Dodge repeats call for single regulator

Canada will be “stuck in the middle of the 20th century,” unless the country moves forward on a single, uniform framework for securities regulation, says Bank of Canada governor David Dodge.

“We need to have a harmonized set of rules and single enforcement authority,” said Dodge during a question and answer session following a speech to the Economic Club of Toronto this afternoon. “Somehow in the end we will collectively come to our senses and have a single set of rules and a single enforcement authority. What that means or how the securities commission will come together is open for discussion.”

Even with a single regulator, Dodge says that rules governing large companies shouldn’t be the same as ones for smaller or mid-size organizations.

“The principles of [Canada’s] regulatory framework must apply to all firms,” he said, “but the application of the rules can, and should be tailored appropriately to take into account the size and complexity of the company.”

Dodge says the “1000 pages of tick the box rules” — referring to the Sarbanes-Oxley Act that American companies have to follow — will force smaller companies who want to become public stay private.

In his speech, Dodge also mentioned that regulatory frameworks in other countries have been greatly improved, therefore “eroding” Canada’s competitive advantage. He mentioned that observers have examined this country’s financial services sector and “noted that the productivity of this sector appears to be lower than that of other countries, particularly the Unites States.”

Dodge appears to have support for the idea of streamlined securities regulation among some politicians in Ottawa. In a pre-budget report released last week, the House of Commons Standing Committee on Finance called on the federal government to conclude an agreement with the provincial and territorial governments on a single securities regulator no later than March 31, 2007, adding that the regulator should begin operations no later than June 30, 2007.

However, this ambitious timetable seems unlikely, considering the Tories’ current minority position, Quebec’s refusal to support a single regulator and concerns in the West that such a system would be dominated by Ontario.

Still, Finance Minister Jim Flaherty has said his government would work towards establishing a single regulator, but has not set a deadline of any kind. Insiders believe Flaherty may revive the topic in next year’s federal budget.

Dodge also says the central bank is looking closely at the issue of whether Canada’s financial institutions are efficient.

Preliminary research found that compared with U.S. banks, “There are unexploited economies of scale for Canadian banks. This suggests that Canadian banks are less efficient with regard to the scale of their operations and if banks could reap economies of scale there would be efficiency benefits to flow through the Canadian economy.”

Just how Canadian banks could become more efficient, such as through mergers, Dodge didn’t say. He did mention, however, that there is more to gain by having larger banking institutions.

“You need a larger scale for our institutions,” said Dodge after the speech. “But at the same time you must ensure that there is enough competition to drive further innovation.”

If Canada doesn’t find a way to create larger financial institutions, Dodge says the country could be in trouble. “Unless we can get greater economies of scale we’ll be less efficient than the global standard.”

Bryan Borzykowski is a Toronto-based freelance writer

(12/11/06)