June 19, 2006
Address by the Honourable Jim Flaherty, Minister of Finance, to the
Halifax Chamber of Commerce
Halifax, Nova Scotia
Check against delivery
Good morning.
It’s an honour to be here to discuss an issue of growing
national importance.
An issue that touches many, yet few know enough about it.
An issue that is critical to our future prosperity, yet
garners little interest beyond the business pages.
An issue that seems mundane and complex, yet cultivates
opportunity, innovation and investment.
The issue is whether it is in the best interests of the
Canadian economy to create a common securities regulator for Canada.
To many in this room, the connection is obvious.
It pertains to investment, economic growth, investor
protection and effective, timely prosecution of white-collar crime.
It’s a matter that resonates loudly on Bay Street, but is
barely a whisper along Main Street.
Although it should be of concern to all Canadians with
market investments whether directly, or through pension plans and/or RSPs.
Canadian Investors
The majority of Canadians refrain from talking about a
common securities regulator, not because they don’t care, because it’s
not seen as relevant.
Well, I’m here to tell you that it is relevant. In
the rapidly changing world of global finances, how we attract investment and
protect investors is as basic to a strong economy as interest rates and
inflation.
For the young worker just starting out, the parent saving
for a child’s education, or the senior living on a fixed income, this is
something that requires our collective attention.
In fact, your personal prosperity, the prosperity of your
businesses and the prosperity of Canada as a whole depend on strong and
efficient financial markets.
Markets matter, because Canada has become an investing
nation.
- 55 per cent of all Canadian households own RRSPs.
- About half of all Canadians own equities, such as common shares or
income trust units.
- 40 per cent of all Canadians own mutual funds.
- And, as of January 2004, there were 14,800 active registered
retirement plans in Canada covering 5.6 million Canadians.
These nest eggs represent the financial future for Canadians
from all walks of life.
People make regular contributions and they trust that this
money is not only going to grow, but that it will be protected and secure.
They trust that proper safeguards are in place and the
system is being properly policed.
Yet their faith in the system is sometimes shaken by
incidents like the Enron scandal in the United States. In this case,
innocent people were victimized by some looking to make a quick buck.
It doesn’t happen often, but regrettably it does happen.
And when it does, the consequences to investors big and small are profound.
We can and we must do better to protect those hard-working
Canadians who, in good faith, set aside a few dollars every pay in order to
retire comfortably.
Efficient Capital Markets
Whether our individual goal is retirement security,
furthering our children’s education or simply trying to get ahead, we must
recognize that collectively as a country this is an issue worth pursuing.
If we as Canadians are to increase our standard of living,
we must reduce or eliminate impediments to the competitiveness and
efficiency of Canada’s economic union.
An important foundation for a strong economy is a regulatory
regime for the securities market that ensures market integrity and investor
protection.
Efficient capital markets promote domestic and foreign
investment in the economy. They stimulate productivity, growth and jobs.
I’m sure all of you here firmly believe that markets
matter.
Markets matter in a city like Halifax with the best-educated
workforce in all of Canada and the most competitive mid-size city in North
America, according to KPMG.
Markets matter when you consider a 68 per cent increase in
aerospace exports from 2001 to 2004, and the tremendous potential of the
Life Sciences Research Institute at Dalhousie University.
Markets certainly matter to local companies like DHX Media,
one of Canada’s leading independent TV and film production companies,
whose shares began trading on the TSX and London’s Alternative Investment
Market on May 19.
Regardless of where we live, competitive and efficient
Canadian capital markets are necessary to give all Canadian businesses
access to capital, domestic and foreign, that Canadian businesses need in
order to grow.
Furthermore, the best capital—"smart capital"—brings
with it the best management expertise and guidance for companies seeking to
expand their business.
It allows companies based in Nova Scotia, for example, to
gain from previously earned knowledge in other markets before they set up
shop themselves.
For the vast majority of Canadians who invest in securities,
either directly or indirectly through their RRSPs or pension plans, dynamic
markets mean more choices to place their savings and better manage their
risks as they build their financial security.
Canada and the Global Marketplace
Over the past several weeks I have had the opportunity to
travel to St. Petersburg, Russia, London, Dublin and New York to discuss
international trends affecting Canada’s position in the global
marketplace.
I met with the finance ministers of the world’s leading
economies and with other senior decision-makers such as the CEO of the New
York Stock Exchange.
During all of these visits it has become clear to me how
very competitive the global financial marketplace has become.
Technology is generating ever-increasing market activity,
allowing international investors in search of the best returns to find them
not in minutes or seconds, but in fractions of a second.
The range of financial products on the market is rapidly
expanding, and the products themselves are becoming more and more complex.
Meanwhile, emerging markets are becoming even more
competitive in the quickening race to attract capital.
The bottom line in this vastly expanding global economy is
that businesses and investors have choices.
They can choose one of a dozen markets to invest; markets
with no impediments; markets where transactions are conducted more
efficiently; markets where the standards of protection are common and
policy-making is more responsive.
Canada has a great story to tell, one of economic success,
visionary entrepreneurs, growing competitiveness and unbounded potential.
And the world sees that potential.
Yet we have a capital markets system that is holding us
back. By maintaining a system of 13 regulators, Canada is out of step
with the western world.
We are the only industrialized country without a common
regulator.
For many, our system is seen as cumbersome, slow and
repetitive, making it unnecessarily difficult to conduct business.
With only 3 per cent of the world market, we cannot afford
to put up unnecessary roadblocks to investment.
While we as Canadians struggle with this issue, our
competitors are passing us by.
It raises some serious questions:
What price have we paid in lost opportunity?
How many potential investors have seriously considered all
of the great advantages we have to offer in Canada, our educated labour
force, our social benefits, our strong economy, and yet opted for a country
with a more efficient market system?
Unfortunately, we will never truly know the answer, but we
are taking steps to make Canada more attractive.
On May 2nd Canada’s new government introduced a budget
with tax cuts that benefit all Canadians and Canadian businesses.
While our budget takes the first steps needed to create a
more competitive tax system, we clearly have some unfinished business ahead
of us: the need to improve how our capital markets work.
Why Canada’s System Must Improve
Quite simply, the current system is inadequate. The call for
action is getting louder and the arguments for change more compelling.
Less than two weeks ago, in fact, a panel of well-respected
Canadians examining Canada’s securities regulation system, headed by Purdy
Crawford, concluded that our fragmented system erodes confidence.
The panel expressed a profound concern about ineffective
enforcement of securities regulation, describing the current system as
"a domestic and international embarrassment for Canada."
Just this month, the Senate Committee on Banking, Trade and
Commerce also found serious problems with a securities regulation system
that has changed little in 40 years.
The committee said our system is "inconsistent with our
productivity goals" and is counter to "our goal of seeking to be a
leader among the G-8 nations."
A recent article by Edward Waitzer, former Chairman of the
Ontario Securities Commission, described our current system as disjointed
and lacking capacity and said, "It is stalled by a unique set of
systemic weaknesses—a highly fragmented system with overall lack of
accountability and co-ordination."
The C.D. Howe Institute, in its review of the productivity
of Canada’s financial services, called Canada’s balkanized securities
regulation all but unique in the developed world. It was no compliment—it
also found it uniquely expensive to comply with.
High Costs and Lost Opportunity
The costs to Canadians are not merely theoretical.
A study on this subject by Charles River Associates for the
Wise Persons’ Committee estimated that, with a single securities regulator
with regional offices, the costs of operating Canada’s regulatory system
would have fallen by about one-third or roughly $45 million a year.
TSX and TSX Venture Exchange issuers would have saved $14
million in compliance costs.
Clearly an unnecessary waste of millions of dollars.
When compliance costs go up, the ability of small and
medium-sized enterprises—including many in Atlantic Canada—to access
markets goes down.
Regulations in multiple jurisdictions can needlessly delay
financings and slow down businesses trying to grow.
Companies faced with these obstacles may simply throw up
their hands and find financing privately—or flee to markets outside of
Canada.
These lost opportunities for Canadian businesses also mean
lost opportunities for Canadian investors and differential access to
investment products from one region to another.
That is not only costly. It is also unfair.
Enforcement
The current system carries an additional cost: our eroding
credibility on the enforcement side.
This is based on a perception that the Canadian system is
soft on corporate crime, especially following successful prosecutions in the
U.S. As Finance Minister for Canada, it concerns me that some Canadian
investors consider it necessary to rely on the U.S. to hold companies to
account for their actions.
This is an area where we can and must improve.
We need to ensure investments are adequately protected and
the consequences of criminal activity are swift and severe.
Although corporate crime is not as high profile as gun
violence, corporate crime is serious crime with serious consequences for
victims. Stealing the value of investments of a retired senior is a serious
crime with a vulnerable victim.
Canada is also taking a global leadership role in the fight
against crime.
In July Canada will be assuming the Presidency of the
Financial Action Task Force for the first time. It is an international body
that develops and promotes policies to combat money laundering and terrorist
financing.
Over the course of the next year we will be responsible for
supervising the ongoing operations of the Task Force and chairing the group’s
three plenary sessions.
We are stepping up our efforts on the crime front, but there
are other considerations domestically as well.
Regional Implications, and Recent Reforms
Without a common securities regulator many provinces are at
a disadvantage.
Under the current system, all provinces, including Nova
Scotia, effectively allow control of the national market by the Ontario
Securities Commission, which regulates 83 per cent of Canada’s total
listed market capitalization.
I don’t believe this is right, for Nova Scotia, for
Atlantic Canada or for any region in this country.
I’m not alone in believing this, either—a growing body
of informed opinion recognizes that the current, fragmented system is
neither desirable nor sustainable.
That’s why, 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.
Through their actions, the provinces and territories have
demonstrated a clear commitment to improving our securities regulatory
system.
Their recent initiatives to narrow regulatory differences
and harmonize and streamline securities laws are important to achieving a
more efficient and effective securities regulatory system.
While I am encouraged by the level of co-operation, however,
I do not believe the passport system, by itself, will be able to fully
address the problems highlighted earlier.
Canada would still have 13 securities regulators, with 13
sets of laws and 13 sets of fees.
Investors across Canada would still receive varying degrees
of protection.
If we are going to keep pace with a rapidly evolving global
marketplace, I believe we need to go further, and faster.
What is required is for all governments to work together to
strengthen Canada’s economic union and agree on a system that is
streamlined, effective and fully equipped to meet the needs of a 21st
century economy.
To succeed in the world economy, we must put the right
system in place that provides world-class investor protection and
enforcement.
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.
The Answer—A Common Securities Regulator
What Canada needs is a common securities regulator.
Such a regulator can:
- create more investment and jobs;
- give all regions a real say.
I believe, along with the Purdy Crawford Panel and the vast
majority of Canadian businesses and financial experts, that Canadians would
be best served by a common securities regulator responsible for a single set
of rules.
A common regulator—not necessarily a federal one—with
the capacity to act promptly in the best interests of all Canadians.
Such a solution would make the regulation of our markets
more responsive and accountable.
How? By creating a decision-making body that would
co-ordinate the views of all jurisdictions promptly and fairly.
It would improve market efficiency and ensure the best use
of money and resources.
How? By making the system more efficient to operate,
lowering costs and making it more affordable for all who benefit from it,
both those with capital to invest and those with businesses to build.
It would improve enforcement and better protect investors.
How? With a common set of sanctions and remedies and better
enforcement across the country.
By serving as a single contact for law enforcement agencies,
both at home and abroad, to share information and detect market fraud.
By being able to set clear enforcement priorities across the
country, while making sure investigation and enforcement resources are
deployed efficiently.
It would improve Canada’s reputation in the eyes of world
markets and lead to more foreign investment in the process.
How? By allowing Canada to speak with one voice instead of
13, while protecting and promoting the interests of Canadian market
participants abroad.
By clearly representing Canada while seeking market
opportunities beyond our borders.
By being better able to work with the United States and
other economic partners.
Finally, a common regulator would better serve our common
interest.
How? 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 participation
by provinces, with a strong presence in all regions and 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, that will establish a competitive
advantage for Canada in global markets.
Our history has shown this can be done. The Canada and
Quebec Pension Plans, now considered sustainable for at least the next 70
years, provide a perfect example of a co-operative approach that can benefit
Canadians while making Canada a world leader.
Conclusion
Let me conclude by saying the time has come to work together
for a common securities regulator.
Canadians are wading into the market like never before,
investing for their future, their children’s future, their family’s
future.
As the Canadian economy continues to strengthen, companies
are looking for an attractive place to establish themselves and create job
opportunities for our friends and neighbours.
Attracting foreign investment is important to ensure our
standard of living continues to rise and quality services are available to
everyone.
By improving the efficiency and integrity of our capital
markets and establishing a common securities regulator, we will be better
positioned to compete in the global marketplace.
It’s part and parcel of strengthening Canada’s economic
union, one of the core principles in our Government’s approach to address
Canada’s fiscal balance.
To help us along we can draw inspiration from the Crawford
Panel.
This report recommends a common securities regulator for
Canada and a governance model that ensures more effective participation by
all jurisdictions.
I believe it’s a sound proposal that can contribute to
reform of securities regulation in Canada.
That’s why I have invited my provincial and territorial
counterparts to discuss this proposal and other capital market issues next
week.
I hope these discussions will turn out to be a good first
step toward a long-term solution.
With the political will and spirit of co-operation, we can
achieve something that will be lasting and worthwhile for all Canadians from
the Atlantic to the Pacific to the Arctic, now and for generations to come.
Thank you.
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