Jonathan Preece is senior policy counsel at the Canadian Forum for Financial Markets.
Ontario’s recent commitment to joining the Canadian Securities Administrators’ “passport” system has been hailed as a step toward removing interprovincial trade barriers and developing “one Canadian economy.” Don’t listen to the fanfare.
The passport system is designed to provide market participants with a window of access to Canada’s capital markets by allowing them to interact with a single principal regulator rather than all 13 of the provincial and territorial regulators.
Through this system, each market participant’s principal regulator is responsible for reviewing and approving specified filings and once approved, the principal regulator’s decision is mutually recognized by participating provinces and territories.
This system was developed in reaction to a series of expert reports and recommendations released in the early 2000s, which highlighted the many inefficiencies in Canada’s regulatory system and reiterated calls for the creation of a national securities regulator.
In 2003, provincial ministers convened to discuss the potential for securities reform driven by the provinces and territories. This was at least partially motivated by a desire by some provincial regulators to stymie the momentum that was building for a national regulator.
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This led to a public consultation and the development of an action plan to identify the most pressing issues affecting Canada’s regulatory system. The ones that were identified focused on costs, delays and complications for issuers and other registrants when filing and obtaining approvals from 13 different securities regulators. The passport system was proposed as the solution.
By the time this system was introduced in 2005, every province and territory had agreed to participate with the exception of Ontario, which withheld its signature as a symbolic gesture in support of developing a national regulator.
Notwithstanding this, the practical impact of Ontario’s recent decision to join the passport system is overstated. This is because, despite Ontario’s intentional foot-dragging, the Ontario Securities Commission and the other CSA members have developed an “interface,” which emulates the benefits of the passport system.
Under this interface, every province and territory has agreed to accept OSC decisions on passport filings. In addition, although the OSC retained the discretion to conduct its own reviews, in practice, it has generally relied on reviews conducted by the other regulators in the passport system. As a result, Ontario’s decision to join the passport system is largely ceremonial and will have a limited impact on reducing trade barriers.
To be sure, the passport system has benefits. It has eased the process for registering, obtaining exemptions and filing prospectuses, and it has promoted some harmonization in the application of provincial securities law.
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But it is not a panacea for all of the legitimate criticisms that have been levelled against Canada’s regulatory system. The passport system does not, for example, improve the CSA’s slow and cumbersome policy-making process nor does it address the difficulties that arise in co-ordinating between regulators in multi-jurisdictional enforcement.
Further, this system does not grapple with the costs that arise from maintaining a regulator in each of the 13 provinces and territories, along with the Canadian Investment Regulatory Organization, which serves as a pan-Canadian self-regulatory organization.
All these regulators are financially reliant on fees from market participants, and despite the benefits of the passport system, provincial/territorial regulators continue to collect duplicative registration and participation fees from market participants.
This means that issuers offering securities across Canada have to pay multiple filing fees, and dealers operating across Canada have to pay multiple registration fees, despite the fact that only one “principal regulator” is responsible for reviewing those filings under the passport system.
These costs often pale in comparison to the compliance costs that are incurred by market participants in order to comply with and respond to inquiries from multiple authorities.
This fragmentation and duplication of fixed costs reduce the attractiveness of Canada’s capital markets. Ontario’s tokenistic decision to join the passport system does very little, if anything, to change that reality. The dissolution of interprovincial trade barriers and the development of “one Canadian economy” will require much more.