Canada's top court derailed government plans to consolidate a patchwork system of provincial securities regulators on Thursday, ruling that proposed federal legislation violated provincial rights and forcing the government back to the drawing board.
The Supreme Court's surprise decision leaves Canada as the only major developed country without a national regulator.
It is clear we cannot proceed with this legislation, Finance Minister Jim Flaherty said in a statement. We will review the decision carefully and act in accordance with it.
Under the present system, each Canadian province has its own securities regulator, leading to awkward scenarios, like when the tiny Saskatchewan Financial Services Commission oversaw BHP Billiton's ultimately failed US$40 billion takeover offer for Saskatchewan's Potash Corp last year.
Flaherty, facing opposition from six provinces to his plans to replace that system, had asked the Supreme Court to weigh the legality of his proposals for a new national regulator.
The court said its ruling did not constitute an opinion on the best model to regulate the Canadian securities market, but simply reflected the text and principles of the constitution.
The proposed federal act overreaches the legislative interest of the federal government, it said in a unanimous decision.
As important as the preservation of capital markets and the maintenance of Canada's financial stability are, they do not justify a wholesale takeover of the regulation of the securities industry, which is the ultimate consequence of the proposed federal legislation.
The push for a Canadian national regulator has been an on-again off-again campaign for decades, and many in the financial industry argued that the current regime creates too much red tape, hurts enforcement and deters foreign investment. Calls for a national body increased during the global financial crisis.
Responding to the criticism, Flaherty has sought to create a national regulator since he became finance minister in 2006, arguing it would help make Canada more competitive.
This is a huge setback for their plan, said Patrick Monahan, provost at York University and the former dean of Osgoode Hall Law School. He said if creating a national regulator was realistic, it would have happened by now.
What interest do the provinces that oppose this have, why would they come to the table? There's nothing to require them to do so, he said.
Ontario, home to Canada's largest stock exchange and most of its financial services industry, has been the most vocal provincial advocate of a single regulator, while Quebec and Alberta have led the opposition.
Provinces that oppose a national entity fear Ontario would dominate a national regulator, which would not serve the local needs of other provinces. Alberta, for instance, is dominated by oil and gas companies, while British Columbia is home to many small mining companies.
But the patchwork system has raised eyebrows abroad. In addition to the Saskatchewan role, Maple Group Consortium's C$3.8 billion attempt to take over Toronto Stock Exchange owner TMX Group will have to be approved by four separate commissions, who each oversee parts of the company's operations.
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While rejecting the proposed law, the court did leave the door open to the possibility of a more unified securities regime on certain matters, while retaining areas of provincial jurisdiction.
A cooperative approach that permits a scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available, the court said.
The court pointed to certain areas relating to systemic risk - derivatives, short-selling, credit rating and data collection - as areas where the federal government could legitimately get involved.
We think real progress has been made here, said Terry Campbell, chief executive of the Canadian Bankers Association, an umbrella group that had supported the push for a single entity. The court has recognized, for the first time, that there is federal jurisdiction over securities.
Alberta Finance Minister Ron Liepert acknowledged the court's recommendation to allow the federal government to deal with areas of national concern.
Alberta will work cooperatively with our provincial partners and with the federal government moving forward, he said in a statement. [ID:nL1E7NM6VJ].
But the court ruling makes it unlikely that the federal government will be able to piece together a single authority similar to the U.S. Securities and Exchange Commission.
A radically downsized law could be constitutional, but would it meet the objectives about which the government was quite explicit in the last year? Probably not, said Carissima Mathen, a law professor at University of Ottawa.
The name of the case is In the Matter of a Reference by Governor in Council concerning the proposed Canadian Securities Act, as set out in Order in Council P.C. 2010-667, dated May 26, 2010 (33718).
The court's written statement is available at: here