There is an ongoing debate in Canada regarding the regulatory approach to financial services. As it stands today, thirteen different financial regulators hold sway when it comes to securities compliance instead of a single national regulator. To the casual observer this makes absolutely no sense at all. Creating an environment where securities laws are not harmonized within the boundaries of a single country adds unnecessary costs to society and is a burden on the populace. It is also an innovation killer. So why not address the problem head on and change things to reflect the need? Well, that’s politics for you. The thirteen provinces have an entrenched hierarchy and bureaucracy. Why would they want to vote themselves out of existence even if it is to the benefit of the country?
Under Discussion Since the 1970s
Recently the National Crowdfunding and Fintech Association of Canada (NCFA) participated in a discussion with Finance Canada in Ottawa that called for urgent regulatory change.
The representatives of the NCFA stated:
“Canada is falling behind international comparators such as the United Kingdom and the United States. Entrepreneurs are reluctant to start up in Canada due to the high costs (relative to a small financing), and significant ongoing regulatory burdens. Investors are inhibited by caps on investment and limited education about the benefits and downside risks of crowdfunding and other exempt financings. This pushes many talented entrepreneurs and investors to overseas jurisdictions that better understand (and support) innovation and the economic potential of start-ups and small businesses.” [Emphasis added]
The NCFA understandably desires streamlined regulation across the country and is asking the federal government to work with the provinces to enhance Canada’s competitiveness. Makes sense, right?
But this is a debate that has been ongoing since the 1970s. It appears Canadians do not want to move too quickly when it comes to boosting Fintech innovation.
In a post last week in Canadian Lawyer, the political blocking by those opposed to a harmonized financial regulatory environment was explained;
“A national securities regulator is intended to consolidate the provincial and territorial securities regulators to better assess and minimize systemic risk in capital markets and to improve regulatory enforcement. The effort to establish such a regulator — which has been ongoing since at least the 1970s — has suffered a series of delays and roadblocks. In May, the Court of Appeal of Quebec ruled that the proposal for a Cooperative Capital Markets Regulatory System, which is to date supported by six jurisdictions — Ontario, British Columbia, Saskatchewan, Prince Edward Island, New Brunswick and the Yukon — but opposed by Quebec and Alberta, is unconstitutional.”
Fiefdoms and Empires
Of course, any creation of a national securities regulator will reduce the import of provincial agencies. In fact, it may eliminate the need for a provincial securities regulator at all. And if you happen to be a longtime employee of a provincial securities regulator, how would you feel about that?
The Supreme Court of Canada is in the midst of a case addressing this issue. In brief, this is the summary of the case;
- Does the Constitution of Canada authorize the implementation of pan-Canadian securities regulation under the authority of a single regulator, according to the model established by the most recent publication of the “Memorandum of Agreement regarding the Cooperative Capital Markets Regulatory System”?
- Does the most recent version of the draft of the federal “Capital Markets Stability Act” exceed the authority of the Parliament of Canada over the general branch of the trade and commerce power under subsection 91(2) of the Constitution Act, 1867?
- The majority of the Court of Appeal answered “no” to the first question, finding that the Constitution of Canada does not authorize the implementation of the regulation at issue under that model. It also answered “no” to the second question, as it was of the view that the most recent version of the draft of the legislation is not beyond the jurisdiction of Parliament, except with respect to its sections 76 to 79 concerning the role and powers of the Council of Ministers which, if not removed, render the act unconstitutional as a whole.
The NCFA is diplomatic in their advocacy urging the federal and provincial governments, and securities regulators, to work together. It is the mission of securities regulators to not just protect investors but to foster capital formation, innovation, and competition.
So what is the solution? Shouldn’t the provincial regulators be rolled up into a single operation to the benefit of all of Canada? Why keep thirteen when one is needed in a country with a population of about 37 million (less than California)?
According to Bruce Ryder, an associate professor and public law expert at Osgoode Hall Law School, who is quoted in the Canadian Lawyer write up, the Supreme Court should view a pan-Canadian system more favorably. He says the “worst case” is where the Supreme Court fudges things and just makes “modes tweaks”.
“Quebec and Alberta don’t have to be on side; there’s nothing that compels them to agree to this regime. The political question will be, can we persuade them [to] join? Or, if we can’t, should we go ahead with national scheme that can operate in most of provinces?”
Canada is not alone in a byzantine financial regulatory environment in an age where the internet can make everything more transparent and easier to monitor. While the US benefits from a federal regulator in the Securities and Exchange Commission, its efficacy is undermined by 50 state regulators creating a costly environment of compliance for Fintech startups.
But globally, it would appear regulatory harmonization is the future. Recently, the European Commission proposed a “Fintech Action Plan“. The first deliverable will be a true single market approach for member countries for online capital formation. Europe recognizes the compelling need to be competitive in the global economy and Fintech innovation is the future of financial services.
So can Canada keep up and deliver regulatory harmonization when it comes to securities rules? Or will the provinces fight to remain rooted in the past? This is more of a question of when not if. Canada just needs to decide how hard it wants to fight beneficial economic progress.