Alternate Futures: Tepid hope for Canada’s new securities regulator

August 24, 2017

If all goes according to plan, by July 2018 several provinces and territories will have a new securities regulator. Currently, each province and territory operates its own regulator that is responsible for administrating each province’s unique laws. The provincial and territorial regulators are part of an umbrella organization, the Canadian Securities Administrators (CSA).

Overcoming jurisdictional issues, in the past few years British Columbia, Ontario, Saskatchewan, New Brunswick, Yukon and Prince Edward Island have agreed to replace their provincial securities regulators with a new overarching body, the Co-operative Capital Markets Regulator (CCMR), to enforce the Capital Markets Act (CMA). The CCMR would mark a significant change in how securities are regulated in Canada, and could be an improvement from our current system.

First, regulating securities across multiple provinces, rather than province by province, may open up these capital markets, providing more investment and borrowing opportunities to people in other provinces. It also makes sense to regulate securities nationally because systematic risk in capital markets often transcends provincial boundaries. A national system could help Canada better address white collar crime, as it may be easier for police and other law enforcement agencies to deal with just one securities regulator when investigating illegal financial practices.

However, as currently envisioned, the CCMR could end up being weaker than the regulators of some participating provinces, since it is not evident that some important investor protection initiatives in those provinces will be carried forward by the new national regulator.

For example, changes to the regulatory system may have a big impact on the legal protections afforded retail investors—Canadians of all income levels who buy mutual funds, GICs and other financial products, often for the purpose of securing retirement income. Strong protections for retail investors are even more critical given that increasingly fewer people have pensions. Many Canadians must now manage their own retirement savings, and rely on advice from representatives of the banks and other financial institutions. Weak protections can lead to financial institutions exploiting their clients’ lack of expertise, with potentially catastrophic consequences for those trying to save for retirement, and Canadian welfare as a whole.  

As a recent white paper from the Foundation for Advancement of Investor Rights (FAIR) explains, retail investors may be less represented in the CCMR than they are within the Ontario Securities Commission (OSC). The OSC, like regulators in the U.K. and Australia, has an investor advisory panel that advocates on behalf of retail investors to improve regulations and promote public confidence.

Unfortunately, there are no plans to include such a body within the CCMR, nor is there any formal retail investor representation on the CCMR’s board of directors. Rather than wait for the board to do the right thing, the FAIR white paper calls on the federal government to amend the CMA to require the new national regulator to establish and fund a retail investor panel.

The CCMR may also bring regressive change with respect to regulation itself. Securities regulators in Ontario and New Brunswick want to see a “best interest duty” implemented that would require registered investment dealers or advisers to act in their clients’ best interests. The high-pressure sales scandals of TD and other banks, exposed in the news earlier this year, show why such a standard is important for ensuring that retail investors are not exploited.

It seems odd, then, that the CMA does not contain a statutory best interest duty, and it is not clear when, or if, the CCMR will adopt one. Putting off the creation of this standard needlessly postpones a critical enhancement to Canada’s consumer protection framework. Likewise, there is currently no proposal for the CCMR to address the issue of embedded commissions, which hurt investors and could negatively affect the capital market as a whole, according to a CSA consultation paper published earlier this year.

Embedded commissions make it difficult for investors to determine what they are actually paying in fees, and therefore whether they’re getting their money’s worth in quality of service. Embedded fees also create a conflict of interest because sellers have an incentive to sell products with the highest commissions rather than those that best suit the client’s risk and return preferences. As a result, investors are at greater risk of earning poor returns.

Despite the obvious dysfunction induced by imbedded commissions, and the CSA’s interest in addressing this issue, there is no clear indication that the new national securities regulator will prohibit such hidden fees when it comes into power next July.

The CCMR could be a significant improvement to Canada’s patchwork securities regulation system, but only if we do it right. Without adequate attention to the needs of retail investors, the CCMR could undo some of the strides made provincially to make sure the majority of Canadians have access to fair investment opportunities for their savings.

Activists and consumer rights advocates should continue their push for both more accountability from financial institutions and laws that protect the financial interests of everyday Canadians.  

Alternate Futures is a new column about finance by Robin Shaban, an independent economic and public policy consultant based in Ottawa. Write Robin at [email protected].

This article was published in the September/October 2017 issue of The Monitor. Click here for more or to download the whole issue.