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