REGULATORY OVERKILL

National Post - February 8, 2002
http://www.nationalpost.com/home/story.html?f=/stories/20020208/1374060.html
Regulatory overkill
In Canada, it takes 3,780 people to regulate financial services, while the U.K. employs 2,765 in a system that's four times bigger by market capital
Ray Protti

When one of Canada's leading financial services regulators describes our regulatory system as "hobbled by excessive cost and complexity," it is time to sit up and take notice. In a refreshingly frank speech, David Brown, chairman of the Ontario Securities Commission, also said this "complexity can be unfathomable" to foreign companies and investors.

Mr. Brown may have been directing his remarks to the state of regulation of Canada's securities industry, but his observations apply with equal truth and vigour to the entire system of financial institutions regulation in this country. Simply put, we have too many regulatory bodies applying too many different sets of rules and regulations to financial services providers that are increasingly offering the same types of products and services to Canadians.

What does this mean in practical terms? It is not unusual for an individual to have a bank or credit union account, carry life insurance, have insurance coverage for a home and car, and also hold investments in mutual funds and stocks and bonds. Today, there are some 50 different federal, provincial and territorial departments and agencies regulating the providers of financial services to this single consumer.

To highlight how costly our system of overlapping regulation is, consider this:

- Between 1996/97 and 2000/01, the Consumer Price Index rose by 7%. Over that same period, however, the revenues of Canada's major financial services regulatory bodies rose by 40%. To be sure, Canada's financial services sector, as measured by GDP, also grew during this period, but by an amount (about 29%) considerably less than the sector's regulators.

- Between 1996/97 and 2000/01, the cumulative surpluses of Canada's four largest securities commissions grew by more than $338-million.

These surpluses serve no regulatory or prudential purpose; they are a hidden tax on consumers.

Canada is not the only country in the world with costly and complex financial services regulation. Others, however, are taking strong measures to tackle this regulatory overkill.

In recent years, several countries have moved to eliminate regulatory bodies and consolidate their functions into one or two agencies. For example, in the United Kingdom, the Financial Services Authority (FSA) is now the single financial regulatory body in that country, combining the functions of 10 separate agencies into one. In Australia, a country with a federal system of government similar to Canada's, the primary financial services regulatory functions of both federal and state governments have been integrated into two national agencies.

How does the cost and complexity of Canada's system of financial regulation compare with that of the U.K. and Australia? To put it bluntly, not very well.

In 2000, Canada spent proportionally more on financial sector regulation than either the U.K. or Australia. Regulatory expenditures per $1,000 of finance and insurance GDP totalled $10.83 in Canada. In other words, for every $1,000 in value added generated by the financial sector, Canadian governments spent $10.83 on regulation. By comparison, regulatory expenditures in Australia and the U.K. were $6.85 and $4.26, respectively.

If Canada could match Australia's regulatory efficiency, consumers would save approximately $180-million per year, and if our regulatory efficiency matched that of the U.K., the savings would be even greater at $297-million per year. Even taking into account structural differences in the financial sectors and regulatory frameworks of the three countries, one is left to wonder: Do Canadians receive appreciably more for these expenditures than the British or the Australians?

The U.K.'s FSA publishes data comparing the costs of regulation in several countries, including Canada. According to the FSA's 2000/01 Annual Report, the direct cost of financial institutions regulation in Canada was approximately $489-million. In the U.K., a country with twice Canada's population and a financial sector considerably larger than ours, the direct regulatory costs totalled $493-million - just $4-million more.

This same report provides another telling fact - in Canada, some 3,780 people were employed to regulate our financial sector; the U.K. employed 2,765. One thousand fewer people were able to regulate a financial sector that produces two-and-a-half times more output and has four times the market capitalization of our own.

While it is abundantly clear that the chair of the OSC got it right, the Canadian story is not all gloom and doom. Canada's stock exchanges have been realigned in recent years, and Ontario and Saskatchewan are moving to create one-window regulatory systems within their jurisdictions. In Quebec, a government-appointed Task Force recently called for the integration of Quebec's three main regulatory bodies into one. And, in December, 2001, the life insurance, property and casualty insurance, securities, mutual fund, and banking industries announced a landmark agreement to create a national financial ombudsman service offering redress services to more than 95% of financial services consumers in Canada.

These are steps on the road to building a regulatory system that protects depositors, investors, and policyholders while reducing needless complexity and cost. But much more can, and should, be done. This is not a call for the elimination of regulation. It is a call for a more efficient - and competitive - regulatory system. In an age when capital moves around the globe in a nanosecond, and where countries compete fiercely for capital investment, we have to make Canada a more inviting destination. Other countries have made impressive strides to streamline their financial regulatory systems. The time has come for us to forge a uniquely Canadian solution to this longstanding Canadian problem.