Regulations sink SME’s growth
Small and medium-sized enterprises (SMEs) are burdened by costly and intrusive regulation. That is a national problem because SMEs are significant drivers of economic growth and employment. They contribute 30 per cent to Canadian GDP, representing over 90 per cent of privately employed individuals and over 95 per cent of private jobs created during the last decade.
Important determinants of their success are access to affordable capital and the ability to operate without an undue regulatory burden or excessively high taxes, both of which stifle expansion and innovation. To get a handle on the regulatory issue, especially as it pertains to capital markets, let’s examine it through the perspective of the key actors.
For government, capital market regulation aims to avoid systemic risk, enhance stability of the global financial system and foster competitiveness. It also has a multitude of other public policy objectives, including environmental safety, antimoney laundering, labour relations and fiscal policy. The result? Government policies, regulations and laws, however worthy their intent, that impose profitkilling costs and fees.
Next are the provincial securities commissions ( and hopefully soon t he Cooperative Capital Markets Regulator) whose statutory mandates relate to investor protection, market fairness and efficiency and confidence in domestic capital markets. Their rules require registrants, including issuers who participate in the primary and secondary markets, to provide adequate disclosure to investors. They also oblige investment dealers to have adequate capital, know their clients’ financial circumstances and goals and recommend suitable investments.
Unfortunately, a by- product of these important public policy objectives can be mind-boggling verbiage and interminable offering documents and filings that too often provide information that is more theoretical than practical. Indeed, the massive detail is rarely read, let alone absorbed, by the average investor and difficult for smaller issuers to cope with. In response, the Ontario Se- curities Commission set up a SME Institute to help small businesses navigate regulations, demystify disclosure requirements and reduce the cost of compliance. Call it a work in progress.
Full- service retail investment boutiques, comprising one-third of retail firms, face the brunt of cost increases, with operating expenses up last year by a substantial 10 per cent, the largest annual increase in 10 years. As a consequence, earnings at the self- clearers fell by half, contributing to the rapid disappearance of this sector of the investment business.
Next are the self- regulatory organizations ( SROs), who bring the market expertise of their members to the development of regulatory policy, without creating unintended consequences or excessive costs. Securities commissions, who oversee SROs, harbour a healthy skepticism about whether the public interest is always put ahead of private interests. That is at it should be. Yet sometimes the skepti-
SMALLER COMPANIES OFTEN LACK THE RESOURCES TO RESPOND TO THE MYRIAD GOVERNMENT REGULATIONS.
cism is excessive, resulting in a cynicism that can be closed to sound ideas.
Then we have trade associations, who represent the securities and mutual funds industries and smaller businesses generally. However, to be effective, they must do so within the context of the broader public interest. After all, investor confidence in fairness and market integrity is critical to liquidity and a strong, competitive capital market, which in turn fosters economic growth. Securities commissions should carefully consider balanced industry representations, in spite of their obvious conflict of interest.
Finally, let’s move on to the targets of all that regula- tion, the SMEs. Their recurring complaint is that rules are drafted for the large players, especially major financial institutions that can destabilize local markets and cause contagion to the global financial system. SMEs feel that is doubly unfair. Rules are generally not created to deal with problems affecting SMEs. And smaller companies often lack the resources to fully understand and respond to the myriad government regulations that impose a disproportionate burden on their overhead and profit margins.
To help deal with this overarching issue, the Conservative government set up a Red Tape Reduction Commission and implemented a One- for- One Rule – every time the government proposes a new rule that imposes a burden on business, it must eliminate an existing one. That makes sense because there are thousands of rules that have long ceased to fulfill a public purpose – if they ever did.
Government also sponsored a Venture Capital Action Plan for private sectorled funds of funds. Recently, the Bank of Canada encouraged banks, pension funds and insurance companies to capitalize a fund to provide debt and equity financing to SMEs. Modelled after the British Business Growth Fund, it would target the funding gap or “valley of death” after angel or seed capital. However, the financial institutions will have to cope with the onerous capital charge OSFI imposes on direct investments.
If we want the biggest generators of employment to prosper and contribute to economic growth we need to reduce taxes, ease the regulatory burden and make SMEs partners in the common pursuit of long- term prosperity.