Drain the regulatory swamp
The Trump admini stration has announced t argets of cutting federal regulations by 75 per cent or more, and revoking two regulations for each new one made. The use of targets for reducing regulation is not new and has proven effective in several jurisdictions. A targeted approach should be used in Canada for securities regulation where proliferation has been running unchecked.
Setting targets f or reducing regulations is a practice that has been used by numerous OECD jurisdictions. The Netherlands was an early pioneer of this approach and successfully reduced red tape through a 25 per cent target. A less aggressive form of targeting is the “one in, one out” approach, which forces government departments to prioritize between new regulations and to simplify and remove existing regulations. A targeted approach has been used in some Canadian provinces. In 2001, British Columbia initiated a deregulation project to reduce unnecessary red tape and regulation by one- third and successfully met this requirement by 2004, subsequently moving to a zero- net- increase approach. Ontario had a policy of revoking two regulations when a new one was added between 2008 and 2013 as part of its Open for Business Initiative.
Securities regulation is unique in that the largest provincial regulators have rule- making powers, which differ from regulation which can only be made by governments. This may have contributed to securities regulators being able to avoid efforts to reduce regulatory burden. Recent consultations by the Canadian Securities Administers ( CSA) on initiatives related to investment advisers illustrate how insensitive the regulators are towards regulatory burden.
The latest consultation is a ban on embedded commissions, an issue that has been subject to considerable debate.
Regulators are concerned about potential conflicts of interest created by these commissions, and investors failing to understand compensation costs. Missing from the consultation paper is any discussion of the scope for reducing existing rules that address the same issues.
There are already extensive regulatory requirements intended to address conflicts of interest and ensure advisers act in the best interests of their clients. For example, there are rules over identifying and disclosing material conflicts of interest. Recent new rules such as pointof- sale disclosure and the client- relationship model have added new disclosure requirements to ensure investors are aware of what they are being charged in compensation. Is all this existing regulation necessary if regulators proceed with a ban on embedded compensation? The regulators prefer to use terms such as “complementary” rather than ask this question.
Another recent CSA consultation related to the investment advice industry centred on a “best- interest standard” that would require dealers and advisers to deal fairly, honestly and in good faith with their clients in their best interests. The best- interest standard has been criticized by some industry stakeholders because it does not fit with the extensive existing regulation that currently exists and the compliance regimes created to address these regulations. The British Columbia Securities Commission declined to participate in the CSA consultation noting, “The adoption of a broad, sweeping and vague best interest standard will create uncertainty for registrants and may be unworkable in the current regulatory and business environment.” In this case, the new standard clashes with existing rules rather than just adding duplication. The consultation paper does not contemplate the scope for addressing this problem by reducing existing regulation. In contrast, the paper includes proposals for more rules.
If securities regulators proceed with these new initiatives, clearing out existing regulations intended to meet the same objectives would offer several benefits to retail investors. Advisers would spend less time on compliance and more providing advice to their clients. Lower compliance costs would make it possible for industry to offer advice at lower costs. And investors with fewer financial assets would find advice more accessible. But regulation of investment advisers is just an example of where regulation is becoming unnecessarily burdensome. A red- tape- reduction initiative across the entire spectrum of the securities industry with explicit targets would result in an industry that would be much more effective in delivering capital to the companies that need it while protecting investors.
THE PROLIFERATION OF RED TAPE IN SECURITIES HAS BEEN RUNNING UNCHECKED.