Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




Credit crunch spotlight turns to regulation

Duncan Mavin
Monday, March 31, 2008



Jim Young/Reuters Canada

  With global financial-sector turmoil showing few signs of easing soon, the introduction of tougher regulations and new oversight regimes seemed a likely response to the crisis even before the wide-ranging overhaul proposed yesterday by Henry Paulson, the U.S. Treasury Secretary.

But following Mr. Paulson's announcement - the most clear-cut indication yet that regulators and politicians are intent on fixing the crisis - it is perhaps not a surprise that changes to the rules will follow, in the United States and also possibly in Canada, where a national securities regulator could be top of the agenda.

Jim Flaherty, the Finance Minister, said yesterday his Group of Seven peers will discuss regulation of the financial industry when they meet in Washington next month. And John McCallum, the federal Liberal finance critic, also outlined the need for a response to the made-in-Canada version of the crisis, the tangled asset-backed commercial-paper debacle that has embroiled thousands of retail investors in a $32-billion market failure.

"We need to understand how governments and regulators are responding to this failure in the U.S. and other jurisdictions," Mr. McCallum told the House of Commons finance committee.

The Liberal MP had proposed parliamentary hearings into the crisis last month, although the hearings have now been deferred while a workout plan is communicated to retail investors ahead of a vote on a proposed restructuring plan.

The finance committee is now expected to look into the crisis before the end of April. MPs will want to "get to the bottom of what went wrong here from a regulatory perspective," and figure out "what must be done to prevent a similar situation from recurring in the future," Mr. McCallum said.

"I believe there are some serious market-oversight issues here that need to be understood," he added.

The finance committee hearings are expected to call upon federal and provincial regulatory authorities, including the Office of the Superintendent of Financial Institutions (OSFI), the Investment Dealers' Association, the banking ombudsman and Canada's various provincial securities commissions.

Mr. McCallum told the finance committee that Purdy Crawford, the head of the group that is working to resolve the crisis, has also already agreed to attend the hearings.

One question that is almost certain to come up at the hearings is whether a national securities regulator would have been able to prevent the crisis or limit its effects. It is an issue that is familiar to Mr. Crawford, the veteran Bay Street lawyer who drew up a plans for a single national securities regulator in 2006.

Last week, Mr. Crawford said he was "optimistic at one time" about getting support for a single securities regulator, though he would not be drawn into a discussion of whether the ABCP crisis would give new momentum to efforts to lobby provinces to support the switch to a national regulator.

However, a legal source close to the ABCP restructuring process said the securities issue is closely tied to the current crisis.

"As a consumer-protection issue, a common securities regulator is hugely important," the source said. OSFI and the IDA, as well as credit-rating agencies, are also implicated in the crisis, the source added.

Mr. McCallum has been in discussions with a number of the 1,700 or so retail investors in ABCP, many of whom say they are angry that they were mis-sold investments they thought were low-risk.

Most of large institutions that hold the majority of the $32-billion in affected ABCP investments by dollar value have largely agreed to the restructuring plan that will see them exchange tainted short-term paper for longer-term notes. But many retail investors continue to question a plan that will likely see them take significant losses on investments they thought were safe.

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