July 13, 2010
Ensuring the Effectiveness of Securities Reform in Canada
This Mowat Centre Note examines the options for organizing the Canadian Securities Regulator. It finds that it is in all Canadians’ interest to have a head office located in Toronto. The note documents how the federal proposal for a “virtual head office” falls short for consumers and investors.
As financial markets become more complex, the concentration of regulatory authority where market activity takes place is essential. A legitimate headquarters in Canada’s financial cluster will better position the regulator to keep abreast of market developments, to make quick and effective regulatory decisions, to be held to account in the case of regulatory failures, and to draw on the skills and talents necessary to exercise effective oversight and provide maximum protection to consumers and investors.
Executive Summary
Canada’s banking regulations have been hailed by international organizations as an important reason why Canada avoided the worst of the global financial crisis. However, these same organizations are critical of our fragmented and inefficient regulatory landscape in securities.
The federal government has introduced new legislation that proposes a national securities regulator to address these shortcomings. The introduction of a Canadian Securities Regulatory Authority (CSRA) is intended to improve investor and consumer protection, enhance our attractiveness as an investment destination and improve market efficiencies while also balancing the needs of regional industries and investors. These goals are not mutually exclusive, but rely on a delicate balance.
In order to properly balance the twin goals of delivering significant advances in consumer and investor protection and meeting regional needs, three components are crucial:
- Regional offices that can cater to local market needs;
- a national governance structure that facilitates input from provincial governments;
- and a legitimate head office located where market activity is clustered.
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A “legitimate head office” houses the majority of decision-makers and staff under one roof and is responsible for enforcing one set of rules and ensuring a coherent, national approach across Canada.
The first two components are part of the proposed legislation and are in direct response to concerns expressed by some provinces, such as Alberta and Quebec. The third component, which is necessary to protect all Canadians, is notably absent. Instead, the federal government says it prefers a “virtual” headquarters with the regulator’s powers and decision-makers dispersed across the country.
This is a mistake. As financial markets become more complex, the concentration of regulatory authority where market activity takes place is essential. Location in Canada’s financial cluster will better position the regulator to keep abreast of market developments, to make quick and effective regulatory decisions, to be held to account for regulatory failures, and to draw on the skills and talents necessary to exercise effective oversight and provide maximum protection to consumers and investors.
The same compelling logic that led to the creation of the CSRA should now govern decisions about its location and administrative structure. If Canada wishes to maximize the significant advantages of a CSRA, a legitimate head office must be based in Toronto.