A case for the cops
Securities regulators are once again getting a lot of flack over the prevalence of fraud in Canadian capital markets. The Canadian Securities Administrators (CSA), the umbrella organization for provincial securities regulators, responded at the end of 2017 with a press release noting provincial securities regulators are not responsible for criminal matters. When securities regulators come under scrutiny over the extent of fraud in capital markets, there are normally calls for the regulators to get more “teeth.” In other words, more resources and greater powers. The CSA stated in its release that more enforcement resources would be welcome.
But do securities regulators really deserve the lion’s share of the blame for the degree of capital- markets fraud? The answer is no. The reality is fraud is a broader problem in Canada, and the CSA is correct in stating that law- enforcement agencies bear the responsibility for pursuing criminal matters. The role of securities regulators in enforcement is to ensure compliance with their rules. Securities regulators only have a supporting role in cases where an alleged criminal breech of securities laws is pursued.
How big a problem is fraud? According to Statistics Canada, there were 108,500 police- reported incidents in 2016, a 15- per- cent increase from the previous year and a 40- per- cent increase over five years. The number of reported incidents underestimates the full extent of fraud as many incidents are not reported. The following num- bers suggest fraud is a major issue outside the realm of capital markets. A 2016 survey by the Canadian Federation of Independent Business estimated the average cost to small businesses at $ 6,200 over the previous 12 months. Fraud is believed to cost between two and 10 per cent of all health- care dollars spent in North America. Canadian banks reimbursed customers for over $900 million in 2016 for credit and card fraud.
Why is fraud so prevalent in Canada? There is a lack of deterrence. Deterrence consists of the likelihood of punishment in combination with the severity of punishment. But even as the incidence of fraud cases reported to police grows, the number of charges are low and convictions are declining. Statistics Canada reported that 17,700 adults were charged with fraud in 2016. Only 7,400 were convicted in 2015/ 16. As for severity of punishment, less than half of individuals found guilty in 2015/ 16 received a custodial sentence.
The CSA reported in its latest enforcement report that only 10 cases of financial misconduct were commenced under the Criminal Code. Because of the low number of cases pursued in the courts, securities regulators rely extensively on administrative actions pursued through their tribunals as a substitute. However administrative powers are not de- signed for criminal matters but for non-compliance with rules such as disclosure standards. Regulatory tribunals operate under a lower burden of proof and sanction powers are limited (i.e., no power to impose custodial sentences).
Provincial governments will likely consider more enforcement resources and powers for securities regulators. But this has been tried in the past and clearly has not been successful. The sanctioning powers of securities regulators simply are not designed to provide an effective deterrent for criminal matters, which should be pursued in the courts. The Cooperative Capital Markets Regulator, which is intended to function as a single securities regulator across participating provinces, might bring some benefits in rules enforcement by reducing jurisdiction hopping. But it will not help with reducing criminal fraud. A single regulator will not change the law enforcement resources allocated to fighting fraud.
More enforcement resources for securities regulators could actually prove counterproductive if the result is prosecutors relying more on securities regulators to address fraudsters in capital markets fraud. Other options should be considered such as encouraging courts to stiffen sentences.
THE SANCTIONING POWERS OF REGULATORS ARE NOT AN EFFECTIVE DETERRENT FOR CRIMINAL MATTERS.