Published in the Financial Post (www.nationalpost.com), April 29, 2008, p. FP-15
The System Works
by
Pierre Lemieux
Proponents of a national securities regulator in Canada start with the unquestioned assumption that financial markets would not work without securities regulation, and conclude with some great national scheme for a strong central monopoly.
Finance Minister Jim Flaherty routinely raises the national regulator as some kind of panacea that, if in place, might for example have saved us from current financial turmoil and the ABCP meltdown. He repeated this idea again yesterday. Toronto lawyer Jeffrey S. Leon, in a recent commentary on this page (Now’s the Time, April 2), also assumed the basic premise to be true: Without a strong national regulator, investors are at risk.
The premise is questionable. From Henry Manne’s 1966 book in defence of insider trading to a host of more recent free-market evaluations of financial regulation, a good case can be made that financial markets would be more efficient without meddling by politicians and bureaucrats. Academic economists generally believe that regulatory competition is, in this field as in others, better than the monopolization of regulation. Competition between regulators to satisfy demand leads to efficient regulations (or less inefficient regulations) and innovation. A good example is American corporate law, which is under state jurisdictions.
If competition is good in producing ordinary goods and services, why would it lead to “duplication of manpower and resources” in the government service called financial regulation? In fact, it is the competition argument that justifies the existence of different countries, and the benefits of federalism within a country. Except from the point of view of the statocrats, the present setup of 13 provincial and territorial regulators is not bad.
Mr. Leon, in his FP Comment article of April 2, invokes the usual fear of “investor loss of confidence” and “investor protection.” As Prof. Roberta Romano of Yale University writes, “little empirical evidence suggests that the [American] federal regime has affirmatively benefited investors.”
And when central regulation does boost confidence, it is often of the perverse kind. As we see in the crash of asset-based securities, there is no form of regulation, short of prohibiting financial markets, that can prevent serious risk from sometimes materializing in non-diversified portfolios. Some investors now seem to think that they have a right not to lose money.
Perhaps because they are not cognizant of the social sciences, proponents of a regulatory monopoly ignore the logic of institutions. Notwithstanding pious wishes, the emergence of American types of trigger-happy business inquisitors is what would result from a Canadian regulator with a mandate and powers like those of the U.S. Securities and Exchange Commission. Instead of Mr. Leon’s “clear national priorities” and “optimal utilization of enforcement resources,” the planner’s Grail, we would get uncontrolled witch hunts.
Contrary to the government reports cited by the proponents of regulatory monopoly (and these government reports are the main “studies” they can cite), there is no evidence that the Canadian financial system does not work well. What Mr. Leon and others call “our fragmented system” works as well as government regulation can work. An OECD index of the quality of securities regulation puts Canada at the second rank, before the United States. A study by professors Jean-Marc Suret and Cécile Carpentier for CIRANO, a University of Montréal think-tank, concludes that “most arguments put forward to support the idea of the inefficiency of securities regulation [in Canada] are not supported by regulatory and finance theory, and are generally based only on unsupported statements.”
There is not so much an argument for a single regulator as an incantatory repetition of speechwriter slogans. “It’s time” and “[t]he world has changed” pretty well summarize the 2003 report of the so-called “Wise Persons’ Committee.” This panacea of a single securities regulator has been pursued by federal bureaucrats and politicians for nearly three decades. Mr. Leon’s proposal for “creative co-operation of federal and provincial authorities to establish a national enforcement framework” partakes in the same illusions.
A great opportunity exists to take our distances from the old and inefficient American model of securities regulation, which has led to a decline of the share of U.S. capital markets in global capitalization over the past two decades. If Mr. Leon is right to call for a “‘made in Canada policy’ consistent with Canadian culture and values,” it should not be the values that we imported from the United States at an increasing speed as the 20th century unfolded, but the values of Canadian liberty that used to define our country.