Fostering market competitiveness fits well with the OSC’s widely supported initiative to reduce the regulatory burden, but requiring the OSC to boost market growth is going a step too far.Melissa Tait/The Globe and Mail
The Ontario government’s Capital Markets Modernization Task Force released a set of recommendations last month containing many thoughtful and worthy ideas. But one’s a clunker. It’s the suggestion that the Ontario Securities Commission (OSC) should be required to pursue “a public policy imperative of growing the capital markets in Ontario,” while making them more competitive, too. That would be an addition to the OSC’s existing mandate of protecting investors, fostering market fairness and efficiency, and contributing to financial stability.
Just to be clear, only half of this recommendation is off-kilter. The part about making our markets more competitive is actually quite sensible. After all, a market that can’t attract capital does no one any good. And fostering market competitiveness fits well with the OSC’s widely supported initiative, already underway, to reduce the regulatory burden wherever possible, so long as it’s done without compromising investor protection.
But requiring the OSC to boost market growth is going a step too far, for several reasons.
First, in an OSC compelled to generate market expansion, growth initiatives will be the equivalent of profit centres. Correspondingly, and somewhat inexorably, compliance and enforcement functions will be regarded as frictions or “costs” that hinder economic progress. What we’ll get as a result is a regulator curiously at war with itself – incented, by its own mandate, to subordinate its policing of market activity.
Then, add into the mix the Ontario government’s standing edict that a cost-benefit analysis must be done before the OSC can impose any new regulation – and the whole thing just gets worse. Why? Because growth is readily quantifiable, but the benefits of enhancing professional standards and preventing harm are not. That means a growth imperative will win out over any attempts to tighten up investment industry practices. It’ll delight those who prefer keeping things lax.
Furthermore, consider that a requirement to expand Ontario’s investment market will force the OSC to function as the market’s marketing department. In effect, it will turn the OSC into a giant stock promoter. That’s hardly the ideal image for an agency also charged with governing the distribution of securities. It hints pretty brazenly that, from now on, our principal financial regulator will be shaping and tilting the law to increase sales.
So, why go there? Why risk degrading the OSC’s integrity quotient by imposing a mandate to grow the market?
Neil Gross, president of Component Strategies, a capital markets policy consultancy in Toronto.Supplied
Presumably, it’s to signal that Ontario’s open for business. But the effort will backfire badly. It won’t inspire confidence that the province offers a buffet of prime investment opportunities. Instead, making the OSC pump the market’s tires is more apt to give prospective investors a queasy feeling about Ontario-based offerings. They’ll be seen as instruments propelled by political credo rather than financial credence – and that’s bound to be a turn off.
What’s surprising about this proposal is how far it diverges from the task force’s other ideas for modernizing securities regulation. In many of their key recommendations, integrity is paramount.
For example, the proposal to split up the OSC’s policy-making and adjudicative functions reflects a strong instinct for rectitude in enforcement. The task force recognizes, quite correctly, that the world no longer thinks it’s okay for one entity to act as rulemaker, prosecutor, judge, jury and executioner.
Likewise, integrity considerations drive the task force’s proposed ban on tying investment product distribution to commercial lending services as well as its recommendations for improving governance of the investment industry’s self-regulatory organizations.
The same ideal is evident in the task force’s stance against manipulative short selling by those bringing issuers to market. It also underlies the proposals to deter short-and-distort campaigns, to increase diversity on boards of directors and to codify the role of independent directors.
A market-pumping OSC is completely out of place amid these principled suggestions, and the idea needs to be dropped. It treads over a line of propriety that regulators should not cross – and they don’t cross it elsewhere.
Take Britain’s Financial Conduct Authority, for example. It’s required to “promote effective competition in consumers’ interests,” but it’s not told to stimulate growth of the capital markets it oversees. Neither are other agencies such as Australia’s Securities and Investments Commission, which has a broad mandate to “facilitate and improve the performance of the financial system,” yet it’s not required to make the markets bigger.
Even the U.S. Securities and Exchange Commission doesn’t go that far. Its mission statement contains no directive to promote market growth – only a more conventional requirement to “facilitate capital formation.”
Ontario’s markets must be open for business, certainly, and the government’s not doing anything wrong by dedicating itself to that goal.
But there’s plenty wrong with the idea of enlisting market regulators to act as market promoters. That’s a task the government should perform itself, through an agency set up specifically to showcase the benefits of Ontario as a great place to raise capital and invest.
Making the OSC do this job, as the task force proposes, would be a mistake. It will give an irregular appearance to how our market’s governed, and that will just repel capital and new investment rather than attract it.
Neil Gross is president of Component Strategies, a capital markets policy consultancy in Toronto.