It’s time to launch the systemic regulator

After the bruising experience of the 2007-2008 financial crisis, one of the most important and under-stated accomplishments since that time has been the steady build-out of the systemic regulator for Canadian markets and accompanying federal legislation, the Capital Market Stability Act (CMSA). The CMSA is the vision of the late minister of finance, Jim Flaherty, to create a federal entity to oversee emerging systemic risks in national markets and coordinate findings and actions with the responsible Canadian regulators. Yet, despite heightened systemic risks in global markets—now 10 years on from the last financial crisis—we continue to delay start-up of the systemic regulator, instead awaiting a synchronized launch with the cooperative securities regulator. Given the uncertainties that overhang the cooperative regulator project in Canada, it is time the federal government, in consultation with the provinces, move quickly to pass the necessary CMSA legislation, and finalize the needed staffing and infrastructure. Arguably the systemic regulator under the CMSA could begin operations within months and take up its mandate to build a national financial database and begin monitoring systemic risks in the marketplace. Active oversight of the capital markets by the federal systemic regulator would boost investor confidence and attract increased foreign participation in our markets. Instead, we’re falling behind. Canada is now out-of-step with other foreign jurisdictions in the monitoring of nation-wide systemic risks. For example, in the United States, the Office of Financial Research (OFR), created by Dodd-Frank legislation, conducts systemic-risk analysis and financial data collection for the Financial Stability Oversight Council (FSOC). The U.S. was hit hardest by the 2008 crisis, but the OFR is working to prevent a repeat. Meanwhile, Canada, still waiting on the CMSA, is without similar safeguards and reliant on our characteristic stability to weather the next potential storm—putting our resilient and stable financial platform, and thus our attraction for investors, at risk. If obstacles to startup remain in place and the delay continues, the federal government would do well to expand the systemic regulator by including a dedicated professional team to address white collar financial crime, including money laundering transactions and terrorist financing. White collar remains a pressing issue that continues to plague the robust health of our capital markets. While efforts have been made to check these practices, resources to do so are often thin on the ground. The systemic regulator provides the opportunity to deal more effectively with white collar financial crime, such as money laundering, and possibly include a so-called “services fraud office” with a dedicated team of professionals to investigate and prosecute. If the systemic regulator is designed as a stand-alone entity, and not incorporated within the Bank of Canada or Office of the Superintendent of Financial Institutions (OSFI), it could be moved back into the cooperative regulator, once there is clarity on eventual start-up. An optimistic view suggests it will be several more years before the latest version of the cooperative regulator, an arrangement that includes six participating jurisdictions, is ready to begin operations. It has been more than five years since the federal government and the provincial governments of Ontario and British Columbia signed an “agreement in principle to move towards a cooperative capital markets regulatory system." Requisites for moving forward include amendments to provincial labour and privacy legislation, provincial approval of the cooperative capital markets regulatory system (CCMRS), finalizing the internal operating infrastructure of the regulator, and designing a framework to link the cooperative regulator with regulators in the non-participating provinces. The recent and possibly further divergences in provincial securities legislation since the latest proposed legislation (2015) of the Capital Markets Act, partly reflecting the deregulation exercise now underway in Ontario, adds further complications to the provincial approval process and eventual start-up. The CMSA is a platform with the potential to help Canada remain a competitive player on the global stage, but for now it remains benched. Ian Russell is president and CEO of the Investment Industry Association of Canada. The Hill Times