Reaction to Ontario’s commitment to join the national securities regulatory passport system ranges from enthusiastic optimism to wary pragmatism. But when talk turns to achieving greater regulatory harmonization, a clear theme emerges: more action is required.
Ontario’s recently announced commitment to join the Canadian Securities Administrators’ (CSA) passport system was described in a release from the Finance Department as “an important step toward greater regulatory harmonization across provinces and, importantly, a requisite step to removing outstanding interprovincial trade barriers and growing one Canadian economy.”
Ontario had refused to join the two-decades-old passport system, preferring instead a national securities regulator, which never got off the ground.
The province’s commitment to now join the passport system is “a huge milestone” for asset managers, capital markets and Canada’s competitiveness, said Andy Mitchell, president and CEO of the Securities and Investment Management Association (SIMA). It’s also “the catalyst for future change, future harmonization, future efficiency.”
Mitchell said the phrase “national regulatory system,” rather than national regulator, is being used by some people on the regulatory side. “I love this framing,” he said, noting that the CSA is collaborative and that the passport system has proved successful in the absence of a national regulator. “If that’s how we’re truly defining it, then this is the final straw to fine-tune that [system] from here on out.”
But there’s “a lot of heavy lifting to do” and “fine lines to draw and figure out,” he said.
Michael Holder, CEO of North Star Consultants Inc., said Ontario joining the passport system is “the final step in the first step toward a more national approach” to regulation. And “as an alternative to a national regulator, this is a good step,” Holder said. “This is something that, coordinated amongst the provinces, can get us to a good place.”
Katie Walmsley, president of the Portfolio Management Association of Canada, said it was a significant announcement that will “have very positive effects for the industry, for attracting and raising capital in Canada, and for the ability of firms to be nimble and responsive as businesses in terms of hiring decisions.”
But Laura Paglia, president and CEO of the Canadian Forum for Financial Markets (CFFiM), warned the announcement may divert attention from addressing underlying issues in the regulatory system. In practice, Ontario already operates under a “de facto” passport system, she said, and “if the public discourse is celebrating a formality as solving a problem or problems, it leaves the core problems intact.”
Michael Thom, managing director of CFA Societies Canada, said, “It’s easy to be cynical after such a long period where Ontario has stayed outside of the system, and where we haven’t seen material progress toward either a national regulator or national regulatory system. But … we need to take the win for what it is”: a step forward.
Thom said he would be meeting with industry and professional counterparts to talk about next steps for further harmonization. “Regulators will need to see strong direction from industry and the professions to say this is not the end point.”
Greater efficiency, more innovation
As described on the CSA website, the passport system gives a market participant automatic access to the capital markets in other provinces and territories by getting a decision from the participant’s principal regulator only, and meeting the requirements of one set of harmonized laws. The passport system thus streamlines the process of registration for firms (such as portfolio managers and investment fund managers) and individuals, exemptions and prospectus reviews and approvals. Last year, provincial/territorial securities regulators delegated responsibility for the registration of investment and mutual fund dealers and reps to the Canadian Investment Regulatory Organization (CIRO).
With Ontario as part of the passport system, when a principal regulator makes a decision, “that would be passported right across Canada, including Ontario,” Walmsley said. “This is in effect going to bring us closer to the reality of a single regulator experience through a principal regulator.”
With Ontario outside the passport system, “there’s been a duplicative process of review and approval,” she said. “That has a competitive impact for companies across Canada” — an especially acute concern given the geopolitical climate that the country faces.
Timeliness is a key issue. Registration, for example, can take several months, depending on the particular details or complexity. With individuals, “there’s often a gap when people are hired and then actually registered,” which is costly for firms, Walmsley said.
Once Ontario joins the passport system, it should be clear that “the principal jurisdiction does have carriage,” Holder said, eliminating additional review by the OSC.
“The registration process and approvals for both public issuers and investment firms should improve considerably,” Walmsley said.
While Ontario joining the CSA passport won’t necessarily mean firms pay less in fees, Holder said “it will reduce the amount of time that [registration or obtaining an exemption] takes, and therefore the amount of money it takes.”
The “biggest” opportunity for savings will be in efficiency, he said. A firm will be able to “get products to market faster, because exemptive relief is centred around your principal jurisdiction.”
The “friction” of where to register products is reduced, Mitchell said, and firms’ resources can go toward innovation. “We’re going to be working very hard with our members to come up with more [product] solutions now,” he said.
And “it’s not just about the asset management side,” Mitchell said. Ontario’s participation in the passport system will make it easier for individual companies to raise capital, and could help set the stage for more international investment in Canada.
“Is it going to prove itself out before the end of this year? No,” he said. But it’s expected to over time as firms reallocate their resources.
The OSC will also have opportunity to be more efficient, Holder said, because it can focus on complex and novel applications and those from Ontario-based firms.
The regulators will also be able to reallocate resources to innovation, “higher-value policy development,” enforcement and investor protection, Mitchell said.
TBD: Fees, rules and oversight
While the passport system is “a good thing,” Paglia said, “we shouldn’t be celebrating formalities … and portraying them as items of significant reform when they are not.”
As explained on the CSA website and noted in a recent article from the CFFiM, the passport system already includes an interface so that non-Ontario market participants can get access to the Ontario market.
“I don’t know that the OSC is getting the credit it deserves for its support of the passport system,” Paglia said. The announcement that the OSC is officially joining the passport system “truly is ceremonial.”
Focus should be on the ongoing economic and structural inefficiencies within regulation, not on the announcement, she suggested. For example, while the passport system seeks to centralize the review work, “the funding and the money remains decentralized,” Paglia said. “You still have provinces charging their own fees [to firms] or their own filing fees [to issuers] when the work is being done elsewhere, so we need to fix that disconnect, amongst others.”
The multiple fee issue is “even more pronounced,” the CFFiM article says in a note, “when considering that CIRO has assumed the administrative responsibility for reviewing provincial registration applications for investment dealers and mutual fund dealers, but provincial/territorial regulators continue to charge registration fees to those market participants.”
“Fees should be a discussion,” Thom said. “Are you paying one fee, if you operate across the country, to one place, or are you paying 14 fees to 14 different places calculated on different variables?” In such a discussion, “even the process … and the concepts behind the fee model could be subject to significant simplification as a starting point.”
SIMA’s “next big step” in its advocacy efforts will be addressing CSA fees across the country, Mitchell said. “There’s a real opportunity for discussion of what the cost is to run your business, launch a product, serve the investor — do all those things.”
Those efforts will be collaborative, he said, and would ultimately involve the provincial finance ministers and first ministers. Addressing fees is “not an easy task,” he said, but over the longer term “we’re seeking more transparency, more predictability [and] ideally some timelines to allow firms to budget their own growth and investment.”
The CFFiM article also highlighted the compliance costs that market participants incur to deal with overlapping regulatory authorities.
“You do have different laws in different jurisdictions,” Holder said. “The passport system doesn’t solve for that problem.” After Ontario joins the system, the next step should focus on reducing provincial carveouts and consolidating rules, he said.
Establishing more common rules and fees is among the next steps suggested by consumer and policy advocate Harvey Naglie in a memo posted by the C.D. Howe Institute on Monday. Naglie also suggests that each principal regulator be responsible for ongoing oversight, not just one-time decisions: “Each issuer and registrant operating nationally should have one lead regulator for examinations, continuous-disclosure review and conduct supervision.”
Once Ontario joins the system, it will be time to “dare to dream a little bit,” Thom said. “What other next steps could make sense in terms of further harmonization?”
First up, “we need to … move forward with ensuring that the OSC signs on to the national instrument [for the passport system] expeditiously, and that there isn’t additional process created,” Thom said. “The system works well for every other province and territory. … I don’t think there’s need to reinvent the wheel.”
Matthew Latimer, executive director of the Federation of Independent Dealers, said he’d like to see a “fixed date” for Ontario joining the passport system and “some results, measurement or information about changes” arising from the development.
No timeline or effective date has been set. Mitchell said he expects more details over the next six to 12 months.
In response to queries about Ontario joining the passport system, including about timelines, an emailed statement from the OSC reiterated a previous response on social media from CEO Grant Vingoe: “We look forward to continuing discussions with members of the Canadian Securities Administrators, and our government, about the terms of Ontario’s participation.”