in accord with the priorities of Ontario’s new administration.
“The Ontario government is focused on reducing regulatory burden, which dovetails nicely with our ongoing work on this area,” Jensen says, noting that the OSC’s task force, which is composed of senior staff at the commission, is seeking to “identify priority areas in which we can move to eliminate some regulatory burden for Ontario businesses and market participants.
“In the new year,” she adds, “we plan to work with our government and consult with market participants on specific changes to deliver on both short-term and longer-term options for reducing regulatory burden.”
If past efforts are any guide, this could go beyond simply cutting the number of rules or requirements that businesses must meet and could point to structural changes among the regulators themselves – along with modifications in how they demand, and monitor, compliance with the rules.