Investors paying cost of regulatory jumble: Panel

The adoption of a single securities regulator would not only make life easier for the industry but it would spare Canadian investors from bearing the brunt of excess costs related to regulatory balkanization, according to a panel of experts.

“The current system is not good enough and we deserve better,” said Len Racioppo, president and COO of Jarislowsky Fraser Limited. “A single [securities] act, a single regulator and a single set of fees is the best approach. All the regional differences can be dealt with.”

One of the biggest problems with the current system, he said, is the inconsistency of regulatory expertise across the country. In dealing with the various regulators, he has experienced “large gaps in knowledge” from one province to the next, and the quality of enforcement is also inconsistent.

A single regulator would bring the best people from each jurisdiction together and close those knowledge gaps.

“Cost is also a very real issue. What you don’t know is that it is actually costing all of you,” he said, referring to Canadian investors at large. “Our fees as a firm have gone from $7,000 to register across Canada to about $600,000 today. Granted, a lot of that is due to growth of assets, but it is also due to different fees being levied by different commissions.”

There are also hidden costs associated with the fragmented system; costs assessed not by the regulators but by the market, according to Poonam Puri, associate professor at York University’s Osgoode Hall.

She said repeated studies have proven there is “a Canadian discount” on our capital markets, with one study claiming that the cost of equity capital is 25 bps higher than in the U.S. At the same time, Canadian equities trade at a valuation discount to comparable American companies.

“This differential can have a negative impact on investment and employment,” she said. “It’s not unreasonable to think there are a couple of factors at play here.”

She pointed to the inefficiency of fragmented regulation and the perceived weakness of Canadian regulatory enforcement as key culprits in the Canadian discount. Puri said the passport model may be streamlined, but it does little to address the excess costs associated with multiple jurisdictions. Nor does it advance the coordination of enforcement.

Paying fees to each province are not the only cost associated with the fragmented system.

European companies frequently pay out “special dividends” in the form of additional stock offered at a discount, rather than in cash. But to issue these new discounted shares, the companies must be registered in the jurisdiction of the shareholder.

European and American investors receive their shares with little hassle, said Racioppo, but few firms are willing to register with Canada’s 13 regulators. Investment firms like Jarislowsky Fraser must immediately sell the shares without actually receiving them, incurring a sales charge.

Assuming the investor wants the increased exposure to the company in question, he or she would then incur a separate charge to acquire the shares using the proceeds from the initial sale.

“Trust me — it’s not a $10 E*Trade trade. It’s a fairly significant one or two percent fee in and one or two percent out,” Racioppo said. “You don’t see it, but it happens.”

That unwillingness to register with Canada’s 13 regulators is putting off not only foreign firms but foreign governments and securities regulators as well.

“We are anomalous among major markets in that we don’t have a common regulator,” said Puri. “To the extent that our regulatory structures are outdated, we risk our credibility and our reputation as an international marketplace if we lag too far behind.”

Federal Finance Minister Jim Flaherty said that Canada is leading discussions in the G7 on the mutual recognition of securities regulators and free trade in securities but that our own arrangement makes it difficult to advance these talks.

Racioppo said that under the passport model, foreign firms will register in the province that makes the process the easiest. Even if all of the provinces start off with the same requirements, eventually their competitive nature will lower the regulatory bar.

“The perception internationally is actually worse than the reality,” said Crawford. “There’s just such a negative feeling in the financial world outside of Canada about our inability to deal with this.”

In an increasingly integrated global economy, Canada cannot continue to act in isolation from the rest of the world, said Jim Goodfellow, partner and vice-chair, Deloitte and Touche. We cannot ignore the demands and needs of foreign investors.

“The world sees our potential, but it also sees a system of 13 regulators that is clearly out of step with our global competitors,” said Flaherty. “Our view is that a common securities regulator is in the interests of all Canadians. We need to work together as one if we are truly going to reach our potential in capital markets.”

Flaherty was quick to point out that such a system would not constitute a federal regulator. It would be a joint effort made up of 14 equal partners, with the 10 provinces, three territories and the federal government all having one vote.

“Even though you have the passport system, you have to pay a fee to every jurisdiction,” said Crawford. “In some jurisdictions — Manitoba, Saskatchewan, the Atlantic provinces and the territories — it’s more of a revenue item.”

The federal government, he said, has been quietly working behind the scenes to assure provinces that Ottawa could make up any shortfall in provincial revenues.

If the federal government really wants to advance the cause, Purdy Crawford suggested, Ottawa should threaten to institute a federal regulatory system, as that would likely inspire greater co-operation between the provinces.

Such a threat could also backfire, warned Robert Knox, principal of R.H. Knox and Associates. As an inter-provincial negotiator, he says the provinces might just walk away from the table if Ottawa takes a heavy-handed approach.