June 27, 2007

Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to a Conference on Securities Law Enforcement Co-Hosted by the Capital Markets Institute, Rotman School of Management and C.D. Howe Institute

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Toronto, Ontario

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I'm not known for speaking at great lengths, but my remarks today are a little bit longer because of the importance that we attach to this discussion concerning enforcement, but also concerning the issues relating to the passport system and a common securities regulator and the topicality right now, as just last week at Meech Lake we had together the ministers responsible for securities regulation from across Canada. Regrettably, not all the ministers responsible for securities regulation are ministers of finance, so it gets a little complicated in terms of who one is speaking with from time to time.

But it was a very good session last week. We were fortunate that Purdy Crawford was there as well to make a presentation to the ministers. So I am going to get into that issue and talk about the growing urgency of it, the issue being modernizing our capital markets. In our view, it is critical to ensure the Canadian economy continues along an upward trajectory

Canada has a strong financial services sector that spans the country, providing good, high-paying jobs-I think we all agree on that. We have a great story to tell nationally in Canada, one of economic success. We are now in the second longest period of economic expansion in the history of our country. The only longer period was that immediately following the Second World War. We have visionary entrepreneurs. We have growing competitiveness. We have unbounded potential.

I tell you, when I go to G7, G8 finance ministers' meetings and G20 and IMF, the World Bank, APEC, it's a very proud story to tell with respect to the fiscal fundamentals of this great country. And the world sees that potential.

Yet we have a capital markets regulatory system that is holding us back. That is a system of 13 regulators that is clearly out of step with global competition. We are in fact the only industrialized country without a common securities regulator. For many outside of Canada, our system is seen as cumbersome, fragmented, slow, repetitive and lacking the proper tools of enforcement, which you have been talking about here today.

For these reasons, our government has developed a comprehensive and forward-looking plan. A plan to develop leading-edge principles and rules to govern our capital markets. A plan that is tailored to the unique makeup of Canada's capital markets to make our markets more effective and more efficient. A plan entitled Creating a Canadian Advantage in Global Capital Markets, which we published with Budget 2007 in March.

Coincidentally, today my colleague in the United States, the Secretary of the Treasury, Henry Paulson, is announcing the next steps of his capital markets competitiveness action plan. He is looking at ways to modernize the regulatory structure in the United States. Clearly, the world is not about to sit back and wait for us, and quite frankly our government is not prepared to accept the status quo.

Our Global Capital Markets Plan has four key building blocks.

  • First of all, enhancing regulatory efficiency by creating a common securities regulator that is principles-based, proportionate and tailored to the unique makeup of Canada's capital markets.
  • Secondly, strengthening market integrity by enhancing investor protection, pursuing the highest standards of governance and enforcing our laws more vigorously.
  • Thirdly, by creating greater opportunity for business and investors by pursuing free trade in securities with the United States and other Group of Seven (G7) countries. And I'll come back to that in a moment about where that is at in terms of our discussions internationally.
  • And fourth, improving investor information by promoting financial literacy, particularly for young Canadians, by developing new financial education materials.

So these four building blocks make up the foundation of our Capital Markets Plan. None are mutually exclusive. They all support one another, and I would like to take the next few minutes to focus on one building block in particular, and that is strengthening market integrity, which begins with enforcement.

I think we can all agree that at a time when Canadians hold almost $2 trillion in financial assets, effective enforcement is critical if we're going to truly protect investors and make us globally competitive. Effective rules of the game and how well you enforce them are essential. In enforcement, reputation matters.

In this regard, there is a broad-based recognition that Canada must close a gap. There is a perception that Canada's system is not performing as it should: that too many breaches of rules are not being prosecuted in Canada; that there are too many delays in investigations; that penalties are insufficient; that more specialized knowledge of capital markets is required in our enforcement system; that our fragmented system hinders effective enforcement.

It does concern me greatly that some Canadian investors consider it necessary to rely on the United States to hold companies to account for their actions. We need to ensure investors are adequately protected and that consequences of wrongdoing are swift and severe. Although corporate white-collar crime is not as high-profile as gun violence, it is serious. Stealing the investments or harming the investments of a retired senior is a serious crime and a crime with victims who are often vulnerable. We need a coordinated effort among authorities, appropriate use of administrative, civil and criminal remedies, and timely investigations and prosecutions. So we need to act and act quickly to better protect investors against breaches of securities laws and white-collar crime.

Now a few words about effective enforcement. We have done some things. I'm going to enumerate them fairly rapidly. Enforcement is an area where our government is investing considerable effort and money. I know because I dealt with it as part of our budgeting efforts the last two years. In our first budget in May 2006, we provided $64 million over two years to bolster our fight against money laundering and terrorist financing and to more aggressively combat counterfeiting.

Secondly, Canada assumed the Presidency of the Financial Action Task Force last year. That was for the first time ever. The purpose of the task force is to develop and promote policies that combat money laundering and terrorist financing.

There is something else too which hasn't got that much notice, and I think it will as the years go on, and there's a group called the Egmont Group, which deals with financial intelligence and was looking for a home. And we have provided a home in Canada, not only in Canada but here in the city of Toronto, and we provided the $5 million in financing to get that started last year. The Egmont Group is an organization of over 100 of the world's financial intelligence units, now situated here in Toronto.

As part of our Capital Markets Plan, we also announced that Nick Le Pan would be the senior expert advisor of the RCMP to help develop a strategy to improve the effectiveness of the IMETs. He will provide recommendations on improving the IMETs to the RCMP commissioner by October of this year and assist the RCMP in making these recommendations a reality. And this strategy will include some concrete steps to attract and retain the best-qualified police and other expert resources, strengthen the coordination of the program nationwide and improve collaboration with provincial authorities, all of which I heard about in the last hour in this room.

Now a few words about securities regulation. These are all positive initiatives, the ones I just mentioned that we've taken. But if we are to truly foster the confidence of investors and establish the reputation of our capital markets globally, we must move to a common securities regulator.

A common securities regulator would be able to establish a national enforcement strategy. Mr. Crawford, in his latest report entitled One Year On: Seeing the Way Forward, the follow-up to his previous report with his panel, says reform is required if for no other reason than a coordinated approach to enforcement. Forgive me, Purdy, but I'm going to quote you now somewhat at length on this enforcement issue.

The further report says: "Each province has its own approach to enforcement. Some jurisdictions lack sufficient expertise to investigate and prosecute complex cases. Self-regulatory organizations, federal, provincial and municipal police and the federal and provincial judiciary also have enforcement interests. Police departments have their own priorities and capacities. Some judges wonder if they have sufficient knowledge to handle complicated cases."

So moving to a common securities regulator with a new common securities act would also provide a unique opportunity to introduce more principles-based, proportionate regulation. This would help establish a regulatory regime that is more flexible, more responsive. It would also bring about a positive change to compliance and enforcement efforts. These would be more focused on high-level principles such as fairness to investors and less focused on process and compliance with detailed rules. In this respect, a common securities regulator would best provide uniform interpretation of these principles, a must for enabling firms to know how to respond.

A few words about free trade in securities-which I mentioned earlier, which internationally more commonly is referred to as mutual recognition of securities regulators-and where we're at in those discussions. Canada raised the issue at the meeting of finance ministers of the G7 in Essen, Germany, two or three months ago. We encourage and I encourage my colleagues in the G7 to move in that direction. The presentation was met with uniform acceptance, and now Canada is leading a group of officials in the G7 who are developing a paper to be presented to the ministers when we next meet.

I've also had the opportunity since that meeting to have further discussions with Secretary Paulson, my colleague of the United States, and with Treasurer Costello in Australia, Secretary Lam in Hong Kong, and the new Mexican Minister of Finance, Augustin Carstens, all of whom support the idea of moving forward on mutual recognition of securities regulation. All the more important-you know what I'm going to say-that we get our act together here at home in terms of 13 securities regulators in a country of 31.5 million people if we're going to lead the charge internationally.

Free trade in securities internationally will require high standards of investor protection that meet everyone's expectations, and Canada of course would benefit from this initiative. It would provide our exchanges with a larger pool of clients while companies would have access to a larger pool of capital. Both would be able to better play to their strengths on a global basis. And our current system of 13 regulators would hold this initiative back, which is a point I made clearly with my colleagues last week when we met.

On regulatory efficiency, as one looks at implementing proportionate, principles-based regulation, strengthening enforcement, or negotiating or implementing free trade in securities, one theme keeps coming back and that is a common securities regulator is quite simply a must. A common securities regulator would also allow us to eliminate inefficiency and duplication. While some inroads in harmonizing and simplifying securities regulation have been made, they haven't taken us to where we need to be.

In September 2004, all provinces and territories with the exception of Ontario agreed to a process to create a passport-style system to regulate securities. Now this was in September of 2004. I can go back a bit longer than that, since I was the Minister of Finance in Ontario in 2001, 2002. And I was involved on behalf of this province with passport discussions there. And I'm not quite sure where it started before then but at least by 2001 we were talking about this. I think this is 2007. That's six years that this passport issue has been discussed among the provinces and the territories.

Through their actions, the provinces and territories-and I think this is positive-have demonstrated a clear commitment to improving our securities regulatory system, and I applaud them for that. Their recent initiatives to narrow regulatory differences and harmonize and streamline securities laws are important to achieving a more efficient and effective regulatory system in Canada.

Unfortunately, they do not go far enough or fast enough and, as I told my colleagues last week during our meeting, the passport system is simply inadequate for where Canada needs to be:

  • Even with the passport system, Canada would still have 13 securities regulators, 13 sets of laws, however harmonized, and 13 sets of fees.
  • The passport system lacks national coordination of enforcement activities, making it difficult to maximize results on this critical part of the system.
  • And the passport system does not address our need to improve policy making. It would still be necessary to obtain agreement from 13 regulators to make changes to rules.

Evidence exists that suggests that the fragmented structure of securities regulation hurts the ability of Canadian firms to raise money, a situation that puts us at a distinct global competitive disadvantage. The time has come to explore a new approach to securities regulation, a more collaborative and united approach across jurisdictions on behalf of investors and businesses.

Now clearly I'm not alone in saying we need to move forward and move forward soon. There's much public comment lately on the subject. With each passing day we get more and more participants in the debate, some within Canada, some without. I'm sure most of you saw last week that we were visited by the managing director of the International Monetary Fund, Rodrigo de Rato, who added his voice to those calling for a common securities regulator in Canada. Mr. de Rato said: "Given that Canada is playing in the highest league on financial issues, you still have to provide your customers-your investors and savers of your country-with better tools. Canada's investors deserve better."

Moving to a common securities regulator is also supported by the Investment Industry Association of Canada that represents not just large investment banks but also broker-dealers-with some of the medium-sized and smaller broker-dealers across Canada.

The idea of a common securities regulator is also endorsed formally by the Canadian Coalition for Good Governance, whose members include the Alberta Teachers' Retirement Fund Board, the British Columbia Investment Management Corporation, the New Brunswick Investment Management Corporation and the Ontario Teachers' Pension Plan. They said: "The Canadian Coalition for Good Governance believes that a national regulator working from various offices across the country will improve enforcement and make the Canadian market more efficient and transparent for Canadian investors."

Both the House of Commons and Senate committees have expressed support for a common regulator. The NDP finance critic, my critic from the NDP in the House of Commons, has launched a campaign to protect investors advocating a Canada Securities Commission and hoping to generate further discussion in the Finance Committee. Despite that support, I still think I'm right. She and I get along fine.

The national media, The Globe and Mail, and I'll read it: "Instead of seeing the creation of a national regulator as a capitulation, the provinces need to understand that a truly national body is the only way to drag Canada's antiquated securities market into the 21st century." Similar editorial support from the Toronto Star. I still believe I'm right.

The vast majority of capital market participants and observers agree that we can no longer afford to sit back and watch our competitors pass us by, and I'm very impressed by this global market movement as I meet with the finance ministers from around the world. And this development, as you know, is an accelerating phenomenon in the world. It's very important that we act in Canada.

So to succeed in the world economy, we must put the right system in place: a system that instills confidence and assures high standards of integrity; a system that gives our businesses, large and small, optimal access to the capital needed to prosper.

Now the benefits of moving to a common securities regulator are well known: more investment, jobs, protection of investors, save money and give all regions of Canada a say.

Such a solution would make the regulation of our markets more responsive and accountable by creating a decision-making body that would coordinate the views of all jurisdictions promptly and fairly.

It would improve market efficiency.

It would improve enforcement.

It would improve Canada's reputation in the eyes of world markets and lead to more foreign investment in Canada.

And a common securities regulator would better serve our common interest by having a structure that would allow all regions of the country to participate in market regulation in a more meaningful and constructive way; by having a structure that would ensure broad and equal participation by all provinces and territories, with a strong on-the-ground presence in all regions of Canada with local expertise that would respond to regional needs; and by allowing Canada to put in place a single code with the right balance of rules and principles, one that will establish a clear competitive advantage for Canada in global markets.

I made the case last week with my colleagues from the provinces and the territories that we need to move beyond the passport system, that we cannot continue to ignore what is happening in world capital markets. I told them we needed to work together and take steps now to bring our capital market system into the 21st century by implementing proportionate, principles-based regulation administered by a common regulator. I suggested to them that we have an obligation to confront realistically the deficiencies in our current system, that we have an obligation to Canadians and Canadian businesses large and small and to investors to overcome jurisdictional preferences and to collaborate on behalf of all Canadians. I emphasized the urgency of this as we stand to lose our Canadian advantage and fall further behind dynamic markets like London, New York and Hong Kong.

Although many of my provincial and territorial colleagues were not prepared to follow suit at this stage, they understood and were not opposed to the next step I felt we had to take. And that next step is an expert panel with time limits to do several things: one, to provide third-party advice, secondly, validation, and thirdly, recommendations to all ministers-federal, provincial, territorial-on how we can move this file forward. And we are specifically-we, the federal government, have asked the panel to deal with five matters.

  • First of all, the outcomes, principles and performance measurements we should rely on while pursuing a Canadian advantage in global capital markets.
  • Secondly, how Canada could best promote and advance proportionate, more principles-based regulation.
  • Thirdly, how enforcement could be improved in the process.
  • Fourth, how this regulatory approach could be implemented under a passport system or under a common securities act and a common securities regulator.
  • And the critical path that will take us there is the fifth thing we've asked them to do, including arranging for the drafting of a model national securities act for Canada.

All provinces and territories have been invited to participate in this collaborative process, including suggesting names for the expert panel, and a few of them have already, and providing input as they carry out their work. I expect to announce the panel within the next two weeks or so. The panel is being given time limits: the first report within six months, the final report within nine months; the first report dealing with the first three items I mentioned, and the second report dealing with the other two.

This is important. This matter is a matter of some urgency, and we want to make sure that we move forward with this plan, and the presentation of the report will be to all of the ministers.

Now I've spent a considerable amount of time talking about the benefits of a common securities regulator and what it might look like. Let me tell you briefly what it isn't, which is important, and address some of the concerns that are sometimes raised.

First of all and most importantly, we are talking about a common regulator in Canada, not about a federal regulator. And for those of you who have not had the joy of federal-provincial-territorial meetings in Canada and dealing with Equalization issues and so on, one cannot be too sensitive to the view expressed by some that Ottawa is up to no good, generally speaking. But in this area-and as many of you have worked on various reports, and I thank you for all of your contributions-the federal government is not seeking to be a dominant force in terms of securities regulation. What we are seeking is to have one of the seats at the table, of the 14 seats at the table, with our colleagues in the provinces and in the territories. And I would suggest that that is essential in terms of enforcement, and also in terms of international financial arrangements and global movements of capital and mutual recognition of securities regulators internationally.

Secondly, and this is another concern that gets expressed, this is the concern that if it's not Ottawa that's going to dominate maybe it's Ontario, and maybe Ontario is trying to become the regulator in Canada through this process. Well, you know, the reality-and most of you would know this-is that Ontario is the de facto regulator of securities in Canada, regulating over 80 per cent of securities. Their legislation doesn't come from the Government of Canada. It comes from the Legislative Assembly of Ontario. A common securities regulator would actually give more influence to provinces, the other provinces, and less to Ontario. Nevertheless, Ontario has been prepared to support a common securities regulator despite its powerful position with respect to securities regulation in Canada now.

A country like Canada needs a common securities regulator that is regionally sensitive and protects small investors and small businesses. And the commentators, including Mr. Crawford's report on this issue, have been sensitive to those needs, those regional needs, and expertise in Canada. That would help protect strong regional financial centres with different areas of expertise across Canada. We need a common regulator that recognizes the core strengths in cities across Canada, whether it's the derivatives market in Montréal, venture financing in Calgary or Vancouver.

Now I've gone on almost as long as it seems. A few final thoughts on this subject. When it comes to establishing a common securities regulator, I assure you that I want to be absolutely clear. My resolve is unwavering. It is in the best interests of Canada and all Canadians.

The approach we take today is not insignificant. This is about improving the efficiency and integrity of our capital markets and about better protecting people who are investing in their future, their children's future, their family's future in Canada. This is about strengthening the Canadian economy and creating jobs and opportunities for our friends and neighbours. This is about attracting new foreign investment to ensure our standard of living continues to rise and quality services are available to everyone.

Last year we published a long-term economic plan for Canada called Advantage Canada and we said in that plan: "Together, Canadians and their government can create a sustainable advantage for our country by building a stronger economy. History shows that change creates both challenges and opportunities. The most successful societies respond by capitalizing on their strengths to turn change to their advantage." This is an area in which we need change to our advantage.

This is certainly germane to our national debate on the future of our capital markets. Canada historically has benefited from vibrant, competitive capital markets. But to sustain our competitive advantage, we must not just embrace change, we must lead it. The evidence is clear: economies with the most dynamic capital markets enjoy the strongest growth over the long run. In a world of increasing mobility of talent and capital and ever-intensifying global competition, developing leading-edge principles and rules to govern our capital markets will be key to creating a true Canadian advantage in global capital markets. And, as I say, the urgency intensifies with each passing day.

We all know what needs to be done to modernize our capital market system, and I look forward to working with you in this room today and my provincial and territorial colleagues to get this job done. The Capital Markets Institute, the Rotman School of Management and the C.D. Howe Institute are all to be commended, and I do, for organizing this conference and advancing the agenda. I will continue to count on your support and expertise and thank you for inviting me here today.