Balanced budgets are great, but the federal government should be doing more to encourage investment in small business, including tax breaks and less intrusive regulation, argues the Investment Industry Association of Canada (IIAC).
In his latest letter to the securities industry, IIAC president and CEO, Ian Russell, looks at the chronic weakness of venture markets, and the efforts, or lack of efforts, to address the issue in the latest federal budget. Russell observes that the budget was largely a “stand pat” exercise, intended to return the government to fiscal balance, rather than setting any bold new policy direction.
“But is the Canadian economy really so strong that we can afford to stand pat?” he wonders. “While it continued a number of sound policies, what the federal budget did not do is introduce an incentive to help small business access capital for start up and expansion.”
The IIAC has long advocated for tax measures to stoke venture investment, either through a preferential capital gains tax rate, or a tax-free capital gains rollover provision for small companies. “Some form of a tax incentive for small business would have been timely given the evidently difficult financing conditions faced by small companies,” he argues.
While federal efforts to catalyze investments in the venture capital markets are welcome, Russell says they will have a limited impact. “A federal tax incentive aimed at listed venture companies would not be a panacea but would improve receptivity for newly offered shares,” he says. “Canada can ill-afford the loss of this critical incubator for small business.”
The one positive thing the budget did do for venture markets, the letter suggests, is reiterate government support for a cooperative securities regulator; which, it says, “will benefit small companies and investment dealers in the venture markets.”
The IIAC expects that a cooperative regulator will benefit venture markets and dealers by streamlining regulation, and making the new authority more accountable. It suggests that the cooperative regulator’s planned governance model would ensure “proper balance between financial stability, investor protection and market efficiency.”
That balance needs to tilt more in favour of market efficiency, Russell suggests, noting that recent reforms, including the introduction of the Client Relationship Model (CRM) reforms, has produced negative consequences, such as an intensified focus on investment suitability. This, he says, “leaves advisors and dealer firms exposed to regulatory and civil risk from a differing interpretation of what constitutes a suitable investment.” And, the letter says that risk “is heightened for speculative investments.”
This heightened risk aversion, in turn, limits investor participation in the venture markets, he argues. To address this, the IIAC suggests either reforming suitability review processes to eliminate the reliance on mechanical factors such as age and experience to reinterpret suitability decisions; or, carving out a portion of investor portfolios that would be exempt from the suitability requirement.
This latter approach “would provide a safe harbour for speculative investments and give more flexibility to advisors to recommend speculative investments, as well as simplify the auditing of the suitability requirement by the regulator,” he says.
Either way, the IIAC hopes that a cooperative regulator, with greater accountability, would be more likely to seek ways to push the regulatory pendulum back toward market efficiency. It also believes that the involvement of the federal government in capital markets regulation will increase Finance officials’ market knowledge, which it hopes will “translate into more effective federal tax and regulatory policies that impact the capital markets.”
“The federal budget has had a positive indirect impact on business, instilling confidence of continued low corporate tax rates and continuing efforts to build a single cooperative securities regulator. But direct incentives to help small business raise equity capital are still needed – urgently,” Russell concludes.