A national securities regulator is a problem, not a solution

Commentary, Role of Government, Frank Atkins

In Canada we need to place more emphasis on competitive forces, in order to create incentives for the creation of new companies with new products in new industries, encouraging companies with growth potential and thereby broadening Canada’s economic base. In any economy this activity must be accompanied by a vibrant, well-functioning financial sector.

It is widely understood that an economy functions best when there are competitive forces. The federal government is aware of this, but appears to be prepared to make a looming problem in the financial sector worse by creating a single securities regulator. For years the government has been making noises about increasing competition in the financial sector, yet we still have a system that is dominated by the major chartered banks.

It may be helpful to think of our financial system as a three-legged stool: 1) commercial banking — deposit-taking and lending, to earn a spread, on a balance sheet; 2) investment management — portfolios of stocks, bonds and other securities administered for fees to optimize return for clients commensurate with risk and liquidity; 3) investment banking — underwriting of new issues of stocks, bonds and other securities issued by corporate finance clients and sold to investors, the primary capital market function, followed by secondary market trading.

The analogy is appropriate here in that if one leg of a three-legged stool is broken, then the stool does not work. One leg of our financial system is not working. The investment banking sector is dominated by the major commercial banks and they are using their dominant position to crowd out independent investment bankers. This could lead (and some say this has already happened) to restricted access to capital by growing companies.

It is very clear that Canada is a diverse economy, but we should look on this as a good thing. Regional competition is good, and can lead to new ideas and new products. However, this can only be accomplished if each region is allowed to raise capital in a manner that suits regional needs. If access to capital is dominated by the major commercial banks, then this regional diversity is going to be stifled. This problem will be made worse by the creation of a single securities regulator.

The push to create a single securities regulator is a bad idea from the above competitive perspective. This begs the question of why the government would push so hard for this policy. Here it is possible to believe that the idea could be a knee-jerk reaction to the downturn that began in 2008. However, this downturn was a problem in the United States’ financial sector and has nothing to do with the Canadian financial sector. So, with the exception of the problems in our investment banking sector, we are trying to fix a problem that does not exist.

Alternatively, it is more likely that the policy weaknesses in the single securities proposal stem from the fact that the federal government’s central objective is not to implement a new policy in the financial sector, but rather to implement constitutional structural change. The federal government may have deliberately put regulatory structure ahead of regulatory policy, and may be willing to pay any regulatory price in order to seize jurisdiction from the provinces. The major banks are, of course, willing to support this because they benefit significantly from the result. Clearly the creation of a single securities regulator will only exacerbate the dominance of the investment banking sector by the major commercial banks.

In a recent article in the Calgary Herald, Deborah Yedlin expressed the view that “the train has left the station” and this policy is a done deal, and only the details need to be worked out. Under this scenario, Alberta is supposed to get on board now, or it will have no voice in the negotiations. This is an absurd scenario. Alberta, Manitoba and Quebec all object to the creation of a single securities regulator. Therefore, not only has the train not left the station, we need to generate serious public debate about the competition-stifling potential of this poorly thought out policy.

This op ed was originally published by The National Post on Tuesday, March 31, 2015: http://news.nationalpost.com/full-comment/frank-atkins-a-national-securities-regulator-is-a-problem-not-a-solution