Expert Panel on Securities Regulation

Creating an Advantage in Global Capital Markets

Speech by the Honourable Tom Hockin, Chair, Expert Panel on Securities Regulation, to the Vancouver Board of Trade

Vancouver, British Columbia
January 12, 2009

Check against delivery

Thank you

And thank you to the Vancouver Board of Trade for your generous invitation to join you today.

For more than 100 years, this Board has been the voice of business, the driver of local initiative and the champion of international engagement. It's a history of can-do spirit and faith in the future.

When the great fire of 1886 burned virtually every building in Vancouver to the ground, a group of businessmen came together to organize the reconstruction. And, on September 22, 1887, thirty-one men - merchants, lumbermen, bankers and manufacturers - formed a Board of Trade.

Today, your organization continues to build: connections within the community, bridges to the Pacific Rim and links to the leaders of tomorrow. Above all, you are building for the future and so it's a real pleasure to be here and to share with you some of the work that I've been involved with as part of the Expert Panel on Securities Regulation in Canada - work that we believe is essential to the future.

We as Canadians, North Americans and citizens of the world are facing another fire, even more potentially devastating - a global financial credit crisis that is affecting all of us. I'll have more to say on that in just a moment, but let me begin by giving you an overview of the work of the Panel - the issues we were asked to address, the submissions we heard, and some of the recommendations we made.

Our work really had its genesis in the 2007 federal budget, where the Government unveiled its capital markets plan, aimed at creating an entrepreneurial advantage for Canada and a more strongly linked national economy with fewer barriers between provinces.

Following a meeting on June 19th with his provincial and territorial counterparts, the Minister of Finance, Jim Flaherty, announced that the Government of Canada would form a third-party Expert Panel on Securities Regulation to advise ministers.

And, on February 21st, 2008 we began our work. We started by beefing up our own capacity - bringing in renowned experts to advise us, establishing a legal advisory committee to provide counsel on specific issues, and commissioning research papers on specific topics. We held extensive meetings with more than 100 stakeholders, receiving over 70 written submissions and consulting with experts from the United Kingdom and the United States.

Our mandate was straightforward: to enlist the best minds, learn from the best practices, find common ground, develop a model Securities Act and chart a path to move us forward.

Now, it's easy, when you get into the complexities of capital markets and the details of securities regulation, to lose sight of why all of this matters. Minutiae can quickly overwhelm meaning. But at its heart this is about Canadians, about you; about your investments, your pensions, your savings today and your dreams for tomorrow.

Back when I was a boy in the 1950s, and even into the 60s, only the wealthy owned stocks and what happened on Bay Street or Howe Street didn't resonate too much on Main Street. But all that's changed. According to a survey by the Toronto Stock Exchange, about half of adult Canadians own shares, either directly or through mutual funds. In fact, Canadians own more than $2 trillion in financial assets - in their RRSPs and through pension plans.

In short, Canada is a country whose majority of citizens rely on the stock market and securities regulation for their economic future

So having financial markets that work efficiently, operate transparently, and provide redress appropriately are important. Important to young people saving for that first home and to entrepreneurs starting a business. They're important to you and your neighbours trying to save for retirement. And - as the current global economic crisis makes clear - they're important to international investors who move billions of dollars around the world at the click of a mouse.

It's not surprising then, that we found Canadians very engaged on these issues. Eager to share their ideas - and their concerns. At the same time, we knew that many of the issues had already been well canvassed by previous commissions and panels. In fact, one of the most common things we heard was, "we hope you're the last panel we see on this stuff". We tried not to take it personally!

But we were impressed, again and again, by the good common sense of Canadians - and even by their sense of humour. One person, who signed themself simply as, "a Canadian investor", wrote, "I'm from Scottish stock - what we pay for securities regulation should be worth it... Coureurs de bois made it right across this country in the harshest of conditions centuries ago but after decades we can't get agreement on one-stop regulation?...In the inimitable words of Nike - just do it." Hard to argue with that!

From market participants, we heard concern about 13 different regulators, administering 13 sets of rules and levying 13 sets of fees. From consumers we heard many - far too many - stories about enforcement that seemed weak and their efforts to get their money back that seemed to take forever. Many complained of the difficulty of even starting the complaint process or of trying to navigate through a web of provincial authorities and national organizations.

My friends, if a basic purpose of security regulation is to protect consumers, it's clear that Canada's system isn't doing the job.

From a macroeconomic perspective, we heard concerns about systemic risk - risks that affect the financial markets as a whole. If the current economic crisis has demonstrated anything, it's that systemic risk is no longer just a banking issue - or responsibility -it's increasingly showing up in capital markets as well.

So that's a sense of some of what we heard. One of the things we wanted to do through our report was get back to basics: what do Canadians think the central objectives of security regulation should be about anyway? What's the main aim here?

Well, most told us that securities regulation, at its core, should be about protecting consumers, promoting economic efficiency and fostering confidence in markets. We agree and have proposed a list of core objectives and guiding principles which are included in our draft Securities Act, including the objective of reducing systemic risk.

There was also widespread support for measuring the performance of securities regulation as a key means of ensuring accountability. Here in British Columbia, the B.C. Securities Commission has one of the most advanced performance measurement systems in the country. We recommend building on the best practices developed here and creating a single, comprehensive system of performance measurement for use right across the country.

In terms of the basic approach to securities regulation, we found a remarkably broad-based consensus that there should be fewer rules and red tape and more high level principles guiding the actions of market participants. This so-called "principles-based regulation" just makes sense in markets that are moving at lightning speed because it gives companies the flexibility they need to respond to changing circumstances while adhering to unchanging principles.

One of the other issues we canvassed was the idea of proportionate-based regulation. In other words, making the amount of regulation proportionate to the size of the company. Smaller companies, for example, may simply not have the resources to comply with a foot-high stack of rules and regulations. And certainly the success of the TSX Venture Exchange provides a great example of how a proportionate-based approach can work in practice.

As a panel, we heard some really very powerful stories about people who had lost their life savings either because of inappropriate advice or outright fraud. That's troubling enough. But what's worse is that a person's chances of receiving redress varied dramatically depending on where they happened to live. And that's simply not good enough. We need to give Canadians the assurance of better and equal opportunity for redress no matter whether they live in Vancouver or High River or Halifax.

We have, therefore, made a number of recommendations aimed at serving investors better, including establishing an investor panel and an investor compensation fund . And we have proposed that an independent adjudicative tribunal be established, which would remove the perception of bias that might exist when a securities commission is both regulator and adjudicator.

Now, on the issue of structure - whether Canada should have a single national securities regulator or continue with something like the current passport system - our conclusion is clear: it's time for a single, national regulator. Here's why.

While steady, incremental progress has been made with the development of the passport system, we heard again and again that it simply doesn't go far enough or fast enough. Not in today's interconnected capital markets. Not when investors can move money around the world so easily. Not when Canada is competing for investment with other developed countries - every one of which does have a national securities regulator.

I like the way Premier Campbell put it recently when he said, "We have to recognize we are in unprecedented times that requires us all to take off our old thinking caps and put on new thinking caps for the new world."

The fact is that the current 13 regulators, with 13 sets of rules and fees is hurting our ability to attract investment and opportunity. As Goldman Sachs told us, "instead of viewing Canada as a single market of 30 plus million people, we must view Canada as 13 separate jurisdictions." The bottom line? A system of 13 separate regulators is too cumbersome, too fragmented and too slow.

It also makes it more difficult, as Premier Campbell points out, for British Columbia to establish itself as the Pacific Financial Centre for the Americas, if BC is not itself part of a more barrier-free regulatory environment across Canada.

The lack of a national securities regulator brings other problems for Canada and BC. It limits Canada's ability to speak with one voice in international fora. And it raises wider concerns about systemic risk because there is no national entity accountable for the stability of our national capital markets.

While the Bank of Canada and the Office of the Superintendent of Financial Institutions are responsible - and accountable - for providing stability to their parts of the financial system, there is no national equivalent responsible for the stability of our capital markets.

When you look at our derivatives markets, we see five provinces regulating exchange-traded derivatives, using three different approaches. We think it's time to adopt the approach used here in British Columbia - bring exchange-traded derivatives under securities legislation and provide a common regulatory base across the country.

A national securities regulator will reduce compliance costs and better protect investors. It will simplify access and attract more investment and a broader range of services for Canadians. It will enable Canada to speak with one voice, better align us with international practices and enable us to address developments in capital markets that are increasingly national and international in scope.

A single regulator will facilitate a move to more principle-based regulation as we would have one regulator, applying one set of principles. And it will provide clear national accountability to both market participants and to the public.

At the same time, - and this is important - we wanted to keep the strengths of the current system including the ability to address the distinct needs of regionally-based market participants and sectors across the country. That's why we're proposing a national regulator with a decentralized structure.

Regional offices would reflect regional strengths and expertise - and continue to provide the high levels of local service they do now. That means that here in B.C., for example, you would continue to deal with the people you already know, and who know you. Local offices would represent regional interests, serve as a point of first contact for complaints and provide investor education to local communities.

We believe, therefore, that there are compelling reasons - and substantial benefits - for all provinces and territories to participate in this new national regulatory regime. But we also know that some provinces, for whatever reason, may choose not to join in. We don't believe that should be the end of it.

With the clouds of a global financial crisis gathering we must get our act together - not "some day" but right now. .

That is why, unlike previous studies of this subject we propose that if, after a reasonable time, a province or territory still choose to not join in this new regime, market participants in those non-participating regions should have the opportunity to opt in directly and reap the benefits of a single, national regulator. This leaves the ultimate decision where it belongs - in the hands of those who have long advocated for these changes.

As I close, let me say that we believe our report, recommendations, and draft Securities Act provide a practical and achievable way forward for Canada. After decades of studies and committees, reports and panels, it's time to position our country for success in global markets. The opportunities are too great, and the stakes too high, to simply muddle through as usual.

Samuel Johnson reminded us that, "nothing will ever be attempted, if all possible objections must first be overcome." He was right. And so now we have a choice. We can have "paralysis by analysis" as every possible objection is advanced and overcome or we can have informed action now.

I think it's time to act.

I think it's time to give investors a stronger voice, with better enforcement and quicker response. It's time to create a common securities regulator, applying one set of principles, one set of rules and one set of fees. It's time to cut the costs of compliance and give Canadians a system that is nimble enough to respond to rapidly changing markets.

It's time, as that wise Canadian investor said to "just do it."

Let's get busy.