Regulation of securities trading in Canada is handled by 13 separate provincial and territorial bodies that have created a process for mutual recognition and harmonization of rules known as the « passport system. » Under this system, a Canadian company, even if it operates in more than one province, is regulated only by a « provincial authority. » The Hockin report adopts the federal government position and recommends the replacement of these 13 bodies with a single national body.
Securities commissions regulate the issuing of financial securities, the information provided by issuers and certain aspects of securities trading, as well as intermediaries and financial advisers, with the aim of protecting investors and guaranteeing the efficiency of financial markets. Meeting these goals should not, however, weigh down regulation to the point that market flexibility is needlessly hindered, in particular by creating new legal risks.
Which type of system – centralized or decentralized – would help reconcile the preferences and interests of investors and issuers most effectively and at the lowest cost? Which would help achieve the delicate balance between guaranteeing efficient financial markets for issuers and maintaining adequate protection for investors?
There are many arguments in favour of a single body. It can ensure uniform standards and regulations, provide more thorough accounting, let issuers and investors benefit from economies of scale, assume a more direct role as Canada’s spokesman in the international harmonization of securities regulation and facilitate the establishment of a national tribunal in this area.
On the other hand, it may be preferable for regulation to be subject to competition rather than entrusted to a single body. Total uniformity is not necessarily desirable. Competition encourages efficiency, stimulates the discovery of more appropriate forms of regulation and respects local conditions.
A regulatory monopoly with a captive client base raises the risks both of excessive regulation and of domination by a small number of players who already call the shots in most banking and securities activities, including the exchanges. Competition can be expected to lead to harmonization to the extent sought by the market, especially in an area such as securities where participants’ level of expertise is relatively high.
What if it were possible to blend the two systems and benefit from their respective advantages? By creating a single national commission operating exclusively through four regional offices (the West and the Territories, Ontario, Quebec, Atlantic), the complex equation of securities regulation in Canada could be resolved favourably.
An advantageously decentralized structure could be maintained, leaving firms free to deal with the regional office of their choice and providing a strong voice within a national authority in setting out and applying standards and rules that are as uniform as possible.
Regional decentralization toward nonexclusive offices that could influence a single national commission in a positive way would provide for innovation and efficiency in the regulation of financial markets while ensuring mutual recognition of regional sensibilities.
Marcel Boyer est vice-président et économiste en chef de l’Institut économique de Montréal.