David Dodge, Governor of the Bank of Canada, says Canada should have the same securities laws across the country, although he stopped short of calling for a national regulator.

Speaking to the Toronto CFA Society today, Dodge called for tougher enforcement, particularly of insider trading rules.

“Efficiency dictates that Canada should have uniform securities laws and regulations based on principles that apply to everyone,” Dodge said. He didn’t indicate whether this would best be achieved through a single regulator, or whether it could work in the present model of provincial regulators.

Dodge also suggested that the rules should be applied in a tiered way to take into account the differing needs of issuers. “For example, one tier could apply to large, complex firms that want access to international capital markets. Rules for these firms would be similar to those that are applied in New York or London. At the other end of the spectrum, another tier could apply to small, speculative resource firms that have historically relied on Canadian equity markets for financing. A third tier in the middle could apply to the bulk of Canadian ‘mid-cap’ firms, which choose to access only Canadian capital markets, and which very often are smaller and less complex than U.S. ‘mid-cap’ firms,” he proposed.

“These different tiers of firms exist in all major provincial jurisdictions. And investors in every jurisdiction have similar needs. So the key point is that, while the application of rules needs to take into account the size and complexity of firms, there is no need for different rules to be applied based on the province or territory of the issuer or investor,” he said.

The comments came in a speech about the broader role of regulation in contributing to financial system efficiency. He suggested that three principles should underlie all regulation: that it’s appropriate to correct a market failure; that it must be effective; and the benefits must exceed the costs.

With these principles in mind, he suggested that regulators can enhance the efficiency of the financial system by: promoting competition in domestic and international markets; working to correct “information asymmetries” that sometimes occur, and that can lead to market failures and a suboptimal allocation of funds; promoting overall financial stability by limiting systemic risk.

Dodge also stressed the importance of the regulatory framework being effective. To do that, he said it should: provide incentives that encourage markets to reinforce and reward the right behaviour; take international developments into account, but also reflect domestic realities; and, the rules must be enforced, and be seen to be enforced.

“A framework with strong monitoring, prosecution, and application of penalties provides the incentives for firms to follow the rules, and this adds to the framework’s credibility,” he said. “When everyone is playing by the rules — and everyone is confident that others have the incentives to do the same — then markets operate with greater efficiency.”

Dodge noted that Canadian firms often have lower valuations that comparable U.S. firms, and one reason appears to be the perception that governance is weaker in Canada and that Canadian enforcement of insider-trading laws is not as strong as it could be. He said the Bank is continuing its research to better understand the root of this perception. “The key point here is that to improve the effectiveness of our regulatory framework, investors must have confidence that they will be treated fairly. To repeat: we must have, and be perceived to have, proper enforcement in Canada.”

Dodge added that recent research at the Bank of Canada concluded that there could be untapped efficiency gains for Canadian financial institutions. The benefits from these efficiency gains could flow across the economy, through lower-cost business and retail lending. “But there are other relevant public policy questions here as well, including foreign ownership and concerns about the concentration of market power among very few players,” he noted. “Striking a balance between these interests is not a simple task. But in terms of competition, we should keep in mind that the level of competition can be maintained or enhanced by new entrants in the marketplace or by the threat of new entrants.”