Latest / How Canadian Markets Work / Episode 11: Why Canada Has No National Regulator

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Episode 11: Why Canada Has No National Regulator · How Canadian Markets Work

0:00
Welcome to today's Deep Dive. It is so wonderful
0:03
to have you joining us. Thank you so much for
0:05
tuning in. We have a really fascinating topic
0:07
today. We really do. And we're going to take
0:10
this nice and slow, just really unpack the source
0:13
material we have today. Absolutely. Because when
0:16
you look at the United States, you have the Securities
0:19
and Exchange Commission, right? The SEC. Right.
0:22
Everyone knows the SEC. Exactly. It's this one
0:24
massive roof, one centralized authority keeping
0:27
a watchful eye on trillions of dollars. And in
0:31
the United Kingdom, it's the Financial Conduct
0:34
Authority, the FCA. Yeah, the single unified
0:37
watchdog. Right. When you look at the financial
0:39
landscape of literally any major developed country,
0:43
you naturally just expect that singular authority.
0:46
But then, you know, you look at Canada. And that
0:48
is where things get really, really interesting.
0:50
It really is. It's the reality that always makes
0:52
financial professionals from other countries
0:54
do a total double take. Canada is actually the
0:58
only major developed country in the world that
1:00
does not have a single national securities regulator.
1:04
Not even one. No. Instead, Canada has exactly
1:07
13 separate provincial and territorial regulators.
1:11
Which, I mean, it almost sounds like an administrative
1:13
typo when you first hear it. It totally does.
1:16
But this 13 -headed system governs every single
1:19
trade, every public company, and every investment
1:22
portfolio in the country. For you listening,
1:26
the core tension here isn't just some sort of
1:28
boring bureaucratic oversight. No, it's much
1:30
deeper than that. Exactly. We are looking at
1:33
a really profound, totally unresolved argument
1:37
about the efficiency of a single national system
1:39
versus the highly specialized local expertise
1:43
that you need to govern vastly different regional
1:46
economies. Which means our mission today on this
1:48
Deep Dive is to figure out how this highly fragmented
1:52
web actually functions day to day without descending
1:54
into total chaos. Because it really should be
1:57
chaotic. It should be. And more importantly,
1:59
we want to look at the sources to figure out
2:01
why you need to understand the mechanics of this
2:04
exact system to protect your own investment.
2:05
Right, because this does impact you directly.
2:07
It does. So to understand why you have 13 different
2:11
watchdogs looking after your retirement fund,
2:14
we kind of have to trace the legal architecture
2:16
backward. All the way back to the very foundation
2:19
of the country. Exactly. This entire structure
2:21
stems directly from the 1867 Constitutional Division
2:25
of Powers. Yeah, so the architects of the 1867
2:28
Constitution had to divide up the responsibilities
2:31
of a brand new nation, right? And the federal
2:34
government in Ottawa, they were granted power
2:37
over things that seemed inherently national or
2:41
systemic. Like the big picture stuff. Exactly.
2:44
So matters like international trade, broader
2:46
commerce. banking and currency, those were placed
2:50
firmly in federal hands. Makes sense. Yeah. And
2:53
the provinces were given authority over matters
2:55
that were considered deeply local and individual.
2:58
Specifically, they were given jurisdiction over
3:01
what was called property and civil rights. But
3:03
wait, if the federal government has jurisdiction
3:05
over banking and broader commerce, shouldn't
3:08
a modern national securities market automatically
3:10
fall under that umbrella? You would think so.
3:13
I mean... Buying and selling millions of shares
3:16
a second across provincial lines sounds like
3:19
the very definition of interprovincial trade.
3:22
It absolutely does by modern standards. But,
3:25
you know, we are dealing with the legal definitions
3:27
of the 19th century here. Ah, right. Because
3:30
in 1867, a heavily regulated digitized securities
3:34
market just did not exist. There was no electronic
3:37
trading. No electronic trading, no index funds,
3:39
nothing like that. Yeah. When you bought a share
3:41
back then, you were literally buying a physical
3:44
piece of paper. Like a tangible object. Exactly.
3:47
A piece of paper that represented partial ownership.
3:50
in like a local railway or a local manufacturing
3:53
plant. OK, let's unpack this because this is
3:55
fascinating. It is. So when securities regulation
3:58
finally emerged as a serious legal necessity
4:01
in the 20th century, the courts had to interpret
4:04
where it actually fit into that old constitutional
4:06
framework. Right. They had to put it in a box.
4:08
Yeah. They look at a stock certificate and they
4:10
classified it as a form of property. Because
4:12
it was a physical piece of paper. Right. And
4:15
they looked at the act of buying and selling
4:17
that stock. and classified it as a contract,
4:20
and contracts historically fall under civil rights.
4:23
So an absolute accident of timing, the fact that
4:26
stock markets mature decades after the Constitution
4:29
was locked in, became this entrenched legal reality.
4:32
Completely entrenched reality. It is honestly
4:34
like trying to regulate modern Internet data
4:38
privacy using laws written for the telegraph.
4:40
There's a perfect analogy. Because I mean, a
4:43
telegraph operator couldn't possibly conceptualize
4:46
a smartphone app harvesting data, just like the
4:49
founders in 1867 couldn't imagine high frequency
4:52
algorithms. where computers are executing thousands
4:55
of trades a millisecond. Exactly. But because
4:57
of that original, very strict definition, securities
5:01
were deemed property, and property belongs to
5:03
the provinces. And the direct consequence of
5:05
that legal interpretation is the deeply fragmented
5:08
reality we navigate today. Yeah. Ontario created
5:11
the Ontario Securities Commission. every single
5:20
province and territory drafted its own securities
5:23
act. Built its own commission, hired its own
5:26
staff, and set up its own enforcement division.
5:29
All 13 of them. Which naturally leads to the
5:31
big question, right? If the underlying logic
5:34
is built on an outdated byproduct of the 1860s,
5:38
why hasn't the federal government just stepped
5:40
in and updated the system? I mean, that is the
5:42
most logical question to ask. The inefficiency
5:45
of 13 different regulators just seems like a
5:47
problem that a single sweeping piece of federal
5:51
legislation could solve overnight. Well, the
5:53
federal government actually did recognize the
5:55
friction and they did try to solve it. They made
5:56
a very aggressive attempt to override the whole
5:58
thing. Oh, really? Yeah. They drafted a comprehensive
6:01
National Securities Act. It was completely designed
6:05
to wipe the slate clean and install one centralized
6:08
regulator for the whole country. Wow. And how
6:10
did that go? Well, they took this legislation
6:12
all the way to the Supreme Court of Canada to
6:14
test its constitutionality. They were really
6:17
hoping the highest court would modernize the
6:19
interpretation of trade and commerce. I imagine
6:22
the provinces did not quietly surrender their
6:24
authority. Oh, far from it. It was a massive
6:26
legal battle. And ultimately, the Supreme Court
6:29
struck the federal legislation down completely.
6:32
Absolutely. Completely. The court ruled that
6:34
the federal government was overstepping its constitutional
6:36
bounds. They said Ottawa was intruding direct
6:40
into provincial jurisdiction. So the attempt
6:43
to force a single overriding national regulator
6:46
was deemed entirely unconstitutional. Yes, a
6:49
total blockade. But surely there's a middle ground,
6:52
right? Between a forced federal takeover and
6:55
13 totally independent silos. Yes, and the federal
6:59
government realized a hostile takeover wouldn't
7:01
work, so they pivoted to a gentler approach.
7:03
They called it the cooperative system. Under
7:06
this model, the provinces wouldn't be forced
7:08
to submit to Ottawa at all. Instead, they would
7:11
voluntarily delegate their regulatory power to
7:13
a common shared regulator. Oh, interesting. So
7:16
it's a choice. Right. And the federal government
7:19
would only pass legislation to cover massive
7:21
systemic risks, you know, the kind of catastrophic
7:24
economic threats that could collapse the entire
7:26
national economy. And how did the Supreme Court
7:29
view that? The Supreme Court reviewed this cooperative
7:32
model, and they ruled that because it relied
7:36
on voluntary provincial delegation rather than
7:39
federal overreach, it was actually constitutionally
7:42
acceptable. OK, wait. If the Supreme Court explicitly
7:45
said a voluntary cooperative system is perfectly
7:48
legal. Why haven't the provinces just agreed
7:51
to join forces? It seems like a massive administrative
7:56
burden to maintain 13 separate commissions when
7:58
a legal alternative is sitting right there. Well,
8:01
resisting a national regulator is about much
8:03
more than just regional pride or political stubbornness.
8:06
There are actually formidable, highly principled
8:10
arguments on both sides of the consolidation
8:12
debate in the source material. The argument for
8:14
a single regulator is mostly about capital efficiency.
8:17
Having 13 watchdogs creates massive administrative
8:20
costs and just incredibly complex compliance
8:24
layers for any company trying to raise money.
8:26
So if a company wants to operate nationwide,
8:29
it is just a legal labyrinth. Exactly. It also
8:33
damages the country's international reputation.
8:35
How so? Well, imagine if global regulators in
8:38
New York or London need to coordinate on a massive
8:41
cross -border insider trading case. Oh, I see.
8:44
It is incredibly exhausting for them to try to
8:46
coordinate with 13 different Canadian agencies.
8:50
A single regulator projects strength and singular
8:52
accountability on the global stage. Those are
8:55
very strong logistical points. But the provincial
8:57
side of the argument is heavily grounded in economic
9:00
reality because the regional markets in Canada
9:03
are not a monolith. No, they're absolutely not.
9:05
There are vastly different ecosystems like British
9:08
Columbia, for example, is heavily defined by
9:10
its junior mining and exploration sector. Very
9:13
heavily. And these are highly speculative companies.
9:16
They often have zero revenue. They are essentially
9:19
raising capital just to dig a hole in the ground
9:22
in the hopes of finding gold or copper. Yeah,
9:24
it's high risk, high reward. Exactly. The risks,
9:27
the corporate culture, and the investor expectations
9:30
there are completely unique. Then you look at
9:33
Alberta, whose capital markets are heavily dominated
9:36
by the oil, gas, and energy sectors. Totally
9:38
different beast. And Quebec operates under a
9:41
completely different legal framework entirely
9:43
civil law rather than common law. And its financial
9:47
sector operates primarily in French. Right. And
9:50
if we connect this to the bigger picture, a national
9:52
regulator sitting in a corporate tower in Toronto
9:55
or Ottawa might completely misunderstand the
9:58
nuances of that highly speculative junior mining
10:02
financing happening out in Vancouver. They may
10:04
just not get it. Exactly. They might instinctively
10:06
apply rigid compliance rules that were designed
10:09
to keep massive stable banks in check and accidentally
10:11
crush small, innovative energy startups in Calgary
10:15
in the process. That makes a lot of sense. Furthermore,
10:17
the provincial model acts as a vital safeguard
10:20
against concentration risk. Meaning that if a
10:22
single national regulator makes a terrible, sweeping
10:25
policy mistake, the entire country suffers the
10:29
consequences at the exact same time. Yes, precisely.
10:32
With 13 regulators, the provinces function as
10:34
individual laboratories. Oh, I like that term.
10:36
Laboratories. Yeah. They can test different regulatory
10:39
policies. If one province tries a new framework
10:43
for regulating, say, cryptocurrency, and it fails
10:47
spectacularly, the systemic damage is localized.
10:50
It doesn't tank the whole country. Right. But
10:52
if it succeeds, the other provinces can analyze
10:54
the data. and organically adopt the framework
10:57
themselves. So it creates this adaptable ecosystem
11:00
rather than a rigid monolith. But from a purely
11:03
practical standpoint, this brings us to a massive
11:05
logistical headache for the listener who is actually
11:08
trying to invest or run a business. It really
11:10
does. Because if the country is locked into 13
11:13
separate regulators, all fiercely guarding their
11:16
own regional economic priorities, how does a
11:19
modern Vancouver tech company ever manage to
11:21
raise money nationwide? Yeah, how do they do
11:23
it? Having to submit to 13 separate regulatory
11:27
reviews would bank up the startup in legal fees
11:30
before they ever even launched a single product.
11:33
It absolutely would. But the market demanded
11:35
a solution. And the result is this massive workaround
11:38
organization called the Canadian Securities Administrators
11:42
or the CSA. And the CSA is arguably the most
11:45
critical body in this entire landscape. Yet,
11:48
amazingly, it has absolutely zero legal authority.
11:51
None whatsoever. It cannot draft a binding law.
11:54
It cannot levy a fine against a corrupt broker.
11:57
It is entirely voluntary. Yeah, the CSA functions
12:00
much more like an ongoing international treaty
12:02
negotiation than an actual government agency.
12:05
That's wild. It really is. It is simply the forum
12:08
where the leaders of all 13 provincial and territorial
12:11
regulators meet to negotiate. That's a big boardroom.
12:14
Exactly. They discuss the rules the market needs,
12:16
they debate the regional impacts, and eventually
12:18
they agree on a standardized text. Okay, so they
12:20
have a text. Then what happens? Well, once they
12:23
agree, the critical mechanism kicks in. They
12:26
all return to their respective provinces and
12:28
individually pass that exact same rule 13 separate
12:32
times. through their own local legislatures.
12:35
That is dedication. It is, and these harmonized
12:38
rules are called national instruments. So they
12:41
essentially run a shadow national regulator by
12:44
sheer collective willpower. They agree on the
12:47
blueprint in one room, and then they all go home
12:49
to build 13 identical houses. That is a brilliant
12:52
way to put it, yes. And that massive harmonization
12:56
effort sets the stage for the second piece of
12:58
the workaround, which is called the passport
13:00
system. Right, the passport system. So while
13:03
the CSA harmonizes the rules themselves, the
13:06
passport system harmonizes the actual day -to
13:09
-day administrative process for businesses. Which
13:11
is what actually saves them from bankruptcy.
13:14
Exactly. Under the passport system, a company
13:16
does not have to knock on 13 different doors
13:18
to get approval. They deal almost exclusively
13:21
with their principal regulator. And the principal
13:23
regulator is usually just the regulator in the
13:25
province where their head office is located,
13:27
right? So our hypothetical Vancouver tech startup
13:29
only deals directly with the British Columbia
13:32
Securities Commission. That's right. They file
13:34
their prospectuses, their financial statements,
13:37
and all their disclosures. Just in British Columbia.
13:40
Just the one time. Just the one time. The BC
13:42
regulator reviews the paperwork, audits the financials,
13:46
and eventually issues a receipt of approval.
13:48
And through the passport system, once that principal
13:50
regulator issues the receipt, it is automatically
13:53
recognized as legally valid in all the other
13:56
participating provinces. One specialized review,
13:59
one point of contact, nationwide access. You
14:02
got it. It simulates the efficiency of a single
14:04
regulator without any province actually having
14:07
to surrender its constitutional authority to
14:10
Ottawa. There is a rather significant catch to
14:12
the passport system, though. Yes, there is a
14:14
very big holdout. Ontario, which is home to Bay
14:17
Street, essentially the Wall Street of Canada
14:19
and the largest financial hub in the country,
14:22
refuses to fully participate in it. Yeah, Ontario's
14:25
refusal is rooted in a really profound philosophical
14:28
disagreement. Why do they hold out? Well... The
14:31
Ontario Securities Commission basically argues
14:33
that the passport system is essentially a beautifully
14:35
designed band -aid. A band -aid? Yeah. They believe
14:38
that By making the 13 regulator system slightly
14:41
more efficient, the passport system actually
14:44
reduces the political pressure to create a true
14:47
national regulator. Oh, I see. By making it work
14:51
well enough, people stop complaining about the
14:53
core problem. Exactly. So by holding out, Ontario
14:56
forces companies to use a slightly clunkier interface
15:00
arrangement when dealing with them, which intentionally
15:03
keeps the friction visible. Despite Ontario's
15:06
friction, though, this whole harmonization effort
15:08
did produce a tool that is incredibly valuable
15:11
for you, the listener. Oh, incredibly valuable.
15:13
Because all these provinces coordinate their
15:15
filings, every single public disclosure document
15:18
for every public company in Canada is funneled
15:21
into one centralized database. Yes. It's called
15:23
CDAR++. CDAR++ is just a monument to regulatory
15:27
transparency. It really is. And the best part
15:30
is that it is entirely free and public. If you
15:34
want to research a company before you buy their
15:36
stock, you don't have to rely on a secondary
15:38
summary from a news site. No, you can go right
15:40
to the source. Exactly. You can go to Cedar Plus
15:44
and read the company's prospectus yourself. And
15:47
that is the massive legally binding document
15:50
detailing every conceivable risk about their
15:52
business model. Everything is in there. And you
15:54
can read their material change reports, too,
15:56
which are the mandatory alerts companies must
15:59
file when something massive happens. Like a CEO
16:01
suddenly resigning. or a major contract unexpectedly
16:05
falling through. The highly paid analysts on
16:08
Bay Street are using this exact same database
16:10
to make a multi -million dollar decisions. And
16:13
you have access to the same raw data they do
16:15
simply by lipping it up. It is a remarkable resource
16:18
for the retail investor, honestly. It empowers
16:20
you directly. It does. While the paperwork and
16:24
the rulemaking side of this fragmented system
16:26
have been smoothed over by the CSA and the passport
16:29
system, we have to talk about the darker side
16:32
to this arrangement. Yeah, we need to look at
16:34
the enforcement gap. Exactly. This is where the
16:37
historical trivia of 1867 suddenly has a very
16:41
real very direct impact on your wallet. Because
16:43
agreeing on the text of a law in a boardroom
16:46
is relatively easy. Actually, prosecuting the
16:49
people who break that law is an entirely different
16:51
undertaking. You can harmonize a prospectus form
16:53
through a voluntary agreement, sure. But you
16:56
cannot simply share a courtroom. No. You cannot
16:59
share prosecutorial capacity. Every single one
17:02
of those 13 jurisdictions has to maintain its
17:05
own enforcement division and its own legal tribunal.
17:07
They all have their own distinctly limited budgets.
17:10
Yes. own investigative staff and their own procedural
17:13
hurdles. So what does this all mean? It means
17:16
the level of protection you have as an investor
17:18
is heavily dependent on geography. It really
17:21
is. If a broker defrauds you or a company flat
17:24
-out lies to you about their revenues, you are
17:26
not calling a massive federally funded law enforcement
17:29
agency with bottomless resources. You weren't
17:31
calling the SEC. No. You are dealing exclusively
17:36
with your specific provincial regulator. And
17:39
frankly, the resources of the Ontario Securities
17:41
Commission are vastly different from the resources
17:44
of the Nova Scotia Securities Commission. The
17:47
speed of the investigation, the aggressiveness
17:49
of the prosecution, and the ultimate recovery
17:51
of your funds will vary wildly depending on where
17:54
you happen to live. Historically, this gap was
17:57
actually so wide that an individual could be
18:00
barred for committing severe financial fraud
18:02
in one province. And they wouldn't automatically
18:05
face consequences in the others. Wait, really?
18:08
Yeah, a fraudster could simply pack their bags,
18:10
move one province over, and basically set up
18:12
a new firm. That is terrifying. It was a massive
18:15
problem. Now that specific glaring loophole has
18:19
been tightened recently. Regulators now utilize
18:21
reciprocal orders. Meaning what exactly? Meaning
18:24
that if you are banned from trading in Alberta,
18:26
that ban generally triggers an automatic ban
18:28
across the other jurisdictions. OK, well that
18:30
is a relief. It helps, yes, but the underlying
18:34
structural reality remains untouched. The speed
18:38
and quality of justice in the financial markets
18:40
are simply not uniform across the country. Which
18:43
translates to a very specific, actionable piece
18:46
of advice for you listening right now. Absolutely.
18:49
It is worth taking 10 seconds out of your day
18:51
to find out exactly which provincial securities
18:53
regulator has jurisdiction over your portfolio.
18:56
Look up their name. Understand what they actually
18:58
do. They are the ones who mandate the disclosures
19:01
you read on cider plus skin. They are the ones
19:04
who audit the financial advisors operating in
19:06
your specific city. Right. And if you are ever
19:09
the victim of financial misconduct, they are
19:11
the tribunal you will have to petition to get
19:13
your money back. You want to know exactly who
19:15
your local watchdog is and what their track record
19:17
looks like before you actually need to file a
19:20
complaint. Understanding who stands between you
19:23
and market misconduct is the very first step
19:26
in protecting your capital. It really reorients
19:29
how you view the entire market. We've traced
19:31
an incredible lineage today on this deep dive.
19:34
We really have. We started with an 1867 constitutional
19:37
framework designed for a world of steam engines
19:40
and telegraphs, which inadvertently classified
19:43
modern digital securities as local property.
19:45
A total historical accident. We followed how
19:47
that quirk forced the creation of 13 separate
19:50
regulators and how the market duct taped the
19:52
system together using voluntary umbrellas like
19:54
the CSA and the passport system. It is a system
19:57
built on compromises, regional realities, and
20:00
honestly just the sheer willpower of commissions
20:03
trying to keep a lightning fast modern market
20:06
from totally fragmenting. It is a uniquely Canadian
20:08
solution. It is. But before we go, there is one
20:12
final somewhat unsettling concept drawn directly
20:14
from our sources that reviews a hidden vulnerability
20:17
in this entire setup. Oh. Yes. We have spent
20:21
this deep dive establishing that your investments,
20:24
the actual buying and selling of securities,
20:26
are regulated strictly at the provincial level,
20:27
right? Right. Property and civil rights. But
20:30
you have to consider who the largest players
20:32
in this space actually are. The massive investment
20:35
brokerages that handle the vast majority of the
20:38
country's wealth, the ones executing the trades
20:40
for millions of retail investors. They are almost
20:43
all wholly owned by the major Canadian banks.
20:47
And banks fall under the 1867 federal mandate.
20:51
Yes. Banks are regulated for their core operations
20:54
and their overall solvency at the federal level
20:57
by an agency sitting in Ottawa. Oh, wow. So this
20:59
means that the biggest, most powerful financial
21:02
players in the country sit directly on top of
21:05
a regulatory seam. A huge regulatory seam. A
21:08
seam where two entirely different watchdogs are
21:11
looking at the exact same massive institution,
21:14
but with completely different mandates. Exactly.
21:16
And think about the mechanics of how that fails
21:18
in a crisis. OK. If one of these massive bank
21:21
owned brokerages miss sells toxic assets to retail
21:25
investors and suddenly faces a wave of massive
21:27
loss. lawsuits, the provincial securities regulator
21:30
steps in. Right, because it's a contact issue.
21:32
Right. Their mandate is to punish the brokerage
21:35
and force them to pay restitution to the investors
21:37
they defrauded. But simultaneously, the federal
21:40
bank regulator is watching. And their mandate
21:42
is strictly solvency. Exactly. They need to ensure
21:45
the bank doesn't go bankrupt and collapse the
21:48
national economy. So in a severe crisis, the
21:51
federal regulator wants the bank to hoard its
21:53
capital to survive, while the provincial regulator
21:56
wants the bank to drain its capital to pay back
21:58
the retail investors. The watchdogs are fundamentally
22:01
at odds. The mandates directly conflict. The
22:04
institution is federally regulated for its survival,
22:08
but provincially regulated for its conduct. That
22:10
is a staggering conflict. And as anyone who studies
22:13
the history of market crackers knows, These regulatory
22:17
seams, the spaces where jurisdictions overlap
22:19
and mandates collide, are exactly where the most
22:22
catastrophic failures occur. Wow. When the system
22:25
is under extreme stress, things slip through
22:27
the cracks of that seam. And it is almost always
22:29
the retail investor who gets trapped in the middle.
22:32
It is a terrifying mechanism to think about when
22:34
you realize how much capital is sitting right
22:36
on that exact fault line. a 13 -headed watchdog
22:40
enforcing conduct on one side, a powerful federal
22:44
regulator ensuring survival on the other, and
22:46
the biggest money in the country operating right
22:49
in the space between them. It's something every
22:51
investor should keep in mind. Well, thank you
22:53
for joining us on this Deep Dive today. It is
22:55
truly a privilege to unpack these complex, hidden
22:58
architectures of the financial world with you.
23:00
Thank you so much for listening. Keep asking
23:02
the difficult questions about how the systems
23:04
around you actually function, and we will see
23:06
you on the next Deep Dive.