Regulatory reform goes beyond politics, Phelps says

(January 13, 2004) The provinces and the federal government must set aside their differences and accept that regulatory reform is an economic issue, not a political or constitutional issue, according to Michael Phelps, chair of the wise persons’ committee (WPC).

In his first public address since the release of the WPC report, Phelps told the Economic Club of Toronto that a single national regulator would draw on the expertise the various provincial regulators have accumulated.

“The provinces have a history of regulation of capital markets, and they have been doing a great job of it,” he said. “As the markets change so fast the companies and investors want a different form of regulation.”

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Most of the provinces, notably British Columbia, Alberta and Quebec, have had a lukewarm response to the notion of a single regulator, though.

“More than anything else, the provinces have said ‘We’ll study this’ — that’s the official response to this point,” Phelps said. “My guess is that the provinces know what the capital market players want and they’re going to have to ponder this.”

B.C. has been at the forefront of the movement for the adoption of the so-called passport model, where issuers and dealers need only to remain onside with their local regulations to be accepted by regulators in other provinces.

But Phelps said this approach might only be a stop-gap measure and that sooner or later, a national body would be required.

“I characterize the passport model as a substantial improvement over what we have, but it’s just not enough,” said Phelps. “If we’re going to do this we need to really do it for a long time and it starts with one code and the passport model doesn’t go near that.”

While some of the provinces appear to feel threatened by a national regulator, Phelps said that investors and issuers across the country would actually be better served by this system.

He pointed out that Canada already had a de facto national regulator, since any company wanting to be listed on the TSX has to comply with rules of the Ontario Securities Commission (OSC).

“Right now, for mid- and large-sized companies, no matter where they are in Canada, they quickly come to the Toronto Stock Exchange for equity capital — effectively that makes them regulated by the OSC,” he said. “Our argument is that we have a national regulator and it’s the OSC. A better model would be to have a Canadian Securities Commission, where people have accountability.”

He gives the example of a company or investor in Lethbridge, who must play by the rules of the OSC, but has no say in the regulatory environment because they have no voice whatsoever in Ontario regulations. With a single national regulator, all entities across the country would enjoy a level playing field, with some say in the regulatory process. The national regulator would be monitored by an external body to ensure accountability.

“In our report, we recommend a joint federal-provincial committee of ministers that would meet several times a year. This kind of joint body would, as part of its explicit mandate, deal with the review of how regulators were performing against service level promises, which we haven’t tried in Canada yet.”

Phelps said that aside from the existing regulators, there is limited resistance to the single national regulator.

“Our report points out where the players want this debate to go, so if anybody, not just the provinces, takes a different view, in our view they will not be doing the best thing for capital markets,” he said. “The weight of logic and the public voices of capital markets players want something much stronger than passport. The provincial efforts to get together and bring about reform everybody acknowledges is too little, way too slow.”

And it’s not just Canadians who think the system should be streamlined.

Phelps also pointed out that most countries with sophisticated capital markets already have a single regulatory body, making Canada unnecessarily complicated in the eyes of foreign investors.

Foreign regulators, like the U.S. Securities and Exchange Commission, want to be able to “make one phone call, not 13,” when they are seeking clarity on a Canadian regulatory issue.

He said the next step would be another round of consultation, this time with the various levels of government calling directly for input on reforms. The WPC was simply a conduit to discover the preferred form for the government to pursue.

“I don’t expect a lot of public activity on this file before an election,” Phelps says. “I expect a lot of work to go on, I expect a certain amount of consultation between ministers and I expect the federal minister and his [provincial] colleagues to circle back and have some more dialogue with the capital markets players.”

Phelps says it is now up to those players to ensure their voices are heard in the coming debate. While the status quo is not acceptable, he believes no changes should be made without political pressure from market participants.

“I’ve been encouraged by most of the public comment,” Phelps says. “I’m obviously interested in what the provinces and regulators have to say, but I’m mostly interested in what the capital markets players have to say and that response has been very warm.”

Still, some submissions to his committee were made off the record, because the companies making the comments insisted on anonymity.

“The profile of this debate needs to be raised, so that’s why we said to companies that if they want their views to be known to us, they have to do so publicly and we’ll put it on the Web site,” Phelps says. “Some companies only wanted to talk privately. I listened, but we didn’t use it much in our deliberations. If someone said to us they wanted to express a private view, I had to respect that.”

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What do you think? Is a single national regulator the way to go? Or is the move politically unattainable? Is a passport model just a stop-gap measure? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(01/13/04)

Steven Lamb