So Much for BC Deregulation

Does your neighbor have a problem with crabgrass this summer? Why not protect yourself by pouring concrete over your lawn? To some, that might seem like a radical solution. However, Canadian provincial and federal regulators are taking exactly that approach in reaction to accounting scandals in the US. Even the BC Securities Commission (BCSC), which professes to be sensitive to escalating regulatory compliance costs in Canada, is on board.

Provincial securities regulators, along with the federal Office of the Superintendent of Financial Institutions (OSFI), have announced their intention to take charge of the regulation of the auditing profession by establishing a new public accountability board. According to David Brown, OSC Chair, the justification for this move is to restore public confidence, which he argues must be deteriorating because there has been widespread media coverage of US accounting issues. David Brown also pointed out that there is no sign of the problems in the US being present in Canada.

Giving its track record on introducing regulatory solutions for non-existent problems, it is not surprising that on the basis of newspaper headlines that the OSC concluded radical regulatory action should immediately be implemented without clearly determining what problems exist. It is also not surprising the OSC would not consider whether markets can self-correct and whether new regulation would really accomplish anything practical. And it is not surprising that the OSC would not trouble himself with what costs a new regulatory initiative would impose on investors and other market participants.

What is surprising is that the BCSC has signed on to the new initiative. In his capacity as Chair of the Canadian Securities Administrators (CSA), the BCSC’s Chair, Doug Hyndman, will be a member of the new five-member Council of Governors that will oversee the new national accountability board that is being set up to regulate auditors. Why is this surprising? Mr. Hyndman is on record as stating that the problem with securities regulation in Canada is there are too many rules, and the BCSC has embarked on a deregulation project that is intended to address this problem.

But in his capacity as the Chair of the CSA, Mr. Hyndman’s actions are effectively undermining the efforts of his own deregulation project. As part of the project, the BCSC recently announced it was undertaking a survey of Canadian public companies to collect data on the regulatory compliance costs they face. The data will be used by the BCSC’s deregulation project to undertake quantitative cost-benefit analysis of regulatory requirements, a first for Canadian securities regulators, which generally like to show their mastership of boilerplate when defining costs and benefits.

But how seriously can anyone take the BCSC’s efforts towards getting rid of regulation where costs exceed benefits when Mr. Hyndman signs on to a new regulatory initiative such as the new public accountability board? Without any doubt, the new board, for which the only possible benefit for investors (improved investor confidence) clearly falls into the category of comfort food, will clearly lead to higher compliance costs that no one has bothered to even estimate.

The BCSC’s reluctance to embrace the latest attempt to establish a national regulator is based on the premise that a national regulator would not be sensitive to the needs of regional markets, dominated by junior companies. These are the companies that are suffering the most from excessive red tape, as compliance costs take up a greater proportion of revenue relative to large more established companies. The increase in auditing fees that will result from auditors passing on their new regulatory costs will hit them disproportionately.

And the new auditing board is not the only example of the BCSC undermining his own deregulation initiative. When the CSA released its new proposals for harmonized disclosure requirements earlier this month that included a number of “enhancements,” Mr. Hyndman had nothing but good things to say about the proposals. The enhancements consist of a number of new disclosure requirements that will hit junior companies hard in the pocket books. One example is the new business acquisition reports that junior companies will be required to file with securities regulators that contain what is essentially the same information they are already required to file with the TSX Venture Exchange.

When the BCSC held its annual conference last month, Mr. Hyndman outlined his vision of making BC the best place in North America for public companies to raise capital. Until he starts taking this vision seriously himself, it will not happen.