David Dodge, Governor of the Bank of Canada, today called for improved securities regulation, tougher enforcement, and reform to financial institutions’ and pension regulation, in order to secure more efficient markets.

Speaking to the Economic Club of Toronto, Dodge said that Canada’s structural policies could do more to support financial market efficiency, particularly in terms of regulations governing financial institutions, securities markets, and pension plans, as well as efforts to strengthen enforcement. Canada is making progress in supporting efficiency in its fixed-income markets, he noted.

“Improving efficiency is everybody’s business. Once policy-makers do their job, it is up to the private sector to respond and take advantage of the opportunities to improve efficiency,” Governor Dodge said. “If we all promote efficiency, then we all can reap the benefits of a more efficient financial system and a stronger economy in the future,” he said.

“If we want our financial institutions to remain a major economic driver in Canada, then we need to make sure that the regulatory framework under which they operate encourages competition and innovation, and does not prevent them from maximizing efficiency,” Dodge said. He noted that, compared with U.S. banks, there are unexploited economies of scale for Canadian banks. “This suggests that Canadian banks are less efficient with regard to the scale of their operations and if banks could reap economies of scale, there would be efficiency benefits to flow through to the Canadian economy,” he said.

“Overall, our research concluded that legislative and regulatory changes have benefited efficiency in Canadian financial services. This shows the importance of removing any remaining restrictions that inhibit competition and efficiency, but provide little or no benefit in terms of financial soundness,” Dodge added.

As for securities regulation, Dodge said that, “Canada’s regulatory framework must apply to all firms, and must be as good as, or better than, those of any other country. But the application of the rules can, and should be tailored appropriately to take into account the size and complexity of the company.”

He said that Canada should try to develop a comparative advantage in securities regulation for smaller firms if it is to remain a market of choice for companies, both Canadian and foreign.

He pointed to the UK’s move towards more principles-based regulation, and efforts to improve US regulation. “Against this backdrop, we in Canada increasingly look as if we are stuck in the middle of the 20th century, and are not positioning ourselves well to compete in the 21st century. For the sake of efficiency, we need a single, uniform framework for securities regulation. Rules need to be applied in a uniform way across the country, and tailored to be appropriate for firms of all sizes, while providing appropriate protection for investors,” he said.

He also questioned the quality of enforcement. “While we have seen some first steps to strengthen enforcement over the past couple of years, there still is a perception, both in Canada and abroad, that Canadian authorities aren’t consistent in their efforts to enforce the rules against insider trading and other offences, nor tough enough in rooting out and punishing fraud,” he said.

“It’s vital that we move quickly and forcefully to strengthen enforcement, so that investors and firms are confident that everyone is playing by the rules,” Dodge stressed. “I recognize that improving enforcement will require considerable effort and extensive co-operation among prosecutors, the police, securities commissions, and industry groups. But we can’t lose sight of the fact that this will pay off in the long run.”

Finally, he addressed pension regulation. “There is a crucial need for a framework that provides the appropriate incentives for employers to establish and maintain pension plans, so that the vast pools of capital in these plans can make their maximum contribution to the efficiency of the Canadian economy,” he said.

He noted that our current regulatory framework provides a number of disincentives for firms to establish or maintain defined-benefit pension plans. He pointed out that Canada’s need to finance major investments in infrastructure and the need for pension funds to find long-term assets, seems perfectly suited to the private-public partnership model, or P3. “But this match can’t be made if governments do not have an appropriate framework for using P3s when looking at infrastructure improvements. There are still relatively few P3s in Canada, compared with countries that have a well-developed framework for P3 investments,” he said.

@page_break@“If capital markets are to make their maximum contribution to growth and provide financing for needed infrastructure, then action is essential both to reduce the disincentives for pension plan sponsors and to improve the framework governing private investment in public infrastructure,” Dodge added.