Harper’s flawed federal securities regulation plan

June 3, 2010

Stephen Harper loves bragging about Canada’s stellar record of financial regulation. So it is a tad awkward to admit the architecture of Canada’s securities regulation is strictly bush league.

Canada has a patchwork of provincial securities regulators, while other countries like the US have federal securities watchdogs (like the Securities Exchange Commission) to oversee securities activities.

The patchwork approach is much more vulnerable to destabilizing financial activity. If securities regulators are going to avert future debacles reminiscent of the Enron collapse and the subprime mortgage meltdown, they need to be sophisticated, powerful and well-resourced. The smaller provincial securities regulators are laughably outgunned. And as we have learned in past financial crises, trouble brews when those with nefarious intentions can gravitate to jurisdictions where oversight is the weakest.

The federal government has an opportunity to create a federal securities regulator with teeth. But preventing corporate malfeasance does not seem to be in the forefront of Harper’s agenda. He wants a business-friendly approach emphasizing streamlined, uniform rules.

Plus the plan to create a national securities regulator has all the makings of a federal –provincial bun-fight. Since securities regulation has previously been viewed as a provincial jurisdiction, some folks are hopping mad in Alberta, Quebec and Manitoba.

To handle this political hot potato, the Harper government has offered a compromise to the provinces. It proposes the creation of a national securities regulator, but will allow provincial securities regulators to continue to exist. Companies could then choose whether to conduct their securities activities under the provincial or national regulatory framework.

This might be good political calculus, but it is lousy regulatory policy. Let’s say a company with operations in Alberta and elsewhere in Canada wants to issue securities to raise money. Why on earth would it bother with the idiosyncrasies of various provincial regulatory systems when it could just conduct its business under one national set of rules? Securities issuance would stampede out of Alberta – unless there was some advantage to working with the provincial regulator.

To avoid withering into irrelevance, Alberta’s securities regulator will have to offer something to attract companies to conduct business via the provincial securities rules. It will be tempted to dilute (or become more lackadaisical about enforcing) inconvenient securities regulation. Or the provincial government will have to offer some other quid pro quo like more attractive environmental regulation or tax advantages which are (implicitly or explicitly) enjoyed by corporations that do business via the provincial regulators.

This tendency for parallel regulators to produce weaker regulatory oversight has a history of wrecking havoc in the American banking system. US banks can do business under state or federal regulatory regimes. This produces a tendency for national and state level regulators to compete by relaxing regulatory standards in order to attract banks to their regulatory jurisdiction. This so-called “competition in laxity” creates a pernicious race to the regulatory bottom. And tears soon follow.

The Harper government is making business happy while advancing an astute political compromise to get them out of a federal/provincial bickerfest. But in doing so they are sowing the seeds of creeping regulatory erosion. The government needs to present an agenda for a national securities regulator that runs deeper than just the convenience of business and political calculation. The national securities regulator needs to have one job foremost: it must have the political mandate and clout to put systemic financial stability above all, and it must be designed to enable regulators to resist pressure to engage in deregulation by the back door.

Ellen Russell is a senior economist with the Canadian Centre for Policy Alternatives (http://policyalternatives.ca).