In a landmark ruling, the Supreme Court of Canada (SCC) shot down plans for a pan-Canadian securities regulator in late 2011. Now, almost five years later, the effort to build a model that adheres to the details of that decision will get its own day in court.

A three-day hearing is slated to begin on Nov. 8 before the Quebec Court of Appeal in Montreal to consider the latest constitutional challenge facing an effort to develop some sort of regulation at the national level for Canada. This latest court case is the first of several obstacles that the proposed new Co-operative Capital Markets Regulator (CCMR) has to overcome before it becomes clear whether the already delayed initiative is going to fly or not.

At the forthcoming hearing, the court will be asked to rule on two questions posed by the attorney general’s (AG) office of Quebec: whether the model proposed as part of the CCMR is constitutional; and, whether the proposed federal legislation that would have to be passed to bring the new authority to life exceeds Ottawa’s jurisdiction.

According to filings in the case, Quebec’s AG is set to argue, among other things, that the agreement between Ottawa and the provinces that have signed on (British Columbia, Ontario, Saskatchewan, New Brunswick, Prince Edward Island and the Yukon) that sets out the structure of the proposed CCMR, would result in a significant shift in the division of powers between the provinces and the feds. Quebec’s filing maintains that this shift in power would amount to a surrender of jurisdiction by the provinces and that the arrangement between the feds and the participating provinces effectively amounts to a covert amendment to the constitution, which would undermine the accountability of the regulators to their legislatures.

As for the proposed new federal law – the Capital Markets Stability Act (CMSA) – Quebec says that this oversteps Ottawa’s bounds and infringes on provincial jurisdiction.

Quebec maintains that the effort to divide responsibility for securities regulation into two parts under the new regime – systemic risk would be a federal responsibility; the day-to-day job of overseeing the markets would remain under provincial purview – is an illusion, and that the federal law would step on existing provincial jurisdiction.

Ottawa, for its part, says that the proposed CMSA is necessary to protect Canada’s financial system, and that this cannot be accomplished properly with a regulatory framework that is solely a provincial responsibility.

According to the federal government’s filing: “The provinces have neither the extra-provincial jurisdiction nor the macroprudential mandate at the national level necessary to ensure stability of the financial system and the Canadian economy.” The filing also notes that the SCC recognized this in its 2011 decision, which singles out systemic risk as a federal concern.

The feds’ filing points to the crisis in the asset-backed commercial paper market in 2007 as proof of the need to address systemic risk: “That crisis demonstrates: the importance of macroprudential oversight of capital markets; how risks within capital markets can spread throughout the financial system and potentially to the real economy; and the need to have access to extraordinary tools to tackle crisis situations.”

The feds’ filing also warns that the lack of national oversight leaves Canada vulnerable to the emergence of future systemic risks. As well, the filing notes that even if the CCMR does not go ahead, the proposed CMSA allows for the possibility of another federal body taking on the task of monitoring for systemic risk.

The feds’ filing states: “Ultimately, although [identifying] vulnerabilities in the capital market that are likely to generate systemic risks [is possible], the fact remains that due to their very nature, these risks cannot be fully anticipated. That is why both data collection and the provision of sufficiently flexible tools to enable regulators to adapt to ever-changing needs are essential.”

At the same time, the feds’ filing also argues that the opposition to the CCMR is based on an outmoded view of the division of powers between the federal and provincial levels of government. The feds insist the separation of powers is not airtight and that co-operative schemes, such as the CCMR, enable policy-makers to address issues that don’t strictly fall to one level of government or the other.

Ottawa believes that it is proposing a regulatory model that is in line with the vision set out by the SCC in its 2011 decision. Yet, back in 2011, many legal experts believed that the SCC would find in favour of the feds in that case.

The Quebec appeal court is expected to hand down its decision within a couple of months. And depending what the court says, its decision may not be the end of the legal wrangling.

And, even if the CCMR passes muster with the courts, the legislation to bring it to life still has to be passed in all of the various jurisdictions that are participating in the co-operative model – including B.C., which is slated to have a provincial election next spring that may yet affect its support for the initiative.

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