The Single Financial Market Regulator

1. The Single Financial Market Regulator Notes for Presentation to CD Howe Institute’s Financial Market Initiative June 16 2006 Stephen L. Harris Carleton University School of Public Policy & Administration 06 June 2006

2. Overview I • Normatively, difficult to argue with the objective that a single securities market regulator is in the public interest – • Would result in a welfare improvement • Practically, its realization is unlikely in the near future • Canadian federalism promotes self-interest behavior by politicians (nationalism/ protectionism) • Moreover, bureaucratic politics will get in the way of single market regulator • Absence of agreement on the passport system 06 June 2006

3. Overview II • Historically, the liberalization of entry and ownership in the Canadian market intermediation business was a casualty of both the nationalism/protectionism (or put more politely – competitive federalism) and bureaucratic politics over the 25 year period ending in the mid-1980s • So path dependency rules the day – or put another way “where you sit depends on where you stand” 06 June 2006

4. Overview III • Nationally, the federal government, particularly the Financial Sector Policy Branch (FSPB) of the Department of Finance has shown no leadership in the domain of its own responsibilities – so why should a reasonable person expect the FSPB to provide leadership in an area not of direct concern to its mandate 06 June 2006

5. Overview IV • Politically, there are no votes to be gleaned from giving up sovereignty in the obscure area of financial market regulation – but there are votes to be lost in Quebec • Benign neglect is the rule • Analytically, the case has not been made. The costs and benefits are too diffuse and unfocussed. • The emphasis must be on how the ends can be realized and not on the ends themselves 06 June 2006

6. Normative Issues • Canada doesn’t need 13 securities market regulators + the SROS • Need a clear statement and accompanying calculus of the costs of the current fragmented regulatory regime • Accompanied by a similar statement of the benefits • For issuers, institutional investors, retail investors • Intuitively the benefits of regulatory consolidation appear to be > than the costs of the status quo • But intuition is not good enough – transparency is required • Serious shortcoming that must be fixed if this issue is to resonate with the key decision-makers 06 June 2006

7. Practical Issues I • We need a roadmap that will take us from the status quo to what is considered the ideal situation or some intermediate alternative acceptable to everyone (a satisficing solution) • Not reasonable to expect Quebec to give up any sovereignty. Quebec sustained its sovereignty in the mid-80s by allowing Scotia Securities to establish in the province 06 June 2006

8. Practical Issues II • Not until all of the policy community recognizes the reality of Quebec’s policy objectives will any further progress be made in the area of rationalizing the existing fragmented regulatory regime • Bureaucratic politics will result in essentially the same arguments from the other provinces • These issues must be addressed upfront 06 June 2006

9. Lessons of History • Because the rent-seeking that permeates the policy reform agenda in the market intermediation arena the policy playing field is littered with “studies”. • The evolution of the discourse surrounding the single regulator was entirely predictable. • The more studies more likely is the status quo to persist • Quebec unlocked the stalemate surrounding entry and ownership liberalization in the dealer industry because such a move was in its interests – and served Quebec’s development agenda. 06 June 2006

10. Politicization of Finance and the Federal Government • It is not obvious that the federal government can play a meaningful role in the establishment of a single market regulator. • The feds policy domain fails to reflect adequately the globalization of finance. • The feds have shown no effective leadership on creating a seamless single economic market • And in policy areas which are shared between the feds and the provinces there has been little to show for the huge transfers • So just what leadership can one reasonably expect on the single regulator issue. 06 June 2006

11. A Mélange of Analytical Issues • Quantitative benefit cost analysis (examples of issues) • Cost to issuers (1 bp on all debt and equity issues in 2005 amounts to about C$4 million) • Benefit from consolidation on administration costs amount to about C$80 annually • Surveillance? • Compliance? • Investigation? • Enforcement? • Duplication? • Consumer protection? • Qualitative benefit cost issues (example of issues) • Externalities of lead regulator (OSC) decisions on other securities commissions • Impact of complexity on action by issuers and investors • Perception by retail investors of poor consumer protection • Costs to consumers of regulatory forbearance • Perception of institutional investors of regulatory forbearance • Offshore issuing or listing 06 June 2006

12. Incentives to Adjust the Regime**Adapted from Beth Simmons, “International Politics of Harmonization: The Cost of Capital Market Regulation,” International Organization, Vol 55, No. 3 (Summer 2001) pp. 589 - 620 06 June 2006

13. Issues Associated with Continuation of the Single Passport • Ontario can be convinced to put aside the protectionist and bureaucratic politics issues (not likely – no benefit for the lead regulator) • Benefits accrue to provincial regulators (ex OSC) from the status quo 06 June 2006

14. Constitutional Issues • Not clear they have been adequately addressed and/or there would not be some challenge if the realization of a national regulator (with federal lead) materializes • If there is to be a constitutional challenge better to restructure the whole of the financial regulatory apparatus • Canadian Securities Commission alone not worth the candle! 06 June 2006

15. Single Financial Regulator • Similar to the Financial Services Authority in the UK with functional specialization driving institutional structure • Governance adopted from proposals in the Crawford Report – pan-Canadian / -regional/-provincial 06 June 2006

16. First Best Solution • Royal Commission to deal with pan-Canadian financial regulation • Piecemeal approach has imposed social costs on Canadian society 06 June 2006