Canadian Capital Markets Thrive without National Regulator

Commentary, Economy, Fergus Hodgson

Advocates for centralized financial regulation have met their match in Canada. She is proof that competition between intranational jurisdictions can foster diverse, prosperous capital markets.

In our research paper, “The Federal Takeover of Canada’s Capital Markets,” we argue the decades-long push for a national securities regulator is a solution in search of a problem. Contrary to the claims of proponents, it would make markets less harmonious and more bureaucratic, the opposite of what Canada needs. 

A Successful Local-Lite Approach

Canada is distinct among developed countries in that she does not have a national securities regulator akin to the US Securities Exchange Commission. Each province and territory has its own capital-markets overseer that issues guidelines and enforces sanctions. 

Yet there is coordination. In 2003, the 13 jurisdictions voluntarily created the Canadian Securities Administrators (CSA) to harmonize their policies. Since 2008, the CSA has had a “passport” system whereby one can register with a province and access the rest of the country’s capital markets, except for Ontario, which has its own process and is leading the charge for the federal scheme.

Even without a national regulator, several federal prohibitions and approval procedures constrain capital markets in the name of national security and Canadian culture. The Investment Canada Act empowers the government to forbid foreign investments “of significant size.” For cultural industries, the thresholds are $5M for direct acquisitions and $50M for indirect acquisitions.

Canada’s relatively decentralized approach has nevertheless harbored diverse capital markets, including derivatives and the first all-digital exchange in North America. The Toronto Stock Exchange is the world’s ninth largest with $1.7 trillion in trades each year.

Central Planners on the Offensive

A publicly stated desire for a national securities regulator dates back at least as far as 1935. To the credit of Canada’s courts and her common-law and federalist traditions, these initiatives have largely failed.

However, the Cooperative Capital Markets Regulatory System (CCMR) is coming close to reality. In late 2018, Ottawa’s push for top-down regulation culminated in a major Supreme Court decision: provinces and territories “were allowed under Canada’s Constitution to delegate their respective authority to regulate securities to a single regulator.”

The major compromise to get the CCMR through judicial review was to make it voluntary. Every province and territory must opt-in for it to have teeth. So far, six provinces and one territory have agreed to the federal initiative. The last one was Nova Scotia in April 2019. Alberta and Quebec are the major holdouts; they challenged the CCMR in court and have refused to participate.

Years of federal lobbying and lawfare have not come cheap. The Capital Markets Authority Implementation Organization is the one greasing the wheels for the CCMR. Founded in 2015, it is doing so at the expense of the Canadian taxpayer, with a war chest of $100 million and $30 million already spent.

The Capital Markets Stability Act and its provincial/territorial version, which must still pass federal and local legislatures, would establish a new national overseer to supervise, collect data, and sanction participants. Given the federal government’s spotty record with protecting data, this heightens rather than relieves concerns.

A Solution in Search of a Problem

If there only were a national securities organization where all 13 jurisdictions already participated…

With the exception of Ontario, there already is self-initiated harmonization between Canada’s subnational governments and the CSA passport system. Rather than convince seven more jurisdictions to join an uncertain federal scheme, a more productive endeavor would be to work out an arrangement to include Ontario in the functioning provincial one.

Whatever regulations need to be harmonized can be done through the CSA. On the other hand, research from the Mercatus Center at George Mason University indicates a national body modeled on Ontario would lead to more regulation rather than liberalization for the likes of Alberta.

One argument for a national regulator is it would elevate Canada internationally and attract investors. However, the Fraser Institute’s Freedom of the World Ranking gives Canadian financial regulation near-perfect scores and has done so for decades. The ranking does warn of red tape such administrative requirements, licensing restrictions, and tax compliance.

A scathing 2017 report by the C.D. Howe Institute concludes “The new body is not likely to increase global competitiveness… in any event, securities regulation tends to have a minimal impact on foreign investment.”

Social-Justice Creep into Finance

The most compelling explanation for the new federal body is a desire for regulatory capture from Ontario and social engineering from Ottawa at the expense of provincial competition and constituent-driven policies.

As Theresa Tedesco of CBC explained, “A national, centralized regulator could remove many of the openings companies currently have to avoid mandatory measures… That alone would help improve the chances of increasing gender diversity in boardrooms and corner offices.”

The CCMR is an unnecessary sinkhole that pits financial centers in Alberta and Quebec against Ontario. It is an arm wrestle for capital-markets that rightfully belong to the subnational governments. Centralization undermines bottom-up coordination already underway between the provinces and territories.

In an industry undergoing a revolution of creative destruction away from centralization and bureaucracy, Ottawa officials are pushing in the opposite direction.