National securities regulation: A saga of political futility
by Jeffrey MacIntosh
This commentary was first published in the February 18, 2011 issue of The Lawyers Weekly.
The political naiveté of champions of a national scheme of securities regulation is astonishing. The last 15 years have been replete with statements from countless Canadians of gravitas that a national regulator is about three months away. It’s amazing how long it has taken those three little months to come and go.
The political reality in Canada has always been that the provinces cede power to the federal government only grudgingly. In this particular iteration of Canada’s longest standing political comedy, Ottawa’s proposal for a national regulator initially garnered the support of seven provinces and all of the territories. That is now down to six provinces, with at least three others making their assent conditional on concessions that could easily end up being spanners in the works.
No one should be surprised by this. Our recent spate of chilly Canadian weather is a perfect reminder that agreements in the abstract are always susceptible to cold feet. The history of attempts to create a national regulator (not to mention Canadian history writ large) make it plain that the smart money will always be put on failure.
It has long been observed by the politically astute that Canada is not a natural unity, but a nation of nations. In particular, there may be a parallel universe in which Quebec will assent to ceding the feds a cherished head of power, but it has precious little congruity with this one. Western opposition has also historically ranked as something akin to a universal constant (although admittedly B.C. and Saskatchewan’s initial assent to Ottawa’s plan raised many eyebrows).
These provincial and regional differences are based on a variety of factors, including language, culture, temperament, political leaning and economic structure. Bringing all of the different provincial actors into a common fold is truly, as the saying goes, like herding cats.
We can add to Canadian provincialism that most practised of Canadian proverbs — that “the devil is in the details.” Consider the fact that in 1996 all provinces except Quebec committed to a national regulator. Despite lofty intentions, the plan foundered when it came to negotiating the fine print.
Since the securities regulatory business has been a money-making venture for many provinces, just how much will the feds compensate the provinces for folding their tents? Will the provinces continue to have control over local offerings and other intra-provincial securities-related activity, in order to preserve their unique local markets? Will local offices have absolute authority over particular policy functions, or simply be local gophers administering the edicts of head office? Where will the head office be located? Will employees of provincial agencies have guaranteed jobs in the new regulator? From what province will the first chair hail? Just how much input will the provincial finance ministers have in making policy?
None of these issues are easily resolved. Consider one of the more pressing: where will the head office be situated? Ontario, in the avatar of no less a personage than the Premier himself (not so secretly nursing plans to turn Toronto into one of the world’s top-notch financial centres), seems to have signalled that the new regulator will be in Toronto — or else. Unfortunately, other provinces, who see this as a thinly veiled attempt to install the Ontario Securities Commission as a de jure (rather than merely de facto) national regulator, have politely intimated that that will occur over their collective dead bodies.
B.C., without whom the whole scheme is almost certainly doomed, seems to have hit upon a compromise solution: the virtual national regulator. A virtual regulator would have a formal head office in Toronto, but would distribute absolute power over discrete regulatory domains to various of the regional offices.
B.C.’s own non-negotiable ticket is control over the regulation of “venture capital” (a somewhat ill-conceived generic term really meaning “small firms”). Ottawa’s embattled “transition team” has indicated that it will play ball (while breaking out in hives at the suggestion that this will constitute a “virtual” commission). In response, Dwight Duncan, Ontario’s Finance Minister, has stated that the idea of a virtual regulator is “just laughable,” and “an enormous slap in the face to Toronto and to the financial services community.”
It would thus seem that either Ontario is in and pretty much everyone else out, or everyone else is in and Ontario out. Either way, Ottawa’s brittle-hulled plans seem to have struck a rather nasty iceberg, the only question being who bails first.
Even vigorous supporters of the federal plan have balked at this prospective disembowelment of the federal regulator. The scheme has always been touted as a way to centralize regulatory resources under one roof, thereby exploiting economies of scale and eliminating duplication of effort. Even if regulatory domains are parcelled out, some replication of functions seems inevitable — and the much vaunted economies of scale inevitably start to drift away.
More worrisome, what kind of coherent policy can be expected to emerge from a splintered agency with discrete regulatory fiefdoms more responsive to local markets and politics than national consensus? Added to this, over 80 per cent of Canada’s financial activity takes place in Toronto. Particularly with psychologists telling us that there really is something different about the “face-to-face” meeting, any solution that habitually loads platoons of lawyers, accountants and business folk onto airplanes to meet with their regulator simply defies common sense (the SEC being a case in point, and not a counterfactual).
Take another sticking point: which of the employees of the various provincial agencies are hired on, and which are handed pink slips? If many or all participating provinces press for full-employment guarantees, we can truly discard any notion that a national regulator will realize economies of scale.
But in any case, once Gordon Campbell hangs up his political cleats, sometime around the end of February, all of the above is likely to become moot. It would be something of a charity to say that the B.C. Securities Commission has been dragged into the federal project kicking and screaming. Local sentiment, following its traditional course, also seems to be running strongly against a federal regulator.
Once the uncharacteristically nationalist premier is gone, B.C. is likely to become a no-show — and all of the blood, sweat and tears expended in this latest Herculean effort to create a national regulator will be forgotten. Until, that is, the next time we dust off this increasingly dog-eared saga of political futility and have another go at it.
