The Wealthsimple app. Wealthsimple recently received regulatory approval to offer certain prediction‑market-style contracts to Canadian investors.Giordano Ciampini/The Canadian Press
J. Ari Pandes is an associate professor of finance and an associate dean at the University of Calgary’s Haskayne School of Business.
Canada’s regulators are sending investors a strange mixed message.
On the one hand, Ottawa and the provinces have spent the past several years loosening restrictions on gambling and speculative activity. Single‑event sports betting is now legal across the country, widely advertised and available at the tap of an app. And just recently, Wealthsimple received regulatory approval to offer certain prediction‑market-style contracts to Canadian investors, joining Interactive Brokers, which entered this space last year. Questrade has also signalled its intention to follow.
On the other hand, the rules governing traditional investment advice have quietly made it harder for financial advisers to recommend one of the pillars of Canadian capital markets: small‑cap publicly traded stocks.
Taken together, these trends reveal a growing inconsistency in how risk, protection and “investor‑friendly” behaviour are defined in Canada.
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Prediction markets, often described as binary or event‑based contracts, allow investors to trade on outcomes such as inflation exceeding a certain level, interest rates rising, or specific economic events occurring by a given date. These products are intuitive and explicitly speculative and typically leave participants, in aggregate, worse off.
That doesn’t make them illegitimate. But it does raise a reasonable question: Why are regulators increasingly comfortable expanding access to short‑horizon, outcome‑based speculation – while simultaneously constraining professional advice on long‑term equity investments that come with audited disclosures, continuous reporting and public price discovery?
Part of the answer lies in the Client Focused Reforms, a major overhaul of Canada’s investment‑advice rules introduced by provincial securities regulators and enforced by today’s Canadian Investment Regulatory Organization (CIRO). Finalized in 2019 after years of consultation, the reforms were phased in during the pandemic and took full effect by the end of 2021. They strengthened “know‑your‑client,” “know‑your‑product” and suitability obligations, and embedded a clear expectation that advisers put clients’ interests first when making recommendations.
The goal was – and remains – investor protection. Few would argue otherwise.
In practice, however, the reforms have had predictable side effects. For many advisers, recommending small‑cap stocks – especially those outside major indexes – now carries heightened compliance risk. These companies tend to be more volatile, less liquid and harder to benchmark. Advisers must document not only why such investments are suitable, but also why they are preferable to simpler, index‑based alternatives.
The result has been risk rationalization rather than risk elimination. Advisers respond by avoiding anything that might attract extra scrutiny, even when those investments make sense for well‑informed clients with long horizons. As a result, small‑cap exposure increasingly disappears from advised portfolios – not because it lacks merit, but because it is harder to defend on paper.
Meanwhile, Canadians remain free to place wagers on sporting events or trade prediction contracts through self-directed platforms, with no advice at all.
This is the paradox at the centre of today’s retail investment landscape: the riskiest decisions increasingly occur outside the advisory framework, while regulated advice is pushed toward homogeneity and caution.
From a market perspective, this matters. Canada already struggles with thin liquidity in its small‑cap universe. Fewer analyst notes, lower trading volumes and declining retail participation reinforce one another. When advisers step back, public companies are pushed either toward private capital – often with far less transparency – or toward foreign exchanges.
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From an investor’s perspective, it matters even more. Risk does not disappear when advisers are sidelined; it migrates. Retail investors discouraged from owning volatile equities through traditional channels may instead gravitate toward meme stocks, gambling platforms or event‑driven products that offer excitement but little long‑term wealth creation.
This is not a debate about whether prediction markets or sports betting should exist, but about whether Canada’s regulatory framework treats different forms of risk consistently.
A small‑cap company listed on a Canadian exchange must file audited financial statements, disclose material risks, comply with governance standards and submit to continuing oversight. A prediction contract, by contrast, settles on a yes‑or‑no outcome over a fixed horizon, with no direct connection to capital formation or productive investment.
If transparency, disclosure and investor understanding truly matter, shouldn’t the system reward investments that offer those qualities rather than penalize them?
Canada is drifting toward a world where it is easier to bet on inflation than to invest – through professional advice – in smaller Canadian businesses that create jobs, innovate and grow. That may be good for apps and sportsbooks. It is less clear that it is good for Canadian investors – or for Canada’s capital markets.