The Ontario Securities Commission (OSC) has capped its year-long effort to ferret out needless regulatory costs by seemingly doing the impossible: crafting a sweeping set of reforms that is winning acclaim from the investment industry and investors alike.
On Nov. 19, the OSC handed down a report containing 107 recommendations aimed at curbing the costs of industry compliance. The report includes reforms that will affect registered firms and investment funds, issuers, investors and derivatives traders. The proposals range from eliminating outdated requirements to improving service standards and streamlining compliance reviews.
The OSC’s preliminary estimates indicate that the industry can save $7.8 million annually by adopting about one-fifth of the recommendations. The initial savings projections are based on 21 of the recommendations to which direct costs can be attributed. Some proposals are notably less concrete in terms of realizing savings at this point.
For example, the report recommends engaging in industry consultations about the appropriate balance between principles-based and rule-based regulation. This is the sort of reform that could have a significant impact on the regulatory framework in the long run, but the impact cannot be estimated in the short term.
The OSC anticipates that tangible savings will come from changes such as scrapping certain regulatory filing requirements and codifying regulatory relief.
Measures that are entirely within the OSC’s control will be implemented over the next 12 to 24 months, whereas reforms that require changes to securities legislation or the involvement of the other members of the Canadian Securities Administrators are likely to take longer.
The recommendations have received near-universal acclaim. Various industry trade groups – such as the Investment Industry Association of Canada, the Investment Funds Institute of Canada and the Portfolio Management Association of Canada – support the OSC’s efforts.
Maureen Jensen, chair and CEO of the OSC, says that every idea considered as part of the OSC’s burden-reduction efforts could proceed only if regulators determined that the proposed change will not imperil investor protection.
That approach means the OSC will not be going ahead with certain ideas it considered, such as reducing the information required in exempt distribution reports or permitting issuers to solicit private placements through social media. Those changes were deemed to reduce industry costs at the risk of investor harm or diminished oversight.
The OSC recognizes that while there’s room for improvement in the existing rules – redundancies can be eliminated, outdated requirements can be abandoned and regulatory practices can be enhanced – focusing solely on cutting regulation without considering the bigger picture can be counterproductive.
“I think that, fundamentally, [the] market can’t exist without confidence,” Jensen says. “So, if there isn’t investor protection, there is no confidence. It’s really important that investor protection and fair and efficient markets go hand in hand. It’s not so much about balancing; it’s about delivering both.”
As a result, the OSC’s plan also is winning applause from investor advocates.
“The burden-reduction report is a thoughtful compilation of practical and measured ideas, and it’s great that the OSC’s first step in this process was to screen out any proposals compromising investor protection,” says Neil Gross, chair of the OSC’s Investor Advisory Panel, the independent body that represents retail investor interests.
Even after ruling out reforms that could potentially harm investors, Gross adds, “there were still plenty of good ideas to pursue.”
For example, Gross says, one of the OSC’s best ideas is its proposal to permit small firms to share chief compliance officers (CCOs). “That’s not just a potential money-saver,” Gross says. “It will help solve the problem that qualified compliance professionals are in short supply.”
At the same time, the OSC proposes to relax the CCO qualifications for fintechs in an effort to expand the pool of potential compliance officers, and to enable more than one CCO to be registered for firms that require such a measure.
Each of these reforms aims to provide more flexible regulation that can fit better with the size and scope of an individual firm.
While the impetus for the OSC’s burden-reduction effort over the past year may have originated with the provincial government – which made “red tape” reduction a priority across the public service – the OSC’s approach also is informed by the rise of fintech over the past several years. That phenomenon has alerted regulators to some of the ways in which traditional regulation doesn’t fit well with emerging business models, a trend that has intensified the need for increased flexibility.
This trend also led the OSC to question some of its existing requirements and processes. “We’ve said it’s important to start looking at these rules. Can we streamline them? Can we update them so that they are more open to some of the new kinds of businesses? And do we need everything that we had before?” Jensen says.
Innovations in the investment industry had alerted the OSC to the need to modernize the regulatory framework before the new provincial government’s edict to reduce red tape. However, that policy provided “a good opportunity to do this in a more holistic way,” Jensen says. That led to the creation of the OSC’s Burden Reduction Task Force and the extensive industry consultations that form the basis of its ultimate recommendations.
Looking ahead, the OSC will establish an Office of Economic Growth and Innovation, which will aim to keep the regulator aware of any regrowth of regulatory burdens.