Flaherty’s dream of a national securities regulator a victim of ‘friendly fire’

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One of these days, Canada is going to suffer the consequences of a massive securities fraud. When it happens, remember June 22, 2021. That’s the day the Conservative Party voted against a more functional approach to financial regulation, dealing a blow to the legacy of one of the best cabinet ministers the party ever produced in the process.

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The Official Opposition teamed with the Bloc Québécois to kill an amendment to the budget implementation act (Bill C-30) that would have set aside about $120 million to fund the Canadian Securities Regulation Regime Transition Office, which was created by former Conservative prime minister Stephen Harper’s government in 2009 to prepare the ground for something similar to the Securities and Exchange Commission in the United States.

We’re still waiting for a Canadian version of the SEC, of course. Harper tried, but the Supreme Court sided with the provinces that protested the regulation of capital markets was their responsibility. So Canada remained the only country in the world with 13 cracks through which bad and/or irresponsible actors can slip. It was embarrassing.

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Still, the Court left an opening. Justices conceded that the federal government could also regulate capital markets if it so desired. Harper’s finance minister, the late Jim Flaherty, who was marked by the events that led to the Great Recession, decided to try to finish what he had started. It was an example of an initiative that has become too rare in the Twitter era of electoral politics. Flaherty, who died in 2014, had nothing to gain from fighting with the provinces over securities regulation. He simply wanted to do the right thing.

Lax regulation of complex securities linked to debt that no one seemed to own had plunged the world into a terrible economic crisis. Yet Flaherty, the top finance official in a G7 country, had little to offer on the subject because he had no line of sight on what was happening in capital markets, even though everyone knew it would be Ottawa’s job to clean up any mess made by the provinces.

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“I’m a bit of a dog with a bone on this,” Flaherty said in the autumn of 2009. “The one part of our financial system that stands out as being inefficient and ineffective is regulation of securities.”

Backed by British Columbia and Ontario, Flaherty set up a voluntary national regulator, betting that most provinces and territories would eventually join. By the spring of 2019, seven had signed up. The remaining holdouts were Alberta, Manitoba, Quebec, Newfoundland and Labrador, the Northwest Territories, and Nunavut. Quebec was never going to join, but it was reasonable to think the others would eventually come around. It would have left Canada with two regulators instead of 13, so arguably only one crack through which trouble could slide instead of many. The system would have been stronger and more efficient.

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Alas, without a champion, the effort lost momentum. An offshoot of the transition office, the Capital Markets Authority Implementation Organization (CMAIO), established in 2016 as something of a secretariat for the national regulator, decided to “pause operations” in March, citing a lack of interest by provincial governments that had become overwhelmed by the fight against the pandemic. “CMAIO’s work can be resumed at a future time when there is greater certainty around Cooperative System launch timelines,” the board of directors said in a note on the organization’s website.

CMAIO is now in the realm of science fiction, as the crew that put it in stasis has been terminated by the Conservatives and the Bloc. Bill C-30 was approved by the Senate on June 29 without funding for the Canadian Securities Regulation Regime Transition Office, which amounted to euthanasia because the agency needed a new allocation to keep going.

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“Without the proposed funding in this year’s budget, the Canadian Securities Transition Office will wind down its operations, as it will no longer have the resources needed to continue managing systemic risks in Canada’s capital markets,” Freeland’s press secretary, Katherine Cuplinskas, said in an email.

Ed Fast, a former Harper cabinet minister who is now Opposition finance critic, characterized the national securities regulator as a victim of friendly fire. “We have consistently been opposed to this budget, as it fails to place the massive borrowing, spending, deficits and debt within the context of a defensible debt management plan,” Fast said in an email. “We aren’t going to start cherry-picking the elements we like (and there are some) and don’t like.”

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The burn-it-all-down approach to politics has become a real threat to the economy because it can’t separate good policy from bad. A responsible group of politicians would have found a way to keep Flaherty’s regulatory initiative alive, but these days, party interest comes first.

It’s difficult to know how much damage this will cause. The lasting legacy of Flaherty’s attempt to create a national regulator could be jolting the provinces into taking the job more seriously. The Canadian Securities Administrators, the group that links all of the provincial and territorial regulators, has become a far more effective organization by most accounts.

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Lawrence Ritchie, a lawyer who specializes in financial regulation at Osler, Hoskin & Harcourt LLP in Toronto, said the best course at this stage might be to let the national regulator go and instead focus on creating a national enforcement body that would represent a greater threat to white-collar criminals. It would be the second-best option, but it might be easier to persuade provinces to hand off hard-to-prove criminal cases to a national body that included the RCMP than it has been to convince them to surrender constitutional powers.

“We muscle our way through collectively and cooperatively,” Ritchie said of the current system. “It’s a testament to the people on the ground, but it’s costly, time consuming and likely comes at the expense of truly national priorities.”

Financial Post

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