The proposed approach to assessing the systemic risk created by investment funds could harm the industry and investors
The financial industry has long pushed for national regulation in the securities industry, but the reality of the current effort to create the Cooperative Capital Markets Regulatory System (CCMRS) is sparking its share of concerns.
The fund industry trade association, the Investment Funds Institute of Canada (IFIC), has released its submission commenting the draft of the Capital Markets Stability Act (CMSA) and Provincial Capital Markets Act (PCMA), which raises a number of issues with the proposals.
Echoing the submission from the securities industry trade group, the Investment Industry Association of Canada (IIAC), the fund industry points out that its tough to comment on the proposed legislation (which is itself incomplete) without the corresponding rules that would be adopted by the new regulator; that the legislation doesn’t explain how the new authority will interface with the provinces that do not participate; and that the transition process is unclear.
In addition to that overriding concern, IFIC says that it also has “serious reservations” with the proposed approach to assessing the systemic risk created by investment funds. “The approach goes well beyond frameworks identified by other jurisdictions and international bodies,” it says.
Ultimately, it warns that the proposed approach could harm the industry, investors, and the economy. “We believe that if it is adopted as proposed, the ill-defined and discretionary regulatory approach to systemic risk contemplated within the [draft legislation] could cause severe harm to investment funds and their managers, with attendant disruptive consequences for Canada’s retail investors, capital markets and economy,” IFIC says in its submission.
For example, IFIC says that there is a lack of clarity when it comes to defining systemic risk, and other critical elements of the legislation. It also says that the proposed legislation contemplates “a complete reliance on regulatory discretion rather than an objective framework” for designating a firm, a fund, or a practice, as systemically risky. It also complains about a lack of clarity on the consequences of designating a source of systemic risk, and the process for objecting to that designation. “The proposed [legislation] relies too heavily on regulatory discretion and, as a result, will not deliver one of the
fundamental benefits that it should: the reduction of risk in the market without regulatory intervention,” IFIC says in its submission.
“In light of the vague definition of systemic risk and the absence of any objective process, economic models or metrics, the proposed approach means that a practice can be designated as systemically risky simply if the Capital Markets Regulatory Authority opines that it is,” notes IFIC president and CEO, Joanne De Laurentiis, in the group’s submission.
The IFIC submission also argues that the draft legislation fails to recognize the features of investment funds that differentiate them from other market participants, such as banks. “Quite simply, mutual funds are beacons of stability within Canada’s capital markets, and should be viewed as dampeners rather than originators of systemic risk,” says De Laurentiis.
Overall, IFIC says that its worried that flawed regulation could have serious unintended consequences. “We are deeply concerned about the potential costs and unintended consequences that poorly designed regulation could impose on issuers, investors, the capital markets and the Canadian economy,” it says.
Yet, notwithstanding its concerns, IFIC also stresses that it still supports the effort to create a new cooperative regulatory model.