The Supreme Court of Canada has finally catapulted this country into the modern age of securities regulation — a decision that could have direct implications for the federal government’s major policy initiatives on gender diversity and the environment.
The top court’s green light for a unified, pan-Canadian securities regulator to govern the country’s financial industry ends an 80-year struggle between the provinces and the federal government.
A centralized securities regulator is intended to replace the current patchwork of provincial and territorial regulators to better assess and minimize systemic risk in capital markets, as well as improve enforcement. It will make securities rules more consistent across the country and cut through reams of overlapping red tape for businesses.
Canada is the only major industrialized country in the Group of 20 that does not have a national securities regulator. Political tensions between the provinces and the federal government, coupled with Canada’s constitutional division of powers that gives jurisdiction over matters of a purely local nature — including the authority to legislate the securities trade within their respective borders to the provinces — made it an elusive proposition.
Capital Markets Regulatory Authority
That is, until now. Five provinces and one territory — Ontario, British Columbia, Saskatchewan, Prince Edward Island, New Brunswick and Yukon — already signed onto the proposed Capital Markets Regulatory Authority (CMRA) tabled by the federal government.
While Ontario, the largest capital market in the country, was the first to sign on, Alberta has continuously demurred. Even after the top court’s ruling earlier this month, the finance minister of the second-largest capital market in Canada reiterated his belief in the importance of having a strong local regulator that understands the complexities of the province’s market. Quebec’s finance minister didn’t mince words, noting that the province remains staunchly opposed in order “to retain our autonomy.”
The groundbreaking decision on the centralized securities regulator could also help fast-track the federal Liberal government’s major policy initiatives on the environment and gender diversity.
Investing in low-carbon growth
Currently, many of the sectors underpinning the Canadian economy are carbon-intensive. In the spring of 2018, the federal environment and finance ministers appointed an expert panel on sustainable finance to make recommendations on how Canada’s financial services industry can develop markets and products that will support investment in low-carbon growth.
The panel recently tabled an interim report that noted that promoting sustainable economic growth and long-term stability of the financial system is paramount to transitioning to low carbon growth. The panel, which will finalize its findings in spring, 2019, noted that “while sustainable finance is growing in Canada, overall, we are not moving with sufficient determination or at the pace of many of our peers.”
Corporate disclosure — especially climate-related information — released by public companies is increasingly coming under closer scrutiny from international regulators as the global financial system realigns with sustainable development.
That much was clear in a 2017 report by the Task Force on Climate-related Financial Disclosure (TCFD), an international panel of 32 members from G20 countries. It developed voluntary and enhanced market transparency recommendations that focused on how public companies can put forward more consistent disclosure of climate-related financial risks and opportunities.
What’s different about the TCFD recommendations from what currently exists in securities regulation is that the disclosure requirements are specific to climate-change risk. For example, companies are required to release information relating to how a corporation identifies, evaluates and manages climate-related liableness in its regulatory filings.
For its part, Canada has attempted to build on the international sustainable finance recommendations and find ways to adapt them to its own capital markets. Currently, public companies in Canada are required to disclose material risks, although not specifically identify climate change, in their regulatory filings.
However, oversight of the capital markets, which includes regulation of disclosure to investors, is largely an area of provincial responsibility. With a pan-Canadian regulator, the prospects of creating uniform national rules that would put this country in lockstep with its international peers in a timely manner could be vastly improved.
Ditto for increasing the representation of women on corporate boards and in executive positions in this country.
Getting women on boards
It is no secret the federal government would like to see more women in positions of power, whether it’s in politics or in corporate corridors.
While strides have been made in legislatures across the land, boardrooms have been more challenging. A national regulator would finally provide a platform for meaningful measures, such as mandating targets and quotas, to increase the representation of women on boards and in executive positions.
Consider the total percentage of board seats held by women increased to 15 per cent in 2018 from 11 per cent in 2015, according to a 2018 report by the Canadian Securities Administrators (CSA), the umbrella group representing provincial and territorial securities regulators. Based on a sample study of 648 issuers, the number of companies with at least one woman on their board increased to 66 per cent in 2018, up from 49 per cent in 2015. Forty-two per cent adopted a policy related to the representation of women on their boards.
By almost any measure, these incremental advancements are underwhelming. That’s why critics say it’s time to abandon voluntary policies, such as comply or explain, and introduce mandatory measures.
Historically, no provincial securities regulator has been willing to set targets and quotas for women for fear of alienating business – and ultimately losing company listings. After all, as it currently stands, companies not willing to meet quotas could simply relocate to another province where no such restrictions exist. And the statistics suggest that is a strong possibility, given that only 16 per cent of the companies surveyed in the CSA report adopted targets voluntarily.
A national, centralized regulator could remove many of the openings companies currently have to avoid mandatory measures, and that alone would help improve the chances of increasing gender diversity in boardrooms and corner offices. Given the next federal election is next year, expect Ottawa to move quickly on making a centralized securities regulator a priority.