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
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
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