Might the proposed new federal securities regulator weaken regulatory oversight?

The front page of today’s Globe and Mail reports the latest chapter in the federal attempt to create a national securities regulator. (Premiers push back against national securities regulator plan).


Part of the Harper government’s response to the financial crisis was to promise to remedy the patchwork of provincial securities regulators.  If securities regulators are going to avert future debacles reminiscent of the subprime mortgage meltdown, they need to be sophisticated, powerful and well-resourced.  The smaller provincial securities regulators are laughably outgunned when it comes to anticipating the next generation of destabilizing financial instruments.  And as we have learned in past financial crises, the most dubious financial activities gravitate to jurisdictions where oversight is the weakest. 


But a new federal regulatory body would encroach in what has previously been viewed as provincial jurisdiction.  To get the provinces onside with a federal regulator, the feds are proposing that provincial securities regulators could coexist alongside the national securities regulator.  The Globe reports that the Alberta premier is running with this idea by seeking to join with Saskatchewan to create a western securities regulator.



Harper may think it is good political calculus to create a multi-tiered securities regulatory framework, but it is lousy policy if the point of a national securities regulator is to prevent the sorts of financial hocus-pocus that played a starring role in the 2008 financial crisis (or perhaps I should say, ongoing financial crisis). 


Let’s say a company with operations in Alberta, Saskatchewan and elsewhere in Canada wants to issue securities.  Why on earth would it bother with the idiosyncrasies of various sub-national regulatory systems when it could just conduct its business under one national set of rules?  Securities issuance would stampede away from the western Canada securities regulator – unless there was some advantage to working with that body.


To avoid withering into irrelevance, a western Canada securities regulator will have to offer something to attract companies to conduct business via its rules.  The western  Canada securities regulator (or any other provincial regulator) will have a huge incentive to dilute (or become more lackadaisical about enforcing) inconvenient securities regulation.  And if the subnational provincial regulators are tolerant of edgy financial activities, it will become harder for a federal securities regulators to insist on the highest standards for regulatory prudence.  If the feds play hardball with questionable securities activities, those activities will just move to a more accommodating provincial jurisdiction.


This tendency for parallel regulators to produce weaker regulatory oversight has a history of wrecking havoc in the American banking system. US banks can do business under state or federal regulatory regimes.  This produces a tendency for national and state level regulators to compete by relaxing regulatory standards in order to attract banks to their regulatory jurisdiction. This so-called “competition in laxity” among regulators creates a pernicious race to the regulatory bottom. 


The Harper government may think it is making an astute political compromise by creating a two-track regulatory system.  But the new regulatory architecture may weaken overall regulatory oversight by encouraging a “competition in laxity”.  We need to make sure that any new regulatory structure does not create a situation in which purveyors of questionable financial instruments can play regulators off against each other. 


  • Your article seems to imply an assumption that the Harper government favours a strong and effective securities oversight system — that it would not want to weaken regulatory oversight. What would lead you to that assumption?

  • The idea of a Canadian federal securities regulator was proposed long before the meltdown: it was not proposed as a response to it. It hasn’t happened yet because some provinces guard their jurisdiction very jealously.

    In an ideal world, the provincial regulators would disappear once the federal regulator was in place. But this will likely not happen, based on the U.S. experience: 75 years after the establishment of the SEC, the state securities regulators are still an impediment to doing business.

  • Right you are RCP, see for example “Ottawa’s Long And Arduous Road To A National Securities Regulator (Globe and Mail, May 27, 2020) for an overview of this history. My intended point was only that this proposal became a higher government priority in the wake of the financial crisis. Following the financial crisis, Canada was in the odd position of extolling the virtues of its bank regulation, while having to acknowledge its rather “embarrassing” patchwork approach to securities regulation. Thus it was an auspicious moment to move the ball forward for a national securities regulator.

    Em Larson: you are wise to question the motivation of this regulatory proposal. Let’s see: if one wanted to go about creating the conditions that promoted weakened regulatory oversight (without, of course, saying so outright), surely it would be helpful to create a regulatory system that is vulnerable to this “competition in laxity”.

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