Upholding Federalism: Supreme Court ruling limits power of the unelected

Commentary, Regulation, Barry Cooper

Just before Christmas the Supreme Court of Canada ruled that the federal government’s proposal to regulate securities as embodied in the “Securities Act” was unconstitutional. They did so, surprisingly enough, on the basis of those sections of the original British North America Act that distributed responsibility and jurisdiction between the provinces and the Dominion government, as it was called back in 1867.

Relying on what lawyers call the constitutional division of powers to decide a case in the era of the Charter is unusual in itself. Deciding unanimously in favour of the provinces is even more so.

The politics of the decision are equally unusual. For over seventy years, various commissions and studies, panels and task forces, have advocated in favour of a single securities regulator. Many lawyers specializing in business and constitutional law have agreed.  Until the federal government tried to create a single securities’ regulator, the provinces were quiet and went about their business.

A few years ago, when the provinces saw what was headed their way, they developed the “passport system.” Or rather, all provinces but Ontario agreed to a scheme whereby once a securities offering was registered in one province, investors would automatically gain access to capital markets elsewhere. Ontario’s absence was significant. So was the fact that the Minister of Finance, Jim Flaherty, was from Toronto, as were just about all the lawyers, economists, and financial wizards in favour of Ottawa’s initiative.

Meanwhile Alberta and Quebec referred the proposed law to their courts for a ruling on its constitutionality. At issue was the conflict between the “trade and commerce” power, which belongs to the federal government, and “property and civil rights,” which is under provincial jurisdiction. Securities had always been regulated by the provinces and the Alberta and Quebec courts saw no reason to change things. Neither did the Supreme Court.

The curious question is: why did the bureaucrats in the Department of Finance think they could ever get away with what the then Finance Minister of Alberta, Ted Morton, called an “unprecedented power grab.”

Having discussed this question with several of the people involved, the chief reason seems to be that the mandarins at Finance are highly ambitious and see themselves as very smart and very important. Therefore, they reasoned, they can do pretty much what they like. But they can’t; even important, smart, ambitious bureaucrats have to obey the law, and the law was clear.

The old lawyer’s adage, “if you don’t have the law, you argue the facts,” seems to have been the essence of the legal strategy of Ontario and Ottawa. So what facts, what new facts, could make securities regulation a matter of federal concern today, even though for time out of mind it had been provincial? The courts refused to take the word of the smart and important mandarins and demanded evidence!

 “Systemic risk,” said the mandarins of Finance. A single securities regulator will help us deal with systemic risk in financial markets today.

 Only two things were amiss. The first is that there was no agreement about what systemic risk meant or if it referred to anything real. Perhaps it was just a notion, an idea, a concept. Perhaps the bureaucrats at Finance had just made it up and said: “look at the economic mess out there. That’s systemic risk in action. We have got to stop it. Give us a national securities regulator and we will.”

The other problem was that among G-8 countries Canada had dealt with the financial crisis pretty well, and certainly better than our close allies, the UK and the US, both of which had central securities regulators. So, if it ain’t broke, why fix it?

The fallout was predictable. “Bay Street Pans Court’s Ruling,” said a Globe and Mail headline. All the usual suspects who favoured a single securities regulator publicly lamented, for several weeks in some instances, the short-sightedness of the Supreme Court.

The fact is, all Canadians should applaud the Court’s decision. It is not enough for some bureaucrat to declare a problem important so that he or she can deal with it. Moreover, this instruction from the Court can easily be applied to other areas of shared jurisdiction such as the environment. This means Ottawa cannot simply declare, say, so-called greenhouse gases to be an important matter and turn over a large section of provincial jurisdiction to the Environment Canada.

The bottom line? The law of the constitution still matters in Canada. The federal structure of the country still counts for something. This is good news.