Re: The regulatory treadmill: An industry perspective, Jan. 31, 2022
Investor protection is fundamental to the effective operation of financial markets. Absent an environment where investors believe that they are being treated fairly and their interests are being protected, the capital markets would grind to a halt, the multi-million-dollar profits of the financial industry would evaporate and capital formation in the economy would be stifled.
It is regrettable that regulators often lose sight of this basic tautology and instead focus their attention on accommodating the interests of other stakeholders, often at the expense of investors; and it is unseemly when industry trade associations, clear beneficiaries of Canada’s highly concentrated and internationally insulated financial markets, regularly complain about and often resist regulations designed to inform and protect investors.
It is true that financial policy development in Canada is a slow, expensive and, too often, unsatisfactory process. However, it is disingenuous when industry trade groups cast themselves as the victims of this situation. For one thing, if financial institutions consistently put the interests of their investors first; if execution only dealers did not charge their customers for advice that they are not permitted to offer; if brokers consistently provided their clients with full and transparent costing of their services; and if all financial institutions adopted a culture and process that treated a complaint as an opportunity to improve service rather than to frustrate a customer, many of the regulations they rail against would be unnecessary.
Also, in most instances the industry has only itself to blame for the protracted and costly nature of policymaking in this country.
While long suspected, the recent Ontario Auditor General Report on the Ontario Securities Commission (OSC) confirmed the considerable influence of industry lobbying on the nature and pace of financial policy. There now can be little doubt that industry lobbying has impeded or slow-walked many recent investor protection-oriented regulatory initiatives.
This same industry influence has likely been instrumental in the recent re-orientation and reorganization of the OSC that now sees burden reduction and fostering capital formation compete with investor protection for this regulator’s scarce resources. In a similar vein, the OSC has also been saddled with a more rigorous cost-benefit analysis requirement in order to justify new rules. This requirement constitutes a serious obstacle for any new rule that is primarily intended to improve investor protection.
Invariably in these instances, industry is able to identify multi-million-dollar costs associated with the implementation of the proposed new rule. However, identifying the long-term benefit or avoidance of loss that the proposed rule could produce is much more complicated and time-consuming to calculate — and is then often challenged by industry. Consequently, new rules designed to protect investors invariably take longer and are more difficult to approve.
Finally, the current comment process, designed to provide all stakeholders with an opportunity to critique proposed rules, inherently disadvantages investors. Industry has the motivation, expertise, resources and access necessary to fully analyze and then meaningfully impact the course and final form of a rule.
Investors, for their part, generally lack any of these levers of knowledge and influence. Consequently, they have to rely on the integrity of regulators to pursue and implement rules that provide investors with the information and protection necessary to make informed and appropriate investments. With this responsibility, it is both unseemly and inappropriate for Canada’s very profitable financial industry to regularly complain about and criticize our imperfect but vital process.
Harvey Naglie is a member of OBSI’s Consumer and Investor Advisory Council. He has spent 40 years in financial services, working in both the public and private sector, and is a former Senior Policy Advisor for the Ontario Ministry of Finance’s Financial Services Policy Division.