In January 2021, the province’s Capital Markets Modernization Task Force released an extensive set of recommendations designed to help rejuvenate markets, facilitate capital formation and improve industry competition while strengthening protection. investors. The centerpiece of this vision – the replacement of traditional securities (and derivatives) legislation with platform legislation – is getting a “thumbs down” from the investment industry.
Last fall, the government presented its draft new Capital Markets Act (CMA) for public consultation. At the time, provincial finance minister Peter Bethlenfalvy said modernizing capital markets legislation would give the province “a competitive advantage and play a vital role in attracting global investment, supporting economic growth and innovation and creating good jobs.
However, consultation on the proposed new approach revealed concerns within the financial services industry and the legal community.
Like Investment Director to press, the government had not published all of the comments received during the consultation, but responses from industry groups and others showed strong resistance to both specific elements of the proposed new legislation and its global vision.
The government’s bill would change the balance between securities law, which is overseen by the legislature, and detailed rules that fall under the jurisdiction of the Ontario Securities Commission (OSC). Modeled on a similar approach taken in British Columbia, the proposed CMA aims to adopt a “platform-based” approach, setting out general regulatory principles in legislation and giving the OSC more power to create detailed requirements.
The goal is a more flexible and responsive regime: the commission can change its rules more easily than the legislature can adopt changes, so that reforms can be implemented more quickly when undertaken by the OSC.
While facilitating the adoption of reforms has some appeal within the industry, organizations are questioning whether it is necessary to abandon existing securities legislation and established processes for developing securities policy. financial markets.
The Investment Industry Association of Canada (IIAC) stated in its brief that it supports the idea of flexible regulation, but questions “the tangible benefits” of adopting entirely new legislation to reach this goal. Instead, the IIAC suggested that revisions to existing legislation and rules could be made “without the market disruption that could be caused by new legislation.”
The new regime could have unintended consequences, the trade group noted, as the industry will need to assess its compliance and companies will need to revise their policies and procedures – and possibly customer documentation – to comply.
“Given the government’s focus on burden reduction, we encourage the department to pursue many of the task force’s laudable goals through other means, including necessary amendments to existing legislation, before replacing the [Securities Act] absolutely,” the IIAC said.
The Investment Funds Institute of Canada (IFIC) echoed those concerns in its brief, which warned that the bill could increase regulatory burden and fundamentally change the way regulatory policy is developed.
Bay Street law firm Davies Ward Phillips & Vineberg LLP was more direct. “In our opinion, the adoption of the CMA project would be exceptionally costly and not very beneficial,” the firm said.
In fact, Davies suggested that the new legislation would be counterproductive, arguing that the proposed approach “is more likely to increase regulatory burden, stifle innovation and inhibit growth than to have the opposite effect”.
The law firm also questioned the premise of passing platform legislation, particularly modeled after BC’s new securities law. Given that Ontario accounts for the largest share of capital markets activity in Canada, modeling reforms on an approach designed for a market primarily made up of small businesses with different needs makes little sense, Davies argued. .
Ensuring compatibility between the laws of Ontario and British Columbia might have made more sense if the cooperative system of capital markets regulation was imminent, since the CMA was originally designed to facilitate the creation of CCMR. However, now that the initiative has effectively been shelved due to lack of political momentum, “there is no longer any compelling justification for using BC law as a precedent for Ontario legislation,” Davies said. .
The law firm added that the new BC legislation was passed without extensive public consultation.
Davies also expressed “serious concerns” over the claim that new legislation is needed to improve regulatory flexibility. Specifically, he said the proposed platform approach would give the OSC, particularly its chief regulator, “almost absolute discretion.” Furthermore, the approach “facilitates legislation by regulatory decree with limited political liability”.
This same concern was echoed by veteran securities lawyer Phil Anisman in his brief, who warned that adopting the proposed platform approach “would give the OSC unlimited power to make rules relating to markets financial institutions of Ontario”.
These sweeping powers would be overseen solely by the government, rather than the legislature, and it would take place “behind closed doors and likely not be disclosed,” Anisman noted.
“This approach to law-making is inconsistent with the democratic principles that underpin our system of parliamentary government,” Anisman said, arguing that laws should be made by the legislature and not by a regulator or even the government. only.
At the same time, the vast expansion of regulator power risks undermining the stability and predictability of regulation that companies rely on when transacting in capital markets, Davies said.
“In our view, it is hard to imagine anything more unduly burdensome than for market participants having to spend time and money learning about and complying with brand new legislation where there is no nothing wrong with existing legislation,” the company said. .
Other industry commentators have also expressed concerns about the proposed reduction in comment periods for regulatory policy initiatives from 90 to 60 days; the prospect of introducing new requirements into the CMA without adequately subjecting them to the ordinary process of public consultation and analysis; and the risk of hampering participants in the global derivatives market with the proposed new law.
The OSC’s Investor Advisory Panel (IAP), which said it supports the idea of platform legislation, also warned that expanding the OSC’s authority will not accelerate policy-making unless the kind of government interference that was identified in the recent Auditor General’s report is also curbed. This report found that investment industry lobbying and political interference were undermining the regulator’s efforts to improve investor protections and costing investors millions in fees.
“No amount of legislative renovation will be [streamline the regulatory process] unless, at the same time, the specialized expertise of the OSC is recognized and used consistently as the most appropriate and impartial resource to deal with rapidly changing financial markets and increasing complexity investment products,” IAP said.