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Thirteen securities regulators in Canada is 12 too many

It is time for Canada to take the leap to a single securities regulator


September 8, 2008 at 6:00 AM EDT


It is time for Canada to take the leap to a single securities regulator, writes Bill Downe, president and CEO of the Bank of Montreal

Now is the time for Canada's securities regime to be controlled by a single regulator.

Provincial and territorial regulators and governments have made considerable efforts to improve the efficiency of securities regulation in Canada. There is a growing consensus that the passport system has been a step in the right direction, but it is not enough.

There is also consensus favouring principles-based regulation over prescriptive rules. Traditionally, in Canada, we favour principles-based solutions over rules-based solutions. At the same time, we recognize that inadequate or lax regulation would hinder Canada's ability to attract capital and would significantly diminish the competitiveness of the Canadian capital markets. Canada should distinguish itself globally by focusing its regulation on clearly enunciated principles.

What is required is strong leadership and the political will among all participants. We applaud Jim Flaherty, Minister of Finance, for his determination to harmonize and simplify the securities regulatory system in order to ensure Canada and its market participants remain globally competitive. It is time for all participants to recognize securities regulation as a national imperative and to get the job done now.

It can be done. In Britain, the Financial Services Authority consolidated in just a couple of years regulatory and supervisory activities previously conducted by almost 10 separate regulatory bodies. In Australia, the power to administer securities legislation, previously exercised by states and territories, was brought under a federal agency. The U.S. Securities and Exchange Commission has just signed a historic agreement with the Australians to allow brokers to do business in each other's countries while being regulated only in their home country. While the Canadian Securities Administrators – a group whose members include the 13 provincial and territorial regulators – has been in discussions with the SEC, it is worth noting that the first arrangement under the SEC's new mutual-recognition policy was with Australia, rather than their neighbour to the north. Some commentators have deemed this a snub, with a recent article in The Globe and Mail suggesting that the SEC turned to Australia's national regulator first “due to concerns over problems that come with trying to negotiate a deal with 13 provincial and territorial securities regimes.” Mutual recognition is important to Canadian banks and investment dealers.

In an age of increasingly global capital markets, Canada can ill afford to be out of step with the rest of the world. But, out of step is where we find ourselves. On the international stage, Canada must speak with one voice. Regulators in other countries cannot understand the need for and do not always have the patience to deal with over a dozen separate securities regulatory bodies from one country.

Bank of Montreal has had first-hand experience with this. Several years ago, the Chinese government wanted to help foster the development of its domestic mutual funds industry to provide a broader range of savings vehicles for its emerging middle class. China allowed its existing domestic funds management companies to form joint ventures with foreign financial institutions.

BMO, like other Canadian banks, could offer China's burgeoning mutual funds industry expertise in marketing, distribution, corporate governance and risk management.

Chinese officials wanted to open up the sector to foreign investment in a measured fashion, granting a few licences at a time. We were very keen to be granted such a licence by the China Securities Regulatory Commission in the first round, as we rightly believed there would be an important first-mover advantage. As we went through the due diligence process, the CSRC stated that a Memorandum of Understanding for co-operation and information-sharing from Canadian regulators was a necessary condition for Canadian companies, such as ours, to participate in joint ventures in the securities and fund management business in China. The problem was there was no one Canadian agency for us or the CSRC to liaise with. The CSRC had signed MOUs with over 20 nations, including all members of the Group of Eight leading industrialized nations, with the exception of Canada.

We were able to encourage one of the provincial securities regulatory administrators to champion this cause within the Canadian Securities Administrators and, in the end, the Alberta Securities Commission, the British Columbia Securities Commission, the Ontario Securities Commission and the Commission des valeurs mobilières du Québec did sign an MOU with the CSRC. The process, however, was more time-consuming, cumbersome and costly than it would have been if we had had one single national securities regulator.

Eventually, we did become the first foreign financial institution to acquire an equity stake in a Chinese mutual fund company, Fullgoal Fund Management Co. We have brought Canadian expertise to the table, and that acquisition continues to yield dividends for BMO and support jobs here in Canada, but our inability to be fast and nimble when needed had, without doubt, put the joint venture at risk. Countries much smaller than ours are more successful in building relationships internationally because they speak with one voice. By contrast, Canada speaks with many voices and few provinces can justify the cost of maintaining the requisite international expertise, let alone an international presence. This is truly a case where the whole is less than the sum of the parts.

As Rodrigo de Rato, the then-managing director of the International Monetary Fund, stated before the Economic Club of Toronto a year ago: “Canada is currently the only G7 country without a common securities regulator, and Canada's investors deserve better. Establishment of a common securities regulator would be good policy, and it would be conducive to mutual recognition of securities regulation with other countries, including the United States.”

But, how do we get there? It is a given that any new structure must inspire confidence; be accountable, efficient, and responsive to change; and help our companies compete globally for capital. In our view, all regulation affecting the national economy, whether dealing with securities or other sectors, should be administered with a national perspective. Having disparate substantive rules and administrative practices, and overlapping and duplicative jurisdictions is inefficient. That said, Canada's first bank also believes that any new regime must remain sensitive to regional differences in Canada. While it must be based on a single piece of securities legislation, it must be flexible enough to cope with the regional and local requirements of our capital markets in order to serve the needs of all participants nationwide.

Therefore, we believe that the operation of a national securities regulator should be under the management of a governing council, which would be constituted with representatives from the participating provinces. As the securities regulatory expertise currently resides in the provinces, we should draw on this expertise and incorporate it into the national securities regulator. To be clear, a national securities regulator should operate using existing provincial personnel through existing regional offices. On that point, there can be no debate.

Canada is the only industrialized country without a national securities regulator. It seems inevitable that we will make the change. Why wait any longer? Now is the time for both levels of government to come together to create a best-in-class securities regulatory regime – a regime that will inspire investor confidence and allow companies to raise capital with maximum efficiency, at a minimum cost and on a timely basis. Now is the time to have one voice for Canada's capital markets.

Bill Downe is president and chief executive officer of Bank of Montreal