A Streamlined Regulatory Structure for Québec's Financial Sector
Report of the Task Force on Financial Sector Regulation December 2001 A Streamlined Regulatory Structure for Québec’s Financial Sector ISBN 2-550-38533-0 Legal Deposit Bibliothèque nationale du Québec Publication: December 2001 Montréal, December 2001
Ms. Pauline Marois Deputy Premier and Minister of State for the Economy and Finance Ministère des Finances 12, rue Saint-Louis, 1er étage Québec (Québec) G1R 5L3
Madam,
We are pleased to submit the report of the Task Force on Financial Sector Regulation, entitled “A Streamlined Regulatory Structure for Québec’s Financial Sector”.
This report is more than the product of our deliberations; it represents the efforts and contributions of interested people, industry stakeholders in particular, to fulfil the mandate you gave us last May 2. This mandate is particularly opportune in view of the disintermediation, decompartmentalization and inter-sectoral convergence in Québec’s financial sector.
Our proposal to create a single regulatory body, namely the Agence d’encadrement du secteur financier du Québec, satisfies, in our view, the clear need for simplicity and efficiency of a constantly changing financial sector.
The recommendations in this report should make it possible to effect tangible improvement in the regulatory structure of Québec’s financial sector.
… 2 Ms. Pauline Marois - 2 -
We thank you for your confidence in us and remain
Yours truly,
Claude Béland Pierre Carrier Yvon Charest
Pierre Comtois Pierre Laurin Dominique Vachon
Yvon Martineau, Chairman FOREWORD
The Task Force on Financial Sector Regulation, constituted by order-in- council on May 2, 2001, was instructed to analyze the regulatory structure of Québec’s financial sector and recommend measures to the Minister of State for the Economy and Finance regarding regulatory bodies and the improvement of this structure. The Task Force’s mandate also stipulated that the recommendations focus primarily on protection of consumers of financial products and services and on reducing the administrative burden on this sector.
The Task Force wanted to know the concerns of industry stakeholders and the public at large. Accordingly, as part of its mandate, it made the effort needed to gather extensive information and data. The Task Force met with representatives of the regulatory bodies it studied. It undertook a general consultation to obtain the views of interested parties (producers, distributors and consumers) on the regulatory structure and met with representatives of certain organizations that filed briefs in order to discuss certain issues and questions with them at greater length. In addition, the Task Force met with guests from Québec, Great Britain, France and Australia, most of which had participated in the reform of financial sector regulation in their respective countries. The Task Force continued its intensive deliberations during many meetings, right up to the tabling of this report.
We wish to acknowledge the contribution of the individuals and organizations that offered their views. We also want to thank the guests who enabled us not only to discuss reforms that have been implemented elsewhere, but also to deepen our analysis.
i
FOREWORD
i
SUMMARY
The Task Force on Financial Sector Regulation was set up on May 2, 2001. Its mandate is to recommend measures to the Minister of State for the Economy and Finance to improve the regulatory structure of Québec’s financial sector so that it is better able to protect the consumer and minimize the administrative burden on the industry, while at the same time allowing Québec to protect its fields of jurisdiction regarding this vital sector of its economy.
After having studied how many regulatory systems operate, more particularly Québec’s, the Task Force consulted broadly and collected comments and suggestions.
The essential message is clear: the administrative burden is excessive and the regulatory structure overly complex. Consumers find the structure confusing and regulated entities complain.
The Task Force observes that, in spite of Québec’s innovative policies, the regulatory structure has yet to be adapted to the transformation of the decompartmentalized financial sector.
All too often, consumers must find their way through a confusing labyrinth, while the industry must deal with a phalanx of regulatory bodies where the clash of cultures and corporate interests often hinder cooperation among stakeholders.
The Task Force then examined how Québec’s regulatory structure can be improved. Drawing on the reforms undertaken in jurisdictions that have already updated their regulatory structure, the Task Force adopted a series of guiding principles that any regulatory structure should satisfy to achieve the objectives of its mandate.
The Task Force proposes setting up the Agence d’encadrement du secteur financier du Québec (Agence). The Agence would be responsible for the entire financial sector regulatory system. It would be headed by a president and chief executive officer, assisted by superintendents, and would have five divisions charged with the following five regulatory functions:
- consumer assistance; - solvency; - distribution; - securities markets; - compensation.
Each division would have specialists with real-world knowledge who would be able to adequately administer the specific regulatory requirements of each field of the financial sector.
iii A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
The Agence would thus provide the consumer of financial products and services with one-stop service for information, education and complaints.
The industry would also have one-stop convenience. As the sole authority, the Agence would have to coordinate all the regulatory duties of its divisions concerning registration, issuing of licenses, disclosure requirements, inspections and investigations.
As a strong and credible organization, the Agence would be in a position to make Québec’s case on various Canadian and North American harmonization forums and thus act as a counterweight to the centralized regulatory bodies of other jurisdictions.
It is impossible to escape the tensions resulting from the ongoing conflict between the interests of consumers and the development of the industry. The Agence would remain sensitive to their needs through consultation mechanisms, including a “Conseil de la régie administrative”.
Relieved of an excessive administrative burden, the financial sector will be able to devote more time, resources and energy to its development. The result will be a more competitive industry, the primary guarantee of better consumer protection.
iv TABLE OF CONTENTS
FOREWORD….. …………………………………………………………………………….i
SUMMARY…….……………………………………………………………………………iii
1. THE TASK FORCE ON FINANCIAL SECTOR REGULATION ...... 1
1.1 MANDATE ...... 1
1.2 MEMBERSHIP ...... 1
1.3 APPROACH ...... 2
2. A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC'S FINANCIAL SECTOR ...... 5
2.1 THE INDUSTRY...... 7 2.1.1 THE SIZE OF THE INDUSTRY ...... 7 2.1.2 MAJOR TRENDS...... 8 2.1.3 GROWTH IN DEPOSITS AND MUTUAL FUNDS...... 10 2.1.4 THE INSURANCE MARKET ...... 10 2.1.5 THE CREDIT AND CORPORATE FINANCING MARKET...... 11 2.1.6 INVESTMENT DEALERS...... 12 2.1.7 PORTFOLIO MANAGERS...... 13 2.1.8 PENSION PLANS...... 14
2.2 THE GOVERNMENT ...... 15
2.3 THE CONSUMER ...... 17
3. EXISTING FINAN CIAL SECTOR REGULATION IS QUÉBEC ...... 21
3.1 FINANCIAL SECTOR REGULATION IN QUÉBEC...... 23 3.1.1 TYPES OF ACTIVITIES: PRODUCTION AND DISTRIBUTION...... 23 3.1.2 REGULATION ...... 24 3.1.3 TYPES OF REGULATION ...... 24 3.1.3.1 Solvency regulation ...... 25 3.1.3.2 Securities markets regulation...... 26 3.1.3.3 Distribution regulation...... 27 3.1.3.4 Consumer assistance regulation...... 28 3.1.3.5 Compensation regulation ...... 29
3.2 QUÉBEC’S REGULATORY BODIES ...... 29 3.2.1 THE ASSOCIATION DES COURTIERS ET AGENTS IMMOBILIERS DU QUÉBEC...... 30 3.2.2 THE BUREAU DES SERVICES FINANCIERS ...... 31 3.2.3 THE CHAMBRE DE L’ASSURANCE DE DOMMAGES ...... 32 3.2.4 THE CHAMBRE DE LA SÉCURITÉ FINANCIÈRE...... 33 3.2.5 THE COMMISSION DES VALEURS MOBILIÈRES DU QUÉBEC ...... 34 3.2.6 THE INSPECTOR GENERAL OF FINANCIAL IINSTITUTIONS ...... 35 3.2.7 THE INSTITUT QUÉBÉCOIS DE PLANIFICATION FINANCIÈRE ...... 36 3.2.8 THE RÉGIE DES RENTES DU QUÉBEC...... 36 3.2.9 COMPENSATION FUNDS...... 38 3.2.9.1 The Fonds d’indemnisation du courtage immobilier...... 38 3.2.9.2 The Fonds d’indemnisation des services financiers ...... 38
v A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
3.2.9.3 The Régie de l’assurance-dépôts du Québec...... 39
3.3 CANADIAN REGULATORY BODIES...... 40
3.4 PAN-CANADIAN FORUMS...... 41 3.4.1 THE CANADIAN COUNCIL OF INSURANCE REGULATORS...... 42 3.4.2 THE CANADIAN INSURANCE SERVICES REGULATORY ORGANIZATIONS...... 42 3.4.3 THE CANADIAN ASSOCIATION OF PENSION SUPERVISORY AUTHORITIES ...... 43 3.4.4 THE CANADIAN SECURITIES ADMINISTRATORS...... 43 3.4.5 THE JOINT FORUM OF FINANCIAL MARKET REGULATORS...... 44
3.5 METHODS OF REGULATION ...... 46 3.5.1 DELEGATED REGULATION...... 46 3.5.2 SELF-REGULATION...... 47 3.5.3 VOLUNTARY SELF-REGULATION ...... 47 3.5.4 THE SPECIAL FEATURE OF THE INVESTMENT DEALERS ASSOCIATION...... 48
3.6 THE QUASI-JUDICIAL PROCESS ...... 48 3.6.1 THE CONCEPT OF THE QUASI-JUDICIAL FUNCTION...... 48 3.6.2 EXERCISE OF THE QUASI-JUDICIAL FUNCTION...... 49 3.6.3 ADVANTAGES OF THE QUASI-JUDICIAL FUNCTION ...... 49 3.6.4 THE QUASI-JUDICIAL FUNCTION AND THE REGULATORY FUNCTION...... 49 3.6.5 PROBLEMS FOR A REGULATORY BODY IN EXERCISING THE QUASI-JUDICIAL FUNCTION ...... 50
4. UNIVERSAL REGULATORY PRINCIPLES ...... 53
4.1 INTERNATIONAL ORGANIZATIONS AND REGULATORY PRINCIPLES...... 55 4.1.1 THE INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS...... 55 4.1.2 THE BASEL COMMITTEE ...... 56 4.1.3 THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS...... 58 4.1.4 THE NORTH AMERICAN SECURITIES ADMINISTRATOR ASSOCIATION...... 59
5 REFORMS UNDERTAKEN BY OTHER GOVERNMENTS...... 61
5.1 THE UNITED KINGDOM...... 63
5.2 FRANCE ...... 65
5.3 AUSTRALIA...... 67
5.4 ONTARIO ...... 68
6. KEY OBSERVATIONS OF THE BRIEFS SUBMITTED TO THE TASK FORCE ...... 71
6.1 PINPOINTING THE PROBLEMS RAISED ...... 73 6.1.1 THE NEEDLESSLY CUMBERSOME ADMINISTRATIVE BURDEN...... 74 6.1.2 CONFUSION AMONG CONSUMERS...... 75 6.1.3 PROBLEMS STEMMING FROM THE REPRESENTATION OF THE INDUSTRY IN REGULATORY BODIES AND SELF-REGULATORY ORGANIZATIONS ...... 76 6.1.4 PROBLEMS PERTAINING TO REGULATORY POWER ...... 77 6.1.5 EXCESSIVELY HIGH DIRECT COSTS...... 77
vi 6.1.6 IMPEDIMENTS TO PARTICIPATION IN THE HARMONIZATION PROCESS ...... 78 6.1.7 REGULATION-RELATED PROBLEMS...... 78 6.1.8 PROBLEMS STEMMING FROM THE CONSOLIDATION OF REGULATORY FUNCTIONS ...... 79
6.2 PINPOINTING THE SOLUTIONS PROPOSED...... 79 6.2.1 A SINGLE BODY ...... 79 6.2.2 TWO BODIES ...... 79 6.2.3 REORGANIZATION OF RESPONSIBILITIES ...... 80 6.2.4 SELF-REGULATORY BODIES ...... 80 6.2.5 SECTORAL CONSOLIDATION...... 80
7. THE TASK FORCE'S OBSERVATIONS ...... 83
7.1 OBSERVATIONS...... 85
7.1.1 SOURCE OF THE PROBLEMS ...... 85
7.1.2 PROBLEMS ...... 86 7.1.2.1 The administrative burden ...... 86 7.1.2.2 Consumer protection...... 88
7.1.2.3 Québec’s jurisdiction ...... 90
7.1.3 OTHER OBSERVATIONS ...... 91
7.1.3.1 The administration of the Supplemental Pension Plans Act ...... 91
7.1.3.2 Administration of the Real Estate Brokerage Act ...... 91
7.1.3.3 Administration of other legislation ...... 92 7.1.3.4 The Consumer Protection Act...... 92 7.1.3.5 Adoption of regulations ...... 92 7.1.3.6 Canadian regulatory bodies...... 93 7.1.3.7 Quasi-judicial and judicial administrative processes...... 93
7.2 GUIDELINES ...... 94 7.2.1 CONSUMER PROTECTION...... 94 7.2.2 STREAMLINING THE ADMINISTRATIVE BURDEN ...... 95 7.2.3 RESPECT FOR QUÉBEC’S FIELDS OF JURISDICTION ...... 95 7.2.4 EFFECTIVENESS AND EFFICIENCY ...... 96 7.2.5 THE LIMITATIONS OF SELF-REGULATION...... 97
8. THE PROPOSED REGULATORY STRUCTURE RECOMMENDATIONS...... 99
8.1 ESTABLISHMENT OF THE AGENCE D’ENCADREMENT DU SECTEUR FINANCIER DU QUÉBEC ...... 101
8.2 FUNCTIONAL DIVISION OF THE AGENCE’S RESPONSIBILITIES ...... 102 8.2.1 THE DIRECTION DE L’ENCADREMENT DE L’ASSISTANCE AUX CONSOMMATEURS, A ONE-STOP SERVICE OUTLET FOR CONSUMERS ...... 103 8.2.2 THE DIRECTION DE L’ENCADREMENT DE LA SOLVABILITÉ...... 104 8.2.3 THE DIRECTION DE L’ENCADREMENT DE LA DISTRIBUTION ...... 104 8.2.4 THE DIRECTION DE L’ENCADREMENT DES MARCHÉS DE VALEURS...... 105 8.2.5 THE DIRECTION DE L’ENCADREMENT DE L’INDEMNISATION...... 105 8.2.6 A ONE-STEP INDUSTRY SERVICE OUTLET TO COORDINATE RELATIONS WITH REGULATED ENTITIES...... 105
8.3 FUNDING AND ADMINISTRATIVE SUPPORT...... 106 8.3.1 FUNDING...... 106 8.3.2 ADMINISTRATIVE SUPPORT...... 106
vii A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
8.4 SENIOR MANAGEMENT OF THE AGENCE...... 107 8.4.1 THE PRESIDENT AND CHIEF EXECUTIVE OFFICER...... 107 8.4.2 THE APPOINTMENT, DISMISSAL, TERM OF APPOINTMENT AND REMUNERATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER ...... 108 8.4.2.1 Appointment ...... 108 8.4.2.2 Dismissal ...... 109 8.4.2.3 Term of appointment ...... 109 8.4.2.4 Remuneration...... 110
8.5 MANAGEMENT OF THE AGENCE’S REGULATORY DIVISIONS ...... 110
8.6 THE CONSEIL DE LA RÉGIE ADMINISTRATIVE ...... 111
8.7 ADVISORY COMMITTEES ...... 111
8.8 ACCOUNTABILITY OF THE BODY AND ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER...... 112
8.9 STRATEGIC POLICY DIRECTIONS...... 113 8.9.1 OBJECTIVES OF THE LEGISLATION ...... 114 8.9.2 THE AGENCE’S STRATEGIC POLICY DIRECTIONS...... 114 8.9.3 ELABORATION OF REGULATIONS ...... 115
8.10SELF-REGULATORY ORGANIZATIONS ...... 116 8.10.1 PRINCIPLES OF RECOGNITION ...... 116 8.10.2 RECOGNITION PROCEDURE...... 117
8.11THE BUREAU DES EXAMENS ET DÉCISIONS ...... 118
8.12OTHER RECOMMENDATIONS ...... 119 8.12.1 THE REAL ESTATE BROKERAGE ACT...... 119 8.12.2 THE SUPPLEMENTAL PENSION PLANS ACT ...... 120
8.12.3 THE CONSUMER PROTECTION ACT ...... 120
8.12.4 THE ADMINISTRATION OF OTHER STATUTES ...... 120 8.12.5 REGULATION OF FINANCIAL PLANNING...... 121
9. THE IMPLEMENTATION OF THE NEW STRUCTURE ...... 125
9.1 LEGISLATION ...... 127
9.2 THE BUREAU DE TRANSITION AND TRANSITIONAL MEASURES...... 127
APPENDIX 1...... 131 BIOGRAPHICAL NOTES ON MEMBERS OF THE TASK FORCE APPENDIX 2...... 135 INTERVENERS WHO SUBMITTED BRIEFS TO THE TASK FORCE APPENDIX 3...... 136 BIOGRAPHICAL NOTES ON EXPERTS INVITED BY THE TASK FORCE APPENDIX 4...... 138 WORKING GROUPS OF CANADA-WIDE FORUMS
APPENDIX 5 ...... 140 DEFINITIONS OF SELF-REGULATORY ORGANIZATIONS (SROS)
viii ix
THE TASK FORCE ON FINANCIAL SECTOR REGULATION
CHAPTER 1
v A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
vi CHAPTER 1 THE TASK FORCE ON FINANCIAL SECTOR REGULATION
1.1 MANDATE
The Task Force on Financial Sector Regulation received a mandate to review the regulatory structure of Québec’s financial sector. More specifically, the mandate consisted in:
- analyzing the current regulatory structure of Québec’s financial sector in the context of decompartmentalized financial institutions and market globalization; and - recommending measures to the Minister of State for the Economy and Finance relating to the regulatory bodies and the improvement of this structure, within Québec’s fields of jurisdiction.
Members of the Task Force were to formulate recommendations to improve the efficiency of financial sector regulation, in terms of both consumer protection and reduction of the administrative and regulatory burden on the industry. 1.2 MEMBERSHIP
The Task Force on Financial Sector Regulation has seven members1 and is chaired by Yvon Martineau, senior partner with the law firm of Fasken Martineau. The other members are: - Dominique Vachon, Vice President and Chief Economist with the National Bank of Canada; - Claude Béland, guest professor, Université du Québec à Montréal, and former chairman of the Mouvement Desjardins; - Pierre Carrier, member of the executive committee and of the Bureau de l'Ordre des infirmières et des infirmiers du Québec and former secretary of the Office de la protection du consommateur; - Yvon Charest, President and Chairman of the Board of Industrial Alliance Life Insurance Company; - Pierre Comtois, Vice Chairman of the Board of Optimum Asset Management Inc.; - Pierre Laurin, guest director at the École des hautes études commerciales and former president for Québec of Merrill Lynch Canada and vice chairman of the board.
1 Biographical notes of the members of the Task Force can be found in Appendix 1.
1 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
1.3 APPROACH
The chief priority of the Task Force was to specify an approach that would enable it to achieve its objectives. The members of the Task Force agreed that the approach should be transparent and reflect the concerns of consumers and the industry.
From the outset of its mandate, the Task Force made it a point to establish open and transparent communications with industry stakeholders and consumers and accordingly it set up a website (www.gesef.gouv.qc.ca) in June 2001 to lay out its approach and show how work was advancing. The website includes the mandate of the Task Force, its membership, a public notice, briefs received, other useful information relating to the work of the Task Force, as well as this report.
In June 2001, following a number of working sessions, members met with representatives of the eight financial sector regulatory bodies,2 targeted by their deliberations, to ascertain the issues facing these bodies. Each organization was invited to describe its mission, its structure, how it is funded, its clientele and its relations with other regulatory bodies in Québec and Canada. Each was also invited to explain its outlook, its strategic plan and its relations with the entities it regulates and with consumers.
Public notices were published in many regional and national newspapers and in specialized media to invite financial sector stakeholders and interested consumers to file briefs with the Task Force. The Task Force accordingly sought their opinions, comments and suggestions on the existing regulatory structure, more particularly on the themes of consumer protection and relief from the administrative burden on a constantly changing sector. In addition, the Task Force directly invited many consumer protection and financial sector stakeholder organizations in Québec to file a brief.
Briefs had to be filed with the Task Force secretariat no later than August 17, 2001. A total of 24 briefs were received.3 The great majority were filed by organizations in the financial sector. We want to express our heartfelt thanks for their contribution.
After studying the briefs, members of the Task Force decided to meet the representatives of certain organizations that had made a submission. The purpose of the meetings was to discuss at greater length specific issues and questions raised in certain briefs, such as the various regulatory models under consideration, consumer protection, safeguarding Québec’s jurisdiction regarding its financial sector and compliance costs. Accordingly, members of the Task Force held meetings with representatives of ten organizations4 between September 20 and 24, 2001.
2 See section 3.2 that focuses on the eight Québec regulatory organizations. 3 Appendix 2 gives a list of the organizations that filed a brief. 4 The Canadian Life and Health Insurance Association Inc., the Investment Dealers Association of Canada, the Canadian Bankers Association, the Insurance Bureau of Canada, the Comité Consultatif
2 THE TASK FORCE ON FINANCIAL SECTOR REGULATION
During October 2001, members of the Task Force welcomed guests from the United Kingdom, France and Australia involved in reforming financial sector regulation in their countries.5 They also met with a professor of the École des hautes études commerciales.6 These meetings afforded members of the Task Force a better understanding of the experience in other jurisdictions, which enriched their analysis. The discussions concerned the situation of financial regulation before the reforms, what was at stake, the reforms themselves, the role played by government in the reforms and efforts to achieve harmonization with regional and international regulatory standards.
The analysis and deliberation continued over the course of many meetings and conferences, from the beginning of the mandate until the tabling of this report.
Juridique en valeurs mobilières, the Mouvement des caisses Desjardins, the Office de la protection du consommateur, Partenaires Cartier, the Regroupement des assureurs de personnes à charte du Québec and the Regroupement des cabinets de courtage d’assurance du Québec. 5 Biographical notes for these guests are given in Appendix 3. 6 See the biographical note in Appendix 3.
3 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
4 THE TASK FORCE ON FINANCIAL SECTOR REGULATION
QUÉBEC'S FINANCIAL SECTOR AND ITS DEVELOPMENT
CHAPTER 2
5 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
6 CHAPTER 2 QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT
This chapter gives a brief description of Québec’s financial sector over the last few years.
The financial sector plays an essential role in the economy and wealth creation. In addition to the operation of the transactions settlement and payments system used to exchange financial products, services and goods, it collects and aggregates savings it then transfers to users of capital as loans or investments in bonds or stock.
The financial sector also helps redistribute risk on the basis of each person’s preferences, through a variety of financial products, and promotes the efficiency of the real sector by allocating resources between regions and sectors and providing a system of information on the value of these resources.
Lastly, the financial system supplies mechanisms that help to minimize the costs relating to information asymmetry such as, for instance, the assessments of rating firms and the prospectuses of issuers.
2.1 THE INDUSTRY
2.1.1 The size of the industry
The financial industry accounts for close to 14% of all economic activity in Québec, i.e. its gross domestic product (GDP). This puts it in third place in Québec after the socio-cultural, commercial and personal services industry and the manufacturing industry. The annual growth of the financial industry has averaged 2.2% from 1990 to 2000, slightly above the 2% average growth of Québec’s GDP.
TABLE 2.1.1a QUÉBEC GDP AT FACTOR COST (Millions of 1992 dollars) Average annual growth 1990 2000 (%)
Finance, insurance and real 18 265 22 727 2.2 estate Québec GDP 136 587 165 752 2.0 Share of Québec GDP(%) 13.3 13.7 n.a. Source: Institut de la statistique du Québec, Produit intérieur brut par industrie au Québec.
Employment in the “finance and insurance” sector declined slightly, while total employment in Québec has risen by an average of close to 1% a year. This decline may be attributed to the significant penetration of technology in this sector.
7 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
TABLE 2.1.1b JOBS IN QUÉBEC (Thousands) Average annual growth (%) Finance and insurance 1990 2000
Financial intermediation and 76.7 69.9 -0.9 related activities Securities, commodity contracts 10.8 16.9 4.6 and related financial investment activities Insurance companies and related 50.0 49.2 -0.2 activities Total finance and insurance 137.5 136.0 -0.1 Jobs in Québec 3 141.0 3 438.0 0.9 Share of jobs in Québec (%) 4.4 4.0 n.a. Source: Statistics Canada, Labour Force Survey.
The transformation of the financial sector resulting from major trends, such as market globalization and decompartmentalization of financial institutions, has caused some movement of jobs in this sector in Québec. Accordingly, during the last decade, employment grew by an average of 4.6% a year in the securities field, including mutual fund distribution, while employment in the financial intermediation field, i.e. deposit-taking institutions, fell slightly by an average of 0.9% a year, and employment in the insurance field remained basically steady.
2.1.2 Major trends
Globalization
In the context of market globalization in which, increasingly, Québec companies are active internationally and can acquire products and services offered by multinational companies, Québec’s financial sector must offer world-class products and services.
Competition has become global, for savings and financing products as much as for other types of products, such as insurance policies or portfolio management. Companies looking for financing now have access to increasingly integrated international financial markets.
8 QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT Chapter 2
Decompartmentalization
Québec-based financial groups have emerged following regulatory initiatives designed to decompartmentalize the financial sector. These groups now operate in a number of fields of activity, often through subsidiaries. These institutions have adjusted their methods of operation to offer an integrated line of products and services adapted to the needs of their customers. Even while operating through subsidiaries, these financial groups have centralized many functions involving, in particular, risk management and product development, complicating the work of each regulatory body whose jurisdiction is confined to a single field of activity.
Inter-sectoral convergence
Another trend in recent years is inter-sectoral convergence, i.e. the development of similar products and services by different types of financial institutions that compete against each other. An example is the market for mutual funds and segregated funds of insurers. In addition to targeting the same client group, the producers of these funds sometimes use common distribution networks. Another example of this trend is the competition between pension plans and registered retirement savings plans, two products aimed at the same client group and the same need, but with completely different regulatory regimes.
Inter-sectoral convergence even exists regarding financial advisory activities, which have become highly valued in recent years. Consumers are offered financial advice by a multitude of representatives from various sectors: financial security representatives, investment advisers or dealers, financial planners or even members of professional corporations.
The multitude of financial products and services available on the market has helped make the advisory function more important. In recent years, the range of financial products and services available on the market has expanded considerably. Advances in risk management have enabled institutions to offer financial products tailored to the needs of users, in particular the many hybrid savings products and derivatives.
Technological development
Advances in technology have encouraged a redeployment of financial products and services distribution networks: ATMs, the Internet, telephone services, etc. More powerful computer systems have also enabled financial institutions to develop integrated management systems to manage their activities more efficiently and offer more complex and better-adapted products. The same is true for securities markets where advances in technology have enabled greater trading volumes and faster execution and settlement.
9 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
Overall, the global environment of the financial sector has changed substantially in recent years and this sector of the economy has been transformed. Québec has not been unaffected.
2.1.3 Growth in deposits and mutual funds
In recent years, deposits have been much less attractive than mutual funds in Québec, mainly because of low interest rates and significant returns on equities. Between January 1996 and June 2000, mutual funds rose by 236%, compared with 8.9% for deposits.
TABLE 2.1.3 SAVINGS HELD IN DEPOSITS AND MUTUAL FUNDS IN QUÉBEC (Billions of dollars)
December 31, 1995 June 30, 2000 Change (%)
Deposits 118.2 128.7 8.9 Mutual funds 18.9 63.5 236.0 Sources: Institut de la statistique du Québec, L’activité des institutions de dépôts, 3rd quarter 2000. Institut de la statistique du Québec, Les fonds communs de placements au Québec, 2nd quarter 2000.
Canadian banks as a whole receive the largest share of deposits in Québec with 52.7% of the market, closely followed by the Mouvement des caisses Desjardins which alone collects 44.6%. Among the banks, the National Bank of Canada ranks first with about 16% of deposits in Québec.
Turning to mutual funds, the independents, i.e. those not affiliated with a financial institution (deposit-taking institution or life and health insurer) rank first by a good margin, with 66.8% of the total of $63.5 billion held in Québec in 2000. Mutual funds affiliated with deposit-taking institutions come next with 29.7%, followed by mutual funds affiliated with life and health insurers, with 3.5%.
2.1.4 The insurance market
Direct premiums collected in Québec by life and health insurers during 2000 amounted to $6.7 billion compared with $5.8 billion in 1996, an increase of 15%. The primary beneficiaries of the general increase in the market are Québec-chartered insurers, with 26.8% growth, followed by Canadian- chartered insurers with an increase of 21.7% while premiums collected by insurers chartered in another province or with a foreign charter fell 36%.
10 QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT Chapter 2
Overall, as a result of these changes, the market share of Québec-chartered insurers has risen from 39% in 1996 to 43% in 2000. This is even more remarkable given the smaller size, in terms of assets, of Québec-chartered insurers ($572 million on average at the end of 2000) compared to those chartered elsewhere ($1 766 million).
TABLE 2.1.4 DIRECT PREMIUMS COLLECTED IN QUÉBEC (Millions of dollars) 1996 2000
(%) (%)
Life and health insurers - Québec-chartered 2 261 39 2 868 43 - Canadian-chartered 2 651 46 3 226 49 - Other 875 15 562 8 Total 5 787 100 6 656 100
Property insurers - Québec-chartered 1 698 40 2 036 42 - Canadian-chartered 1 960 46 2 131 43 - Other 569 14 733 15 Total 4 227 100 4 900 100
Sources: Inspector General of Financial Institutions, Le système financier 1996, December 1997. Inspector General of Financial Institutions, Rapport annuel sur les assurances 2000.
In the property insurance sector, the volume of direct premiums collected in Québec rose 15.9% between 1996 and 2000. In this regard, Québec- chartered insurers registered growth of 19.9% compared with 8.8% for insurers with a Canadian charter. These growth rates enabled Québec- chartered insurers to increase their market share to 42% in 2000 from 40% in 1996. As with life and health insurers, the good performance of Québec- chartered property insurers is especially remarkable since they are smaller in terms of assets ($61 million on average at the end of 2000) than their competitors ($410 million).
2.1.5 The credit and corporate financing market
The following table shows traditional bank financing (outstanding business loans) in Québec and bond financing (net bond issues) by companies in Canada from 1992 to 1999. Assuming that the movement in net bond issues by companies in Québec is the same as in Canada as a whole, it can be seen that the growth of net bond issues was much greater than the growth in traditional bank financing. This change would confirm that companies are making less and less use of traditional financing and are tending to other forms of financing.
11 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
TABLE 2.1.5 CORPORATE FINANCING (Millions of dollars) Outstanding business Net corporate bond issues in Canada loans in Québec
1992 25 912 2 116 1993 23 836 9 832 1994 24 214 5 808 1995 25 918 20 024 1996 25 432 20 650 1997 27 668 38 653 1998 30 471 36 258 1999 29 555 40 553 Sources: Institut de la statistique du Québec, Institutions de dépôts 1995-1999 and Bank of Canada, Banking and Financial Statistics, October 2001
In the corporate lending sector in Québec in 1999, Canadian banks held 65% of the market followed by the Mouvement des caisses Desjardins, whose share rose to 27% from 24.5% in 1995. This increase was largely at the expense of foreign banks since the market share of Canadian banks remained relatively stable.
2.1.6 Investment dealers
The securities brokerage industry in Québec and Canada has undergone significant changes in recent years. Following the wave of acquisitions at the end of the 1980s, during which the large brokerage houses were acquired by the banks, many other transactions occurred in this industry. Some recent transactions involved Québec companies, including the acquisition of First Marathon by National Bank of Canada in 1999 and that of Tassé et Associés by BLC Securities in 2000.
12 QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT Chapter 2
TABLE 2.1.6 MAJOR BROKERAGE HOUSES ACTIVE IN QUÉBEC1 (In 2000)
Jobs in Gross world Québec income Number $ million
Largest Québec firms
National Bank Financial 1 862 883.0 Valeurs mobilières Desjardins 574 116.3 Laurentian Bank Securities 253 43.4 Groupe Option retraite 169 16.3 Valeurs mobilières Courvie 130 12.8 Partial total 2 988 1 071.8
Largest Canadian firms
RBC Dominion Securities 706 1 732.3 Merrill Lynch Canada 600 n.a. BMO Nesbitt Burns 444 1 475.9 Scotia Capital 328 1 578.3 CIBC World Markets 236 1 134.9 TD Securities 149 2 700.0 Canaccord Capital Corporation 125 n.d. Partial total 2 588 8 621.4
Note 1. Firms with at least 100 employees in Canada. Source: Le Journal Les Affaires, “Les 500 plus grandes entreprises”, 2001 edition.
Brokerage houses have also positioned themselves in the discount brokerage and online brokerage growth industry. For Canada as a whole, such brokerage activities generated revenue in 2000 approaching half that earned from full-service retail brokerage activities. In addition, brokerage revenue relating to mutual funds now accounts for about one quarter of total brokerage revenue, compared to less than 10% in the early 1980s.
On the basis of their gross world income, the largest Québec-based brokerage houses are small compared with the largest Canadian firms. However, five of these large brokerage houses employ over 100 people in Québec for a total of 2 988 jobs, while only seven Canadian firms employ over 100 people in Québec for a total of 2 588 jobs.
2.1.7 Portfolio managers
Portfolio management corporations in Québec manage total assets of close to $696 billion, including $327 billion by corporations whose head office is in Québec. This pool of $327 billion represents almost 27% of the funds
13 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
managed in Canada. However, it should be mentioned that the Caisse de dépôt et placement du Québec alone manages assets that amount to 10.2% of the assets of funds managed in Canada.
TABLE 2.1.7 ASSETS UNDER MANAGEMENT OF FUND MANAGERS1 IN QUÉBEC (May 2001) (Billions of dollars) Corporation Total assets
Caisse de dépôt et placement du Québec 124.9 T.A.L. Investments 51.2 Jarislowsky & Fraser Ltd. 26.1 State Street Global Advisors 18.6 Bimcor Inc. 14.2 Natcan (National Bank) 14.1 Standard Life Portfolio Management Ltd. 12.9 Others 433.9 Total funds managed by corporations in Québec2 695.9 Total funds managed in Québec by such corporations3 326.9 Total funds managed in Canada 1 229.1 Funds managed in Québec - as a % of total funds managed in Canada 26.6 - excluding the Caisse de dépôt et placement du Québec, as a % of total funds managed in Canada 16.4
Note 1. Includes mutual funds, segregated funds and pension plans. Note 2. Represents funds managed by corporations with an establishment in Québec. Note 3. Represents funds managed by corporations whose head office is in Québec. Sources: Canadian Investment Manager Financial Database, spring 2001; Paltrak database of Portfolio Analytics Ltd., December 2000; and ministère des Finances du Québec.
2.1.8 Pension plans
In 2000, 183 pension plans with assets in excess of $1 million, of 1 062 such plans in Canada, were headquartered in Québec, i.e. 17.2%, compared with 15.2% in 1996. However, Québec’s share is more significant when pension plans with assets in excess of $1 billion are considered. This share stands at 24% of such funds, which corresponds to Québec’s share of Canada’s population.
14 QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT Chapter 2
TABLE 2.1.8 GEOGRAPHIC DISTRIBUTION OF PENSION PLANS (As at December 31) Assets of $1 million or more Assets of $1 billion or more 1996 2000 1996 2000 Number % Number % Number % Number % Québec 169 15.2 183 17.2 16 24.0 22 24.0 Ontario 590 53.1 488 46.0 25 38.0 35 38.0 Other provinces 352 31.7 391 36.8 25 38.0 35 38.0 Total 1111 100.0 1062 100.0 66 100.0 92 100.0
Sources: Canadian Pension Fund Investment Directory, spring 2001, CFP Publishing, Toronto for 2000; J. Roy, Rapport sur le développement du secteur financier, École des hautes études commerciales, 1997, for 1996.
It is apparent then that there has been tangible development in Québec’s financial industry and that government must continue to support its development.
2.2 THE GOVERNMENT
The Québec government has always paid close attention to the development of the financial sector, a major sector for Québec’s economy. And the government has been a constant legislative innovator. In the early 1980s, the Québec government identified the major trends that continue to influence the financial sector today and did not hesitate to move quickly, with innovative legislation, to encourage the decompartmentalization of financial institutions. The innovative nature of Québec’s legislation is widely recognized.
Prior to 1990, various laws affecting the financial sector were amended to enable financial institutions to broaden their range of products and services. Québec was the first province to allow financial institutions to acquire securities brokerage houses. During this period, the Mouvement des caisses Desjardins and insurers were given the right to own subsidiaries and, accordingly, the power to be involved in activities in fields referred to as the traditional four pillars of the financial sector. In addition, decompartmentalization was quickly initiated in the distribution of financial products and services by allowing market intermediaries to hold a variety of licences in order to broaden the range of products and services offered to consumers in Québec.
During the 1990s, the regulatory framework of Québec’s financial sector was adapted on a regular basis to a rapidly changing context. However, few changes were made to the regulatory structure before 1997. In that year, the Commission des valeurs mobilières du Québec (CVMQ) was transformed into an independent body with extra-budgetary funding, and was no longer subject
15 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
to the Civil Service Act (R.S.Q., c. F-3.1). In 1998, the Act respecting the distribution of financial products and services (R.S.Q., c. D-9.2) was passed. This legislation, which replaced the Act respecting market intermediaries (R.S.Q., c. I-15.1), governs the distribution of financial products and services, with or without a representative. In particular, it reduced the number of regulatory bodies by creating the Bureau des services financiers (BSF), the Chambre de l’assurance de dommages (ChAD) and the Chambre de la sécurité financière (CSF) as well as the Fonds d’indemnisation des services financiers (FISF), which replaced two councils, two associations and four compensation funds.
In 1999, the government passed the Act respecting international financial centres (R.S.Q., c. C-8.3), designed to bring the various rules relating to international financial centres (IFCs) under a single piece of legislation to facilitate the promotion of IFCs and encourage foreign, Canadian and Québec companies to develop their international activities in Montréal. The legislation stipulates a package of tax benefits available to a company operating an IFC. To encourage the development of Québec’s financial sector and of Québec’s economy in general, the government also passed, in 2000, the Act respecting Nasdaq stock exchange activities in Québec (S.Q. 2000, c. 28). This legislation sets out the terms and conditions concerning the establishment of the Nasdaq stock market in Québec.
The government remains vigilant in adapting its legislation to provide adequate protection for consumers of financial products and services, while encouraging the development of the financial industry. In 2000, the Act to amend the Supplemental Pension Plans Act and other legislative provisions (S.Q. 2000, c. 41) was passed to update and simplify the legislative framework applicable to pension plans. The government also passed the Act respecting financial services cooperatives (S.Q. 2000, c. C-29) that replaced the Savings and Credit Unions Act (R.S.Q., c. C-4.1). This legislation sets out the terms and conditions concerning the merger of the Confédération des caisses populaires et d’économie Desjardins du Québec and the eleven federations to form the Fédération des caisses Desjardins du Québec as well as measures requiring that financial services cooperatives follow sound and prudent management practices instead of rules tied to maintaining financial ratios. In addition, in 2001, the Act to amend the Securities Act (S.Q. 2000, c. 38), which, in particular, gives the CVMQ the means to react to the rapid emergence of new financial products and new players in the context of market globalization, was assented to. Lastly, the Act to establish a legal framework for information technology (S.Q. 2001, c. 32), which seeks to harmonize the technical systems, norms and standards for communication using technological documents, was passed.
All these changes to the legislative framework were formulated bearing in mind international practices and regulatory principles.
In addition, the Québec government undertook to provide relief from the regulatory burden on companies, including those in the financial sector. In
16 QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT Chapter 2
1997, it formed the Advisory Panel on Regulatory Reform, and created the Secrétariat à l’allégement réglementaire within the Conseil exécutif. The Québec government’s policy is to make Québec companies more productive and more competitive to foster job creation.
In recent years, the Québec government has also formulated a series of tax measures and other incentives to promote the development of Québec’s financial sector. Besides the IFC program, there are programs to foster the creation of mutual funds administered and managed in Québec, the apprenticeship of portfolio managers, the apprenticeship of employees specializing in international transactions, communications between corporations and investors, the hiring of junior financial analysts specializing in the securities of Québec companies and the hiring of junior financial analysts specializing in financial derivatives.
Lastly, once again to find ways to better protect the consumer and support the development of Québec’s financial sector, the government formed the Task Force on Financial Sector Regulation on May 2, 2001.
2.3 THE CONSUMER
The consumer of financial products and services has changed substantially over the last twenty years: he is now more experienced and better informed. He is increasingly becoming an investor.
Consumers are looking for more financial information. This information is becoming more accessible through specialized newspapers, television programs and electronic networks. In addition, financial institutions themselves must invest more in producing explanatory material to satisfy this need for information, either voluntarily, for competitive reasons, or in compliance with new regulatory requirements.
This flow of information and the efforts of governments and regulatory bodies in the popularization of financial products and services and their regulation have in turn helped consumers to become more knowledgeable in this area.
Québec consumers are investing increasingly in financial vehicles that previously were of no interest to them. This change in consumers’ habits has contributed to the phenomenal growth in holdings of mutual funds or stock, as shown by a survey7 carried out by the CVMQ in 1999. Consumers are becoming more open to new products, services and methods of distribution. They are more selective and their loyalty cannot be taken for granted. At times they acquire various products from the same place, from a number of intermediaries or directly, with no intermediary.
7 According to the “Sondage sur l’actionnariat au Québec: Les Québécois et l’investissement font-ils bon ménage?” published in March 2000, 31% of Quebecers owned stock in 1999 compared with 16% in 1989 and 4% in 1977.
17 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
The ageing of Québec’s population is a demographic phenomenon that will have a significant impact on the financial sector. A large share of the population, the baby-boomers, is currently in the capital-accumulation phase in preparation for retirement. This phenomenon, combined with the many tax incentives, such as registered retirement savings plans and others, makes substantial funds available for investment, contributing to the financial sector’s growth.
Given consumers’ growing interest in obtaining information and given the increase in the number of complaints, many regulatory bodies, in Québec and elsewhere in Canada, as well as many sectoral organizations, have set up information and complaint processing services or other mechanisms for settling disputes. However, in view of the large number of such organizations, the consumer finds himself in a labyrinth and, paradoxically, is helpless.
TABLE 2.3 1 REQUESTS FOR INFORMATION AND COMPLAINTS FROM CONSUMERS IN QUÉBEC Number of Number of requests for complaints information
Bureau des services financiers 8 000 67 Chambre de l’assurance de dommages - 117 Chambre de la sécurité financière - 148 Insurance Bureau of Canada and GAA 2 52 8063 n.a. Canadian Life and Health Insurance Association 23 9954 684 Inspector General of Financial Institutions 2 000 136 Commission des valeurs mobilières du 5 Québec 19 732 185 Office de la protection du consommateur 37 616 7456 Investment Dealers Association of Canada n.a. 807
1. Annual basis 2. GAA: Groupement des assureurs automobiles 3. Canada as a whole 4. Québec’s share of the 56 090 requests (46%) in Canada 5. New investigations 6. Complaints on financial matters 7. For the period from January 1 to November 27, 2001 Source: Ministère des Finances compilation; information taken from the annual report or supplied directly by the body
The large number of requests for information and complaints received from consumers by various organizations shows that consumers are seeking information from and complaining to a host of organizations. It can also be
18 QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT Chapter 2
assumed that this host of organizations forces consumers to deal initially with many agents in the financial sector before obtaining an answer to their request and obtaining satisfaction if they are complaining. The consumer, increasingly solicited by various players in the financial sector, must find satisfaction. Accordingly, the proposed regulatory structure seeks to use every opportunity for possible improvement of consumer protection.
19 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
20 QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT Chapter 2
EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC
CHAPTER 3
21 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
22 CHAPTER 3 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC
3.1 FINANCIAL SECTOR REGULATION IN QUÉBEC
3.1.1 Types of activities: production and distribution
Two types of activities can be identified in the financial sector: the production of financial products and services, and their distribution.
Insurers, deposit-taking institutions, investment dealers and pension plans are producers of financial services. They very often also handle the distribution of their products.
An important distinction can be made between the methods of production of various financial products. While deposit-taking institutions, insurers and pension plans can create their products on their own, the production of securities necessarily involves a number of players. It requires an issuer, a broker, if necessary, and an exchange mechanism, such as a stock exchange, to set the price of the security. All of these players form the market when the security is produced.
Distribution encompasses various activities: advice, brokerage (the intermediary role) and information. Brokerage and information are always part of distribution: the purchase of a financial product always requires that a form be filled out and information obtained concerning the product and the terms and conditions of the commitment made by the financial institution. Advice is part of the role of a specialized adviser (representative).
Financial products and services are distributed by financial institutions, by legal persons that are not financial institutions and by independent natural persons. In this regard, representatives and firms governed by the Act respecting the distribution of financial products and services are simply intermediaries in the distribution process.
The consumer can use the services of an adviser who will recommend certain products that satisfy the consumer’s needs. He can also purchase a product using the “self-serve” approach, with no help from an adviser; this is known as direct distribution.
Some products are more suitable for direct distribution, others for distribution by a representative. In general, deposit-taking institutions distribute their own products while insurers often act through intermediaries. The nature of these activities obviously requires that the government regulate them with rules that protect the public and allow development for the industry.
23 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
3.1.2 Regulation
In Québec, the rules regulating the financial sector take various forms:
- statutes of the National Assembly; - government regulations; - government orders-in-council; - ministerial decisions; - regulations of a regulatory body; - directives, instructions and decisions (authorizations, approvals, exemptions) of a regulatory body.
The state sets out the major rules in a statute and entrusts the power to set other rules, in particular by regulation, to the government and regulatory bodies. The role of the government and the regulatory body in setting the rules depends on the statutes and the nature of the activity to be regulated.
3.1.3 Types of regulation
The nature of the regulation imposed by the legislation governing the financial sector depends on the type of activity to be regulated.
There are three types of regulation for the financial sector:
- solvency regulation; - securities markets regulation; - distribution regulation.
The first two types of regulation govern the production of financial products and services while the last type governs their distribution.
In addition, certain measures specific to consumer protection are generally applied by regulatory bodies:
- consumer assistance regulation (for handling complaints, information and education); - compensation regulation (in the event of insolvency or fraud).
The production of financial products and services is a highly regulated activity in the financial sector mainly because confidence in the financial services industry is essential to the efficient operation of the economy. Since the financial product or service is an intangible good, its quality cannot be measured by conventional means. The quality of a financial product is assessed by the producer’s ability to meet its obligations or, in the case of a security, by the fairness of its price (that must adequately reflect the risk and expected return features of the security).
24 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
Accordingly, production is an activity reserved to certain participants and only duly authorized participants (enrolled or registered) can exercise it. In addition, each authorized participant must satisfy a set of rules designed to ensure that its products and services meet certain quality standards.
3.1.3.1 Solvency regulation
Regulation of an insurer, a deposit-taking institution or a pension plan is centred on maintaining solvency and, increasingly, the solvency of investment dealers is also regulated, in view of their financial commitments to investors. The purpose of this regulation is to guarantee that the regulated entity is in a position to satisfy its obligations, i.e. pay deposits when they mature or retirement benefits or indemnities in the event of loss. Accordingly, these producers must satisfy requirements to maintain capital and liquid assets as well as prudential rules for their investments and adequate management practices (record keeping, prevention of fraud, control of conflicts of interest, etc.).
The regulatory body is concerned especially with oversight (inspection and examination of reports). If it notes that the producer’s financial situation is deteriorating, it acts so that recovery measures are applied.
Tasks relating to solvency regulation
The tasks of solvency regulation bodies can be divided into three categories:
- control of access to the activity; - control of the activity; - action in the event of non-compliance.
To exercise control of access to the activity, the body must, in particular:
- administer the process of incorporation of producers and check their financial soundness; - study applications for incorporation and issue incorporation documents; - issue a license in the case of insurers, trust companies and savings companies incorporated in Québec or elsewhere; - collect the fees paid by regulated entities; - maintain a register of participants.
To control the activity, the regulatory body must ensure that regulated entities comply with legislative requirements. To do so, it must, in particular:
- determine, and inform regulated entities of, certain requirements, either by publishing guidelines or administrative directives; - inspect regulated entities itself or have them inspected;
25 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
- require regulated entities to prepare activity reports and examine them; - audit financial statements or have them audited; - carry out any investigation required.
Lastly, to enable it to enforce legislative requirements, the regulatory body has intervention powers. In particular, it can:
- order the cancellation of a transaction, impose corrective measures or a remedial action plan; - assume or have assumed the interim management of a regulated entity; - withdraw or restrict a license as well as impose conditions thereon.
3.1.3.2 Securities markets regulation
The market, i.e. the issuer, the broker and the exchange mechanism, is regulated to allow a “fair price” to be set continuously for a security.
Securities markets regulation is designed to secure access to relevant, truthful and complete information (for instance, the prospectus in the case of mutual funds, or the information documents in the case of a segregated fund). Another objective of regulation is to ensure that the exchange mechanism (trading, clearing and settlement) operates efficiently so that the price set by this exchange mechanism is “fair” and that the execution of the transaction is guaranteed.
The role of the securities markets regulatory body is to oversee the process of production of the security, since the quality of the security depends on the quality of this process.
The regulatory body also supervises the operation of markets. To do so, it must regulate in particular:
- the securities issuance process; - takeover bids, exchange offers and issuer bids; - securities markets (stock exchanges) and clearing and settlement organizations.
To supervise the securities issuance process, the regulatory body must in particular:
- register issuers; - authorize the use of information documents (prospectus); - assemble information relating to markets (financial statements, insider reports, etc.).
When the body regulates take-over bids, exchange offers and issuer bids, it must in particular: 26 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
- control how long they remain open; - control the information disclosed.
When it regulates stock exchanges and clearing and settlement organizations, the body can in particular:
- authorize clearing and settlement organizations to exercise their activities; - delegate powers and responsibilities to them; - oversee their activities (inspection); - approve their regulations; - intervene if need be by order; - review the decisions of these organizations taken regarding their members.
3.1.3.3 Distribution regulation
The main purpose of distribution regulation is to help the consumer to buy products that are suitable for him and provide him with ways to make fully informed choices.
The need to regulate the distribution of financial products and services depends on the product distributed. For example, distribution by deposit- taking institutions of their savings products is much more loosely regulated than that of insurance products or securities for which the legislation regulates the activities of representatives (disclosure of sources of remuneration, competence, continuing education, code of ethics, etc.).
Representatives and their activities are regulated essentially to ensure that they are in a position to properly advise the consumer. Accordingly, regulation seeks, first, to ensure that the adviser has the necessary competence to give advice and, second, that the adviser puts the client’s interests before his own.
To ensure the competence of the person giving advice, some minimum education is generally required or the passing of an exam or the completion of a training period. These requirements are normally sufficient to ensure an acceptable level of competence.
When it is a matter of the consumer’s interests taking precedence, regulation becomes more difficult, especially when the adviser’s remuneration depends on the products he sells the consumer (remuneration by commission). The adviser is then in a situation where his personal interests may conflict with those of the consumer. Regulation of the advisory activity is based on a code of ethics. This code sets out the duties of the adviser towards his client. Committees, generally consisting of specialists in the field, are charged with assessing the conduct of the adviser and, if necessary, imposing sanctions when, following an investigation, a complaint is lodged with these committees.
27 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
The tasks of distribution regulation bodies are generally divided into three categories:
- control of access to the activity; - control of the activity; - action in the event of non-compliance.
To control access to the activity, the body must in particular:
- administer the participant registration process; - analyze registration applications and issue the documents certifying such registration; - issue a license; - collect the fees paid by regulated entities; - maintain a register of participants.
When it controls the activity, the regulatory body must ensure that regulated entities comply with legislative requirements. To do so, the body must in particular:
- determine certain requirements, either by passing regulations, by publishing guidelines or administrative directives, and inform regulated entities accordingly; - itself inspect regulated entities or have them inspected; - request activity reports from regulated entities and examine them; - audit the financial statements in certain cases or have them audited; - carry out an investigation, generally following a complaint.
To enforce the requirements of the legislation, the regulatory body has intervention powers. In particular, it can:
- assume or have assumed the interim management of a regulated entity; - withdraw or restrict a license as well as impose conditions thereon; - impose fines; - bring a regulated entity before a committee that may impose various sanctions, in particular fines and suspensions or withdrawals of licenses.
3.1.3.4 Consumer assistance regulation
The regulatory structure offers two types of services to consumers of financial products and services:
- assistance in the processing of complaints; - assistance in obtaining information or education services.
Regarding processing of complaints, regulatory bodies have the authority to intervene in cases where the law has been violated. However, even if there is 28 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
no legal obligation to intervene, their initiative can often improve the balance of power between the consumer and the regulated entity concerned: for instance, they can correct the asymmetry in the availability of information.
The regulatory body is generally in a particularly good situation to help the consumer in terms of distribution of information and education services. It is acknowledged that these two areas offer excellent means of prevention in the field of consumer protection.
Accordingly, the body may set up a consumer assistance service that can provide relevant information. The body is also able to distribute information and offer education services to the consumer. In addition, it can inform the consumer on how to have his rights respected. Lastly, it may also be responsible for following up on complaints.
3.1.3.5 Compensation regulation
A variety of compensation mechanisms have been set up to bolster consumer confidence, which is essential to the efficient operation of the financial sector. These compensation mechanisms come into play in the following two situations:
- if a financial institution or an investment dealer is unable to meet its obligations to its customers; - if a representative or broker certified under certain laws is guilty of fraud in the exercise of his functions.
Some of these mechanisms are public or stem from legal measures (for instance, the Régie de l’assurance-dépôts du Québec (RADQ) and the Fonds d’indemnisation des services financiers). Others are private and stem from initiatives of the industry concerned (for instance, the Canadian Life and Health Insurance Compensation Corporation or COMPCORP, the Property and Casualty Insurance Compensation Corporation and the Canadian Investor Protection Fund or CIPF).
In practice, the organization collects assessments, administers the fund, rules on compensation claims and pays compensation.
3.2 QUÉBEC’S REGULATORY BODIES
In Québec, the regulatory activities described above are distributed among many regulatory bodies. The Task Force examined eight Québec organizations that exercise regulatory functions in the financial sector and three organizations that provide compensation for consumers of financial products created by Québec legislation. These bodies currently operate in various fields of the financial industry (insurance, securities, deposit-taking, pension plans, etc). The mission, objectives and funding methods vary from one organization to the next.
29 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
This section briefly describes the chief activities, functions, responsibilities and revenue of these organizations.
3.2.1 The Association des courtiers et agents immobiliers du Québec
The Association des courtiers et agents immobiliers du Québec (ACAIQ) began operating in 1994 when the Real Estate Brokerage Act (R.S.Q., c. C- 73.1) became effective. It succeeded the Association de l’immeuble du Québec. Membership in this body is compulsory, it is self-financing and its mission is to protect the public by enforcing rules of ethics and the professional inspection of its members to ensure, in particular, that they conduct their activities in compliance with the legislation. It provides its members with continuing professional education courses and awards the specialist titles members can use. It also administers a financial activity, namely the brokerage of loans secured by a mortgage, under the Real Estate Brokerage Act. Its membership consists of 10 500 real estate agents and brokers.
For the fiscal year ended December 31, 2000, the total revenue of the ACAIQ stood at $5.3 million, mostly from fees imposed by the legislation. This revenue breaks down as follows:
TABLE 3.2.1 ACAIQ (Revenue in dollars, fiscal year ended December 31, 2000) Fees 3 421 887 Sale of supplies and services 502 142 Penalties and disbursements received (discipline) 168 216 Fees and penalties (illegal practice) 514 550 Partial total 4 606 795 Investment income and other revenue 293 148 Interest 377 140 TOTAL 5 277 083
An 11-member board of directors administers the affairs of the ACAIQ. Two of the directors, who are neither real estate agents nor brokers, are appointed by the government after consulting with various socio-economic groups. The other nine directors are elected by their peers. The ACAIQ has about 50 employees.
30 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
3.2.2 The Bureau des services financiers
The Bureau des services financiers was formed under the Act respecting the distribution of financial products and services. It is neither a public organization, a government organization nor a government enterprise for the purposes of legislation in effect in Québec. It is a self-financing financial sector regulatory body whose mission is to ensure that the public is protected in the fields under its authority, in particular in the following disciplines:
- life and health insurance; - group life and health insurance; - property insurance; - claims adjustment; - financial planning; - group savings plan brokerage; - investment contract brokerage; - scholarship plan brokerage.
The BSF administers the Act respecting the distribution de financial products and services and its regulations for all regulated entities. In addition, it receives complaints filed against firms, independent representatives, independent partnerships and distributors of financial products and services and carries out investigations in their regard. It also acts as an insurance and reference centre in the insurance field.
According to its annual report for 2000, about 35 000 representatives are certified by the BSF and close to 2 500 firms are registered. For the fiscal year ended December 31, 2000, the BSF’s total revenue amounted to $7.5 million, mostly from fees imposed by the legislation. This revenue breaks down as follows:
31 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
TABLE 3.2.2 BSF (Revenue in dollars, fiscal year ended December 31, 2000) Contributions 5 528 119 Other services 61 423 Analysis of distribution guides 26 120 Examinations 497 729 Study of files 741 331 Sale of manuals and forms 465 986 Dues – Centre collégial de formation à distance 44 760 Fees of the Chambers and of the Regroupement des 27 422 cabinets de courtage du Québec Loss on the disposal of assets (440) Partial total 7 392 450 Other income – interest 143 698 TOTAL 7 536 148
A 15-member board of directors administers the affairs of the BSF. Ten of the directors, including the chairman, are appointed by the Minister of Finance. The other members of the board are ex officio the president and vice- president of the Chambre de l’assurance de dommages and those of the Chambre de la sécurité financière. The BSF has over 150 employees, 90 of them permanent and 60 casual.
3.2.3 The Chambre de l’assurance de dommages
The Chambre de l’assurance de dommages, formed under the Act respecting the distribution of financial products and services, is a legal person that is not a government mandatary. It is a self-financing organization whose mission is to protect the public by maintaining discipline, enforcing the code of ethics and ensuring the training of its members. Accordingly, it sets rules of ethics and continuing professional education and oversees the operations of a discipline committee.
For the fiscal year ended December 31, 2000, the total revenue of the ChAD amounted to $2.7 million, mainly from dues imposed by legislation. This revenue breaks down as follows:
32 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
TABLE 3.2.3 ChAD (Revenue in dollars, fiscal year ended December 31, 2000)
Dues 2 477 061 Clerk 73 950 Professional development 16 444 Publications 7 958 Partial total 2 575 413 Interest 36 290 Interest on the brokers reserve fund 39 750 TOTAL 2 651 453
An 11-member board of directors administers the affairs of the ChAD. The Minister of Finance appoints two directors to represent consumers; the other nine directors are elected by various groups of ChAD members, of which there are just over 10 000. The ChAD has 19 permanent employees.
3.2.4 The Chambre de la sécurité financière
The Chambre de la sécurité financière, formed under the Act respecting the distribution of financial products and services, is a legal person that is not a government mandatary. It is a self-financing organization whose mission is to protect the public by maintaining discipline, enforcing the code of ethics and ensuring the training of its contributors. Accordingly, it sets rules of ethics and continuing professional development and oversees the operations of a discipline committee. It has just over 25 000 members.
For the fiscal year ended December 31, 2000, the total revenue of the CSF amounted to $4.8 million, mainly from dues imposed by legislation. This revenue breaks down as follows:
TABLE 3.2.4 CSF (Revenue in dollars, fiscal year ended December 31, 2000) Dues 4 086 229 Clerk 157 798 Training 480 178 Preventive audit 13 539 Partial total 4 737 744 Other revenue 1 782 Interest 49 558 TOTAL 4 789 084
33 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
An 11-member board of directors administers the affairs of the CSF. The Minister of Finance appoints two directors to represent consumers; the other nine directors are elected by various groups of members. The CSF has 40 employees.
3.2.5 The Commission des valeurs mobilières du Québec
The Commission des valeurs mobilières du Québec is incorporated under the Securities Act (R.S.Q., c. V-1.1). It is a self-financing regulatory organization, mandated by the government, and is responsible for enforcing the Securities Act. Its mission is to foster the efficient operation of the securities market, protect investors against unfair, abusive and fraudulent practices, oversee information to holders of securities and the public on persons making a public offering and on the securities they issue, and monitor the activity of securities market professionals, their associations and the organizations responsible for insuring the operation of a securities market.
For the fiscal year ended March 31, 2001, the total revenue of the CVMQ amounted to $38.7 million, mainly from fees imposed by the legislation. This revenue breaks down as follows:
TABLE 3.2.5 CVMQ (Revenue in dollars, fiscal year ended March 31, 2001) Fees: Corporate financing 24 170 056 Enrolment 8 496 574 Financial information 3 450 310 Inspections 151 725 Other 17 700 Settlement agreements and fines 332 750 Partial total 36 619 115 Interest on bank deposits 2 073 692 TOTAL 38 692 807
The CVMQ has a maximum of nine members including a chairman and no more than three vice-chairmen who hold their positions on a full-time basis and are all appointed by the government. It has slightly more than 200 employees.
34 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
3.2.6 The Inspector General of Financial Iinstitutions
The Inspector General of Financial Institutions (IGFI) is incorporated under the Act respecting the Inspector General of Financial Institutions (R.S.Q., c. I-11.1). He is charged with exercising the functions and powers attributed to him by a number of statutes and administering any law or provision of a law whose administration is entrusted to him by the government.8 Accordingly, he is charged with overseeing and inspecting financial institutions and advising the minister concerning the legislation whose administration is entrusted to him or under which functions or powers are attributed to him. He is also charged with administering and operating a central registry of businesses set up by the government.
Under the Real Estate Brokerage Act, which he administers, the IGFI monitors the ACAIQ and the Fonds d'indemnisation du courtage immobilier.
For the fiscal year ended March 31, 2001, the total revenue of the IGFI amounted to $54 million, with $9.4 million from the financial sector. The IGFI’s main source of revenue is fees imposed on enterprises, accounting for about 83% of his revenue. Total revenue breaks down as follows:
TABLE 3.2.6 IGFI (Revenue in dollars, fiscal year ended March 31, 2001) Field of Constitution Annual activity 1 Legal Dues Licenses of and initial persons Misc. TOTAL companies reports Insurance 5 138 534 299 229 118 482 - - - 5 556 245 Real estate - - - - brokerage 69 241 (2 045) 67 196 Deposit- - - - taking 3 620 898 39 920 83 028 3 743 846 institutions Enterprises - - - 35 077 496 9 226 864 304 9552 44 609 315 TOTAL 8 828 673 337 104 201 510 35 077 496 9 226 864 304 955 53 976 602
1. Dues for 2000-2001 are based on expenditures for fiscal year 1999-2000. 2. Interest on arrears, penalties for NSF cheques and othe revenue.
The senior officers, namely the Inspector General of Financial Institutions and the Deputy Inspector General are appointed by the government. The IGFI is
8 The following in particular: Act respecting insurance (R.S.Q., c. A-32), Act respecting the caisses d'entraide économique (R.S.Q., c. C-3), Act respecting certain caisses d'entraide économique (R.S.Q., c. C-3.1), Act respecting financial services cooperatives (S.Q. 2000, c. 29), Companies Act (R.S.Q., c. C-38), Real Estate Brokerage Act (R.S.Q., c. C-73.1), Winding-up Act (R.S.Q., c. L-4), Act respecting special corporate powers (R.S.Q., c. P-16), Act respecting the legal publicity of sole proprietorships, partnerships and legal persons (R.S.Q., c. P-45), Loan and Investment Societies Act (R.S.Q., c. S-30), and many others. (See section 1 of the Act respecting the Inspector General of Financial Institutions).
35 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
funded by appropriations voted by the National Assembly and the amounts it collects are paid directly into the government’s Consolidated Revenue Fund. It employs 298 people, with 122 working on tasks relating to the regulation of the financial sector and 176 on those relating to the enterprises’ sector.
3.2.7 The Institut québécois de planification financière
The Institut québécois de planification financière (IQPF) is a non-profit organization responsible, under the Act respecting the distribution of financial products and services, for granting the diploma required to obtain the certificate authorizing the use of the title of financial planner and setting the continuing professional development requirements for financial planners.
For the fiscal year ended December 31, 2000, the revenue of the IQPF amounted to almost $2 million. This revenue breaks down as follows:
TABLE 3.2.7 IQPF (Revenue in dollars, fiscal year ended December 31, 2000)
Training 1 259 573 Annual convention 228 350 Teaching material 179 317 File set-up 116 400 Single exam 107 000 Annual dues (voluntary, 2000) 37 028 Reference service 4 651 Diploma equivalency 4 000 Advertising 3 737 Partial total 1 940 056 Interest 23 355 TOTAL 1 963 411
The IQPF obtains its revenue from its activities rather than from fees imposed by legislation.
It has awarded diplomas to over 4 800 financial planners in Québec. A board of directors of 11 financial planners, elected by their peers, administers its affairs. It has 12 permanent employees.
3.2.8 The Régie des rentes du Québec
The Régie des rentes du Québec (RRQ) is incorporated under the Act respecting the Québec Pension Plan (R.S.Q., c. R-9). The RRQ is a self-
36 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
financing organization mandated by the government. Its mission is to contribute to income security, chiefly at retirement.
The RRQ also has a specific mission to promote financial planning for retirement, in particular by encouraging the establishment of new pension plans under the Supplemental Pension Plans Act (R.S.Q., c. R-15.1). To ensure that these plans are administered in accordance with the law, it must in particular:
- register pension plans and the changes made to them; - verify the information sent to it annually by plan administrators; - ensure that participants’ rights are respected when plans terminate; - provide the pension plan clientele with information and support; - ensure that an actuarial valuation is carried out on each pension plan; - authorize changes to pension plan investment policies; - assume the provisional administration of all or part of a pension plan, or entrust it to a person it designates.
For the fiscal year ended March 31, 2001, the RRQ’s total revenue from supplemental pension plans amounted to $4.6 million, mostly from fees imposed by the legislation. This revenue breaks down as follows:
TABLE 3.2.8 RRQ (Revenue in dollars, fiscal year ended March 31, 2001) Fees 4 508 000 Interest 37 000 Other 62 000 TOTAL 4 607 000
The RRQ is administered by a board of directors consisting of 12 members, including a chairman, all appointed by the government. Two members are appointed after consulting with the most representative organizations of the business world, two after consulting with the most representative organizations of labour, two after consulting with the most representative socio-economic groups, one after consulting with organizations of business or individuals working in the field of social benefits for employees and two are appointed from among recipients of benefits paid by the RRQ. Two other members are appointed from among officials of the government or its organizations.
The RRQ has 1 100 employees of whom 37 work at monitoring supplemental pension plans.
37 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
3.2.9 Compensation funds
3.2.9.1 The Fonds d’indemnisation du courtage immobilier
The Fonds d’indemnisation du courtage immobilier (FICI) is incorporated under the Real Estate Brokerage Act. Its mission is to compensate consumers who are victims of fraud, a dishonest transaction or misappropiration of funds from a trust account by a real estate agent or broker.
For fiscal year 2000, the total revenue of the FICI amounted to $423 570. This revenue breaks down as follows:
TABLE 3.2.9.1 FICI (Revenue in dollars, fiscal year ended December 31, 2000) Contributions 188 560 Investment income 235 010
TOTAL 423 570
The FICI is managed by a board of directors of seven members appointed by the government, four of whom are chosen from among holders of the certificate issued by the Association des courtiers et agents immobiliers du Québec; the other three directors are individuals with a particular contribution to make to the advancement of the profession.
3.2.9.2 The Fonds d’indemnisation des services financiers
The Fonds d’indemnisation des services financiers is incorporated under the Act respecting the distribution of financial products and services. It succeeded the corresponding funds that existed under the Act respecting market intermediaries. It is mandated to administer the monies deposited in the fund, rule on compensation claims and compensate victims of fraud, deceitful practice or misappropriation of funds for which a firm, independent representative or independent corporation is liable.
38 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
For fiscal year 2000, the total revenue of the FISF amounted to $3.1 million including contributions of $2.9 million paid pursuant to the legislation. This revenue breaks down as follows:
TABLEAU 3.2.9.2 FISF (Revenue in dollars, fiscal year ended December 31, 2000) Contributions 2 931 804 Interest 144 379 TOTAL 3 076 183
The FISF is administered by a seven-member board of directors, including a chairman and vice-chairman, appointed by the BSF for a three-year term. Two members of the board are chosen to represent the public. The FISF has seven employees.
3.2.9.3 The Régie de l’assurance-dépôts du Québec
The Régie de l’assurance-dépôts du Québec is incorporated under the Deposit Insurance Act (R.S.Q., c. A-26). It is mandated by the state and the property in its possession belongs to the state. It is charged with overseeing, under the Deposit Insurance Act, the solicitation and acceptance of deposits of money from the public, guaranteeing the payment of deposits of money to the extent and as stipulated by the Act and its regulations, managing the deposit insurance fund and administering the regime of licenses necessary for a financial services cooperative, trust company, savings company or other eligible institution to receive deposits under the regulations.
For the fiscal year ended March 31, 2001, the total revenue of the RADQ amounted to $25.9 million including $14.7 million in premiums collected pursuant to the legislation. This revenue breaks down as follows:
TABLE 3.2.9.3 RADQ (Revenue in dollars, fiscal year ended March 31, 2001) Premiums 14 703 800 Investment and interest income 11 064 703 Other 122 374 TOTAL 25 890 877
The RADQ is administered by a board of directors consisting of the incumbents of the positions of Inspector General of Financial Institutions,
39 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
Deputy Inspector General of Financial Institutions and the Deputy Minister of Finance, as well as two other persons who are not public servants nor heads of a government organization, and appointed by the government. The Inspector General of Financial Institutions is the President and Chief Executive Officer. The RADQ has five employees.
Overview of the revenue of organizations
To summarize, the revenue from fees, fines and other amounts charged to the financial sector by the eight regulatory bodies and the three compensation funds amounted to a total of $89.6 million for the last fiscal year. This revenue is broken down in the following table:
SUMMARY TABLE FEES, FINES AND OTHER AMOUNTS CHARGED TO THE FINANCIAL SECTOR (In dollars, last fiscal year)
Regulatory bodies ACAIQ 4 606 795 BSF 7 392 450 ChAD 2 575 413 CSF 4 737 744 CVMQ 36 619 115 IGFI 9 367 287 IQPF 1 940 056 RRQ 4 508 000 Partial total 71 746 860
Compensation funds FICI 188 560 FISF 2 931 804 RADQ 14 703 800 Partial total 17 824 164
TOTAL 89 571 024
3.3 CANADIAN REGULATORY BODIES
In addition to Québec regulatory bodies of the financial sector, various Canadian regulatory bodies oversee financial institutions active in Québec. The major ones are the Office of the Superintendent of Financial Institutions, Canada Deposit Insurance Corporation and the new Financial Consumer Agency of Canada.
40 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
Many functions and responsibilities of these organizations overlap, not to say encroach on, Québec’s fields of jurisdiction. For instance, insurance contracts and consumer protection fall within Québec civil law.
The Office of the Superintendent of Financial Institutions regulates Canadian- chartered financial institutions within Québec.
Canada Deposit Insurance Corporation is responsible for insuring deposits in banks and other Canadian-chartered deposit-taking institutions.
The mission of the Financial Consumer Agency of Canada is to supervise Canadian-chartered financial institutions to ensure, among other things, that they comply with the provisions of the legislation regarding consumer protection, oversee the implementation of voluntary codes of conduct regarding consumer protection, and educate and inform consumers.
In addition to this agency, a new body might be created whose mission would be to implement and administer a system to examine claims from persons who have requested or obtained financial products or services from member institutions of the organization and are dissatisfied with them. This system would be compulsory for banks, but optional for other Canadian-chartered financial institutions. However, the latter institutions would be required to join the system if they do not participate in an equivalent dispute settlement system.
The creation of such federal organizations operating within Québec adds to the consumer’s confusion and to the administrative burden on regulated entities. It is not our task to determine the extent of this overlap or encroachment. The courts alone are competent to determine the constitutionality of legislative texts.
3.4 PAN-CANADIAN FORUMS
Over the years, provincial regulatory bodies in their fields of competence, such as insurance, securities and pension plans, have initiated the creation of informal field-based forums in order to work to harmonize regulations in various jurisdictions.
These forums are:
- for insurance, the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO); - for pension plans, the Canadian Association of Pension Supervisory Authorities (CAPSA); - for securities, the Canadian Securities Administrators (CSA).
41 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
3.4.1 The Canadian Council of Insurance Regulators
Structure
The Canadian Council of Insurance Regulators is an informal and voluntary association of various provincial regulatory bodies in the insurance field, with federal participation through the Office of the Superintendent of Financial Institutions. It recently set up a secretariat to support its initiatives. The organization is currently chaired by the representative from Newfoundland, whose successor will be determined according to an alternating jurisdiction rule.
Mandate
The CCIR’s mission is to encourage and promote an effective regulatory system for insurance in Canada to promote the public’s interest.9
3.4.2 The Canadian Insurance Services Regulatory Organizations
Structure
The Canadian Insurance Services Regulatory Organizations (CISRO) form a voluntary, informal and pan-Canadian group of certain regulatory bodies or self-regulatory organizations that regulate the distribution of insurance. The group plans to eventually set up a more formal structure with a secretariat and staff. It is currently chaired by the director general of Québec’s Chambre de la sécurité financière, whose successor will be chosen according to an alternating jurisdiction rule.
Mandate
CISRO’s mission is to promote harmonization of standards of qualification and practice among insurance intermediaries through cooperation. More specifically, its objectives are:
- to standardize and propose Canadian standards of training for intermediaries; - to facilitate information sharing among various jurisdictions; - to develop greater expertise of resources by discussing common issues; - to create a single voice to intervene on issues affecting other financial services regulatory authorities and to communicate with the media, consumers and intermediaries; - to cooperate with other regulatory bodies.
9 See Appendix 4 for a list of work by its sub-committees. 42 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
3.4.3 The Canadian Association of Pension Supervisory Authorities
Structure
The Canadian Association of Pension Supervisory Authorities is a formal and voluntary group, incorporated as a legal person, of provincial pension plan supervisory bodies and the Office of the Superintendent of Financial Institutions. The secretariat has its office at the headquarters of the Financial Services Commission of Ontario, but is under the authority of the chairperson of CAPSA. Currently, CAPSA is chaired by the Superintendent of Pensions of Alberta, whose successor will be chosen according to an alternating jurisdiction rule.
Mandate
The mission of CAPSA10 is:
- to promote improvement in pension plan policy in Canada; - to promote simpler and harmonized pension plan regulation throughout Canada; - to make pension plan commitments more secure; - to improve communication between pension plan supervisory organizations and interested parties and to intervene on issues of common interest.
3.4.4 The Canadian Securities Administrators
Structure
The Canadian Securities Administrators form an informal group consisting of securities commissions and other authorities of the provinces and territories, that have exclusive competence in this area. The group has no formal structure and studies proposals on which the representatives of interested provinces and territories take a position. The CSA is currently chaired by the representative of the British Columbia Securities Commission, whose successor will be chosen according to an alternating jurisdiction rule.
Mandate
The CSA’s mission is to provide Canada with a securities regulatory system that both protects investors against unfair, abusive and fraudulent practices, and promote a dynamic, efficient and honest capital market.11
10 Idem. 11 Idem.
43 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
3.4.5 The Joint Forum of Financial Market Regulators
In view of financial sector decompartmentalization and inter-sectoral convergence, the forums described above have formed the Joint Forum of Financial Market Regulators (Joint Forum) to work to harmonize regulations affecting more than one field. No regulatory body is formally bound by the decisions the Joint Forum may make.
Structure
The Joint Forum consists of groups of regulatory bodies from three fields (insurance, securities and pension plans). The CCIR, CAPSA and the CSA each appoint four representatives, while the BSF and CISRO each appoint one representative to the Joint Forum (see the table at the end of this section setting out the membership of the pan-Canadian forums).
The Joint Forum is an informal voluntary group planning to set up an office to study various proposals, to which staff would be assigned. The office would report to the chairman of the Joint Forum and is to be located in the premises of the Ontario Securities Commission.
The Joint Forum is currently chaired by the Superintendent of Pensions of British Columbia, whose successor will be chosen according to an alternating jurisdiction rule.
Mandate
The Joint Forum seeks to coordinate and rationalize the regulation of financial products and services in Canada.12
Its objectives are:
- to improve consumer protection; - to rationalize (simplify) the regulation of financial services and make it more effective; - to adapt the regulatory system to a rapidly changing market to make the market more efficient, limit its costs and increase consumer confidence regarding regulated sectors.
It also works to harmonize regulation in the following areas:
- proficiency requirements for financial planners; - individual variable contracts and mutual funds; - information on investments in capital accumulation plans; - the proficiency of intermediaries and granting of licenses.
12 Idem. 44 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
TABLE 3.4.5 REGULATORY BODIES BELONGING TO PAN-CANADIAN ORGANIZATIONS1
Participants Pan-Canadian forums Québec Ontario British Columbia Alberta Other provinces Canada
CCIR IGFI OFSC2 FICOM Superintendent of Superintendents OSFI Insurance CSA CVMQ OFSC2 BCSC ASC Commissions and authorities CAPSA RRQ OFSC2 Superintendent of Superintendent of Superintendents OSFI and Pensions Pensions Finance Canada CISRO CSF OFSC2 Insurance Council of Alberta Insurance Various provincial ChAD RIBO British Columbia Council organizations BSF Members of the Joint Forum CSA CVMQ OFSC2 BCSC NSSC CCIR IGFI Superintendent of Newfoundland, Superintendent of Saskatchewan and Superintendent of Manitoba BSF BSF CAPSA OFSC2 Superintendent of Superintendent of Superintendent of Pensions Pensions Pensions of Saskatchewan CISRO CSF 1. The acronyms of pan-Canadian organizations and regulatory bodies are:
Pan-Canadian organizations CSA: Canadian Securities Administrators CCIR: Canadian Council of Insurance Regulators CAPSA: Canadian Association of Pension Supervisory Authorities CISRO: Canadian Insurance Services Regulatory Organizations
Regulatory bodies ASC: Alberta Securities Commission BCSC: British Columbia Securities Commission BSF: Bureau des services financiers OSFI: Office of the Superintendent of Financial Institutions ChAD: Chambre de l'assurance de dommages OFSC: Ontario Financial Services Commission CSF: Chambre de la sécurité financière CVMQ: Commission des valeurs mobilières du Québec FICOM: Financial Institutions Commission of British Columbia IGFI: Inspector General of Financial Institutions NSSC: Nova Scotia Securities Commission RIBO: Registered Insurance Brokers of Ontario RRQ: Régie des rentes du Québec
2. Currently, the regulatory body for the securities sector is the Ontario Securities Commission (OSC) while the Financial Services Commission of Ontario (FSCO) is the regulatory body for other sectors. These two bodies are expected to merge in the near future and will be called the Ontario Financial Services Commission. This commission would be Ontario’s sole representative on these pan- Canadian forums.
45 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
3.5 METHODS OF REGULATION
The National Assembly is responsible for passing laws and, as a general rule, the government is responsible for regulations. As far as the regulation of the financial sector is concerned, certain tasks and functions are generally entrusted, under the legislation, to regulatory bodies13 such as the Commission des valeurs mobilières du Québec and the Bureau des services financiers. To carry out these tasks and functions, regulatory bodies are sometimes instructed to formulate relevant regulations to set out rules to control and oversee certain activites. These regulations must generally be approved by the government before they become effective: this is called delegated regulation.
In other cases, the legislation authorizes a regulatory body to delegate certain tasks and functions to self-regulatory organizations (SROs) under the supervision of regulatory bodies. Accordingly, certain private associations or organizations obtain a mandate to regulate or enforce the regulation of a sector of activity on behalf of the regulatory body or the government. This way of structuring tasks and functions in the financial sector is called self- regulation.
There is a third situation, in which associations or organizations elect to voluntarily regulate the activities of players in the financial industry, without having received a mandate to that effect from a regulatory body or from the government. Such voluntary self-regulation of the industry applies only to members of such associations or organizations.
It is important to clearly identify, within the regulatory structure of the financial sector, which from among the government, the regulatory bodies or the associations of the financial sector, will be responsible for carrying out regulatory tasks and functions, to avoid increasing the administrative burden on market players and provide the best protection for the public and ensure that Québec’s fields of jurisdiction in financial matters are safeguarded.
Briefly, here is how the regulatory tasks and functions in Québec’s financial sector are currently divided.
3.5.1 Delegated regulation
Delegated regulation obtains when the legislation grants a financial sector regulatory body the power to make regulations. The body is accordingly the assignee of the regulatory power that usually rests with the government.
The terms and conditions, results and effects of regulations made by such bodies generally remain under the government’s control. In most cases, the government must approve the regulation made by a regulatory body before it
13 See section 3.2 on Québec regulatory bodies. 46 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
can become effective. Such regulation is applicable to all regulated entities just like any other regulation made by the government. The CVMQ, the BSF and the Chambers (CSF and ChAD) have been delegated, by legislation, the power to formulate regulations on certain matters within their jurisdiction.
3.5.2 Self-regulation
One form of self-regulation occurs when a regulatory body delegates certain regulatory tasks or functions to a private organization. Such sub-delegation of functions or tasks must be stipulated in the legislation. The regulatory rules or, in other words, the regulations and methods of regulation formulated by self-regulatory organizations generally remain under the control of the regulatory body that must approve them.
One example of a self-regulatory organization is the Montréal Exchange, which received such recognition regarding the regulation of its members. Accordingly, the CVMQ delegated to the ME the regulation of participants in the ME’s market, and its regulatory rules must be approved by the CVMQ.
3.5.3 Voluntary self-regulation
Another form of self-regulation, which we call voluntary, occurs when the members of an association choose on their own initiative to adopt operating rules or regulations they will observe. These rules are applicable only to the members of the association and are not recognized either by a regulatory body or by the government. This collective way of proceeding is an associative form of self-regulation.
The rules decided by such associations cannot take precedence over those of the government or a regulatory body for two reasons: first, because these associations are not recognized under the legislation as self-regulatory organizations, and second, because they do not necessarily represent all the participants in the sector to be regulated. For example, the rules of professional associations, other than those subject to the Professional Code (R.S.Q., c. C-26), correspond to this form of self-regulation. Membership in these associations is voluntary. Persons who do join undertake to observe certain rules formulated by their association. These rules do not bind all the participants in a field of activity, only the members of the association are bound to observe the rules established on a contractual and non-legal basis.
47 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
3.5.4 The special feature of the Investment Dealers Association
The role played by the Investment Dealers Association (IDA) in regulating investment dealers in Québec, even though it does not have SRO status under the law, should be mentioned.
The IDA is a professional association of brokers founded in 1916. It has taken on the responsibility of regulating the activities of Canadian investment dealers, particularly regarding their business practices and regarding capital requirements. In addition, it receives complaints from consumers and is responsible for disciplining representatives. However, its consumer protection component has been criticized.
While the Securities Act authorizes the IDA to continue regulating its members in Québec,14 the CVMQ has not recognized it as a SRO. In addition, the rules it prescribes for its members appear compulsory and restrictive. When a broker voluntarily joins the IDA, he must undertake, by contract, to observe its rules and regulations and suffer the sanctions it levies.
3.6 THE QUASI-JUDICIAL PROCESS15
In the field of financial sector regulation, the quasi-judicial process found within organizations takes on a particular character that deserves analysis.
3.6.1 The concept of the quasi-judicial function
The quasi-judicial function (jurisdictional function) consists in deciding disputes between parties, i.e. ruling, like a judge, on the existence of facts and impartially applying the rules of law to them. The dispute between parties occurs between a subject and an administrative authority where the latter has previously handed down, or is about to do so, a decision that deprives the subject of a right.
14 Sec. 351, Securities Act. 15 This section is based largely on chapter 6 of the book by Pierre Issalys and Denis Lemieux, L’action gouvernementale: précis de droit des institutions administratives, Cowansville, Les Éditions Yvon Blais inc., 1997, 1332 p.
48 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
3.6.2 Exercise of the quasi-judicial function
There are two forms of quasi-judicial function in the government administration.
The first is the administrative tribunal, i.e. an organization of the administration specializing solely in the quasi-judicial function, such as the Administrative Tribunal of Québec and the Labour Tribunal.
The second is a body that exercises both regulatory functions and quasi- judicial functions, such as the Commission des valeurs mobilières du Québec, the Régie des alcools, des courses et des jeux and the Canadian Radio-television and Telecommunications Commission.
3.6.3 Advantages of the quasi-judicial function
The quasi-judicial function is entrusted to a body to avoid turning to the courts in the first instance. In matters of economic regulation, short-term and specific initiatives are required. Accordingly, to resolve disputes, in some cases bodies have been created to exercise the quasi-judicial function, and in others, the quasi-judicial function has been introduced within regulatory bodies.
As a result, decisions are reached:
- with less formality, at lower cost and more efficiently; - in a way that is more accessible, faster and better perceived by subjects and the administration; - with the benefit of more extensive, and eventually multi-disciplinary, expertise; - with knowledge of the specific context and technical aspects specific to the matter in dispute.
3.6.4 The quasi-judicial function and the regulatory function
In the financial sector, regulatory bodies are formed to regulate a field of activity. These bodies wield administrative, quasi-judicial and sometimes regulatory power. Accordingly, a regulatory body acts like a tribunal at times. The regulatory function and the quasi-judicial function go hand in hand and are closely linked.
Regulatory bodies are often confused with administrative tribunals. The two types of authority exercise the quasi-judicial function for technical, efficiency and accessibility reasons, while maintaining the rules of impartiality and independence that are essential to the judicial function.
49 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
However, regulatory bodies that exercise the quasi-judicial function differ from administrative tribunals mainly because regulatory bodies apply both objective and subjective standards, such as the public interest, while administrative tribunals apply purely objective legal standards to situations of fact.
In addition, the regulatory body oversees a sector of economic activity on a continuous basis. It has more extensive powers than an administrative tribunal. The body is called upon to rule on more “open” questions, taking into account a broader factual context and on the basis of rules that are not always legal by nature. Accordingly, it has extensive discretionary power.
In addition, the regulatory body differs from the traditional legal function. Unlike a judge who is called on to reach a decision only when a dispute is brought before him, the regulatory body’s role is proactive: it can investigate and impose administrative or penal sanctions against a player who breaches the rules.
Lastly, the decision-making process of a regulatory body is more complex than that of an administrative tribunal because it applies to economic situations affecting a myriad of interests: competitors, suppliers, customers, consumers, communities, professional associations, etc. Sometimes, a decision may concern a group of individuals and companies. At other times, the body may rule on a particular situation and the decision-making process then becomes very formal.
3.6.5 Problems for a regulatory body in exercising the quasi- judicial function
We observe that the main problem of any administrative authority exercising both regulatory functions and quasi-judicial functions involves the guarantee of independence and impartiality of the individuals charged with exercising quasi-judicial functions compared to other regulatory tasks.
Under the Charter of Human Rights and Freedoms (R.S.Q., c. C-12), persons or organizations exercising quasi-judicial functions are considered as tribunals for the purposes of the Charter and are thus subject to the obligations that must be taken into account in their structure and operation.
A number of situations immediately spring to mind. For instance, a regulatory body, unlike an administrative tribunal, is not limited to the evidence laid out before it by the subjects. It can make use of its human and material resources to carry out its mission: which gives it an advantage that, however, creates obligations in terms of the decision-making process. This situation imposes constraints with respect to observance of principles of natural justice or fair treatment of subjects.
50 EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3
In addition, the institutional independence and intellectual autonomy of the authority exercising the quasi-judicial function must be preserved from the influence of the authority exercising other regulatory functions. These essential attributes of the judiciary may be compromised or appear to be compromised when, for instance, the quasi-judicial authority uses common services within the regulatory body (investigators, legal advisers, secretaries, communication services, staff, etc.). A barrier must therefore be raised between certain activities.
51 52 UNIVERSAL REGULATORY PRINCIPLES
CHAPTER 4
53 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
54 CHAPTER 4 UNIVERSAL REGULATORY PRINCIPLES
4.1 INTERNATIONAL ORGANIZATIONS AND REGULATORY PRINCIPLES
It appeared useful to examine international organizations promoting cooperation among regulatory bodies and harmonization of rules in the financial sector. The exercise helped deepen the Task Force’s consideration of regulatory principles in the financial sector.
This chapter describes the core principles developed by major international organizations.
4.1.1 The International Association of Insurance Supervisors
The International Association of Insurance Supervisors (IAIS) was formed in 1994. It represents insurance regulatory bodies from over 100 jurisdictions including Québec. Its objectives are:
- promote cooperation among insurance regulatory authorities, both domestically and internationally, with a view to maintaining an efficient, fair and safe insurance market for the benefit and protection of policyholders; - unite the efforts of regulatory bodies to develop oversight standards that members may choose to apply; - encourage cooperation with other international bodies; - assist each other to maintain the integrity of markets; - encourage regulatory bodies to exchange information to promote the development of domestic insurance markets.
According to the IAIS, a regulatory body should apply regulatory principles to all insurers under their jurisdiction. Application of these principles may, if need be, be completed with additional measures.
More specifically, the IAIS sets out core principles for the regulatory body. According to these principles, the regulatory body must be structured in such a way as to fulfil its basic mission, i.e. maintain a fair, safe and stable insurance market for the benefit of policyholders. It must be able to carry out its functions efficiently. Among other things, the regulatory body must:
- be operationally independent and accountable in the excersing of its functions and powers; - have adequate powers, legal protection and financial resources to perform its functions and exercise its powers;
55 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
- adopt a clear, transparent and consistent regulatory and supervisory process; - clearly define the responsibility for decision making; - hire, train and maintain sufficient staff with high professional standards who follow the appropriate standards of confidentiality.
The IAIS16 has also adopted various other core principles for insurance regulation. These principles range from the need to hold a license to operate in the insurance field to the quality of management and managers, rules for change of control, rules for corporate governance, solvency rules, rules for diversification of investment risks, acceptable liability standards, sanctions, etc.
4.1.2 The Basel Committee
The Basel Committee (Basel Committee on Banking Supervision) was formed in 1974 by the central banks of the G10 countries, including Canada. It has no official supranational authority, but formulates broad regulatory principles in the expectation that national regulatory bodies will implement them.
In 1977, the Basel Committee released a document on the core principles for supervision of deposit-taking institutions. These core principles are seen as minimum requirements. Their objective is national and international financial stability. These principles have been approved by the governors of the central banks of the G10 countries. It should be noted that the Basel Committee was assisted in its work by a large number of organizations other than the central banks of G10 countries.
Seven basic precepts
The basic task of supervision is to ensure that deposit-taking institutions operate in a safe and sound manner and that they hold capital and reserves sufficient to support the risks that arise in their business.
Here are the seven basic precepts on which the core principles mentioned below depend.
1. The key objective of supervision is to maintain stability and confidence in the financial system, thereby reducing the risk of loss to depositors and other creditors.
2. Regulatory bodies should encourage and pursue market discipline by encouraging good corporate governance (through an appropriate structure and set of responsibilities for a bank’s board of directors and
16 See the IAIS website: www.iaisweb.org . 56 UNIVERSAL REGULATORY PRINCIPLES Chapter 4
senior management) and enhancing market transparency and surveillance.
3. In order to carry out its tasks effectively, a regulatory body must have operational independence, the means and powers to gather information both on and off site, and the authority to enforce its decisions.
4. The regulatory authority must understand the nature of the business it is overseeing and ensure, to the extent possible, that the risks incurred by deposit-taking institutions are being adequately managed.
5. Effective supervision of deposit-taking institutions requires that the risk profile of individual institutions be assessed and supervisory resources allocated accordingly.
6. The regulatory body must ensure that deposit-taking institutions have resources appropriate to undertake risks, including adequate capital, sound management, and effective control systems and accounting records.
7. Close cooperation with other regulatory bodies is essential, particularly where operations cross national boundaries.
Regulatory core principles
We have identified, from among the core principles,17 a number of items that deal with the regulatory body.
- A regulatory body must have clear responsibilities and objectives. It must possess operational independence and adequate resources. There must be a suitable legal framework for its powers of intervention. It must have legal protection in performing its functions. Arrangements for sharing information between regulatory authorities and protecting the confidentiality of such information should be in place.
- The regulatory body must have regular contact with the management of deposit-taking institutions and a thorough understanding of the institution's operations. In addition, the regulatory authority must have a means of collecting and analyzing reports and statistical returns from financial institutions on a solo and consolidated basis. It must have a means of independent validation of supervisory information.
- Lastly, the regulatory body must have the ability to supervise a financial conglomerate on a consolidated basis and have at its disposal adequate supervisory measures to bring about timely corrective action when institutions fail to meet solvency requirements (such as minimum capital
17 See “Core Principles for Effective Banking Supervision”, Basel Committee, September 1997, 46 p., available at: www.bis.org/publ/bcbs.htm .
57 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
adequacy ratios) or other rules. In extreme circumstances, this should include the ability to revoke the institution’s license.
4.1.3 The International Organization of Securities Commissions
The International Organization of Securities Commissions (IOSCO) seeks to help its members:
- to cooperate to promote high regulatory standards with a view to maintaining a fair and efficient market; - to exchange information; - to unite their efforts to establish standards and an effective surveillance of international securities transactions; - to provide mutual assistance to ensure the integrity of the markets by a vigorous application of the standards and by effective enforcement against offences.
IOSCO membership comprises regulatory bodies from 91 jurisdictions, including Québec.
IOSCO has formulated a number of core principles of which the following relate to regulatory bodies.
- The responsibilities of the regulator should be clear and objectively stated.
- The regulator should be operationally independent and accountable in the exercise of its functions and powers.
- The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
- The regulator should adopt clear and consistent regulatory processes.
- The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.
- The regulator should have comprehensive inspection, investigation and surveillance powers.
- The regulator should have comprehensive enforcement powers.
- The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
58 UNIVERSAL REGULATORY PRINCIPLES Chapter 4
- The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
In addition, IOSCO has adopted the following core principles in relation to self-regulatory organizations.
- The regulatory system should make appropriate use of professional authorities that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to the size and complexity of the markets.
- Professional authorities should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
In addition, according to IOSCO, the three core objectives of securities regulation are: the protection of investors; ensuring that markets are fair, efficient and transparent; and the reduction of systemic risk.18
4.1.4 The North American Securities Administrator Association
The North American Securities Administrator Association (NASAA) represents all the securities authorities of the American states, the District of Columbia, Puerto Rico, Mexico, Québec and the other provinces of Canada, a total of 66 securities regulatory bodies.
NASAA was formed in 1919 and is the oldest international organization devoted to investor protection. It is headed by a ten-member board of directors. It has no regulatory power, but makes recommendations to its members and to market players.
Its areas of activity are:
- protecting investors and educating the public; - standardizing regulation, forms, review and registration processes, etc.; - making recommendations to authorities to adopt or amend regulations.
NASAA19 has five sections: broker-dealers, corporate finance and administration, enforcement, investment advisers, and investor education.
18 See “Objectives and Principles of Securities Regulation”, IOSCO, September 1998, 74 p., available at: www.iosco.org/iosco.html .
19 See the following website: www.nasaa.org .
59 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
60 UNIVERSAL REGULATORY PRINCIPLES Chapter 4
REFORMS UNDERTAKEN BY OTHER GOVERNMENTS
CHAPTER 5
61 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
62 CHAPTER 5 REFORMS UNDERTAKEN BY OTHER GOVERNMENTS
In recent years, many jurisdictions throughout the world have carried out a thorough examination of their financial sector regulation in response to its decompartmentalization. In most cases, these examinations have led to reforms that have been announced or initiated.
The Task Force studied some of these reforms, namely those in the United Kingdom, France, Australia and Ontario, to determine to what extent the situations elsewhere are comparable with the one in Québec and to examine the solutions developed in these jurisdictions.
The situation in the United States was also studied, in view of the importance of the American market. The United States has recently taken a step to decompatmentalize its financial sector and integrate, to some degree, the regulation of financial institutions with the passing of the Gramm-Leach-Bliley Act in 1999. Accordingly, this model has little relevance, since decompartmentalization was initiated in Québec over 15 years ago.
5.1 THE UNITED KINGDOM
In 1997, the British Parliament concluded that the financial regulatory system was in need of reform. It observed that the regulation of the financial sector, based on fields of activity, no longer corresponded to the dynamic demands of financial markets. At the time, there were over ten regulatory bodies and SORs in the United Kingdom, each responsible for a field of activity such as banking, securities, insurance, etc. This plethora of organizations was very costly for companies and subjected them to different regulatory regimes depending on the product or service provided. Similarly, the consumer had to deal with many organizations to obtain information or to complain, and with a large number of dispute settlement mechanisms. This left him confused by the financial system’s morass of regulations and oversight structures.
To reduce the regulatory and administrative burden by eliminating duplication of actions by organizations, and to modernize and simplify the financial markets regulatory structure, the British Parliament decided to pass a single statute to control the entire financial sector, and entrust all regulatory and oversight responsibilities for financial markets to a single organization, the Financial Services Authority (FSA). In addition, the government decided not to use SROs to regulate the financial sector.
In 1997, the reform began with the transfer to the FSA of supervision of banking and securities, performed by the Bank of England and the Securities and Investments Board respectively. The other regulatory authorities gradually combined their operations and staff with the FSA and concluded agreements with it to carry out their responsibilities stipulated in various statutes. These other authorities are: the Building Societies Commission, the Friendly Societies Commission, the Investment Management Regulatory
63 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
Organisation, the Personal Investment Authority, the Registry of Friendly Societies, the Securities and Futures Authority and the HM Treasury.20
In 2000, after consultation, the British Parliament passed the Financial Services and Markets Act. This legislation, all of whose provisions are to become effective by the end of 2001, stipulates that the regulation and oversight of the entire British financial industry is to be integrated under the FSA, thus officializing the passage from a structure consisting of many regulatory bodies and SROs to a structure based on a single strong regulatory body answerable to the British Parliament.
The British legislation is based on four core objectives that guide and frame the entire financial sector integration process:
- confidence in the market: maintain confidence in the financial system; - public education and knowledge: promote a better understanding of the financial system; - consumer protection: ensure an appropriate degree of protection for consumers (not the same thing as the traditional objective of eliminating all risk); - curb financial crime: elimnate fraud, money laundering, etc.
The legislation stipulates that consultation mechanisms, chiefly committees of interested parties, will head the entire consultation procedure undertaken by the FSA. In particular, a Consumer Panel and a Practitioner Panel are stipulated.
The FSA publishes discussion papers to inform, but also collect comments from, the public, professionals and specialists concerning the policies, strategies and mechanisms it sets up to achieve its objectives. In addition, it holds public hearings in many regions of the country, works with professional associations and makes the documents it produces publicly available.
When members of the Task Force met with their British guest, William Blair,21 he maintained that the single organization scenario results in a regulatory structure that is more appropriate to today’s increasingly integrated financial markets. Mr. Blair, a consultant to the British government, stated that the consultation mechanisms put in place, among other things, help maintain close contact with industry representatives, whereas previously such contact had been maintained through the involvement of SROs, in various fields of activity, in the regulatory structure.
20 To oversee insurers. 21 See the biographical note in Appendix 3. 64 REFORMS UNDERTAKEN BY OTHER GOVERNMENTS Chapter 5
5.2 FRANCE
In February 2001, the French Minister of the Economy, Finance and Industry tabled draft legislation in the National Assembly to reform the regulatory structure of the financial sector. The bill followed an examination of the situation that identified the new issues of market integration, the restructuring of stock markets (creation of Euronext resulting from the consolidation of the Paris, Brussels and Amsterdam stock exchanges), growing competition among financial centres, the emergence of financial conglomerates, the inter- penetration of banking and insurance activities and the arrival of new players, particularly on the Internet.
French government authorities concluded that it was necessary to review the regulation of financial activities after observing that:
- the trades and techniques of banks and insurers are growing more similar: accordingly, it is appropriate that banking and insurance solvency regulatory authorites coordinate their oversight and resources; - in the context in which European bourses are forming alliances, French regulatory authorities appear too numerous and too segmented and are incapable of optimal action regarding foreign institutions: the structure needs to be rationalized; - customers of banks and insurers are demanding more attention and concerted action: the reform must broaden their representation; - the draft legislation seeks to give more legal security to the actions of regulatory authorities to better protect savers.
Key components of the reform
The reform has two main focal points, namely financial markets and prudential management. Once the legislation is passed, the three existing securities organizations (the Commission des opérations de Bourse or COB, the Conseil des marchés financiers or CMF and Conseil de discipline de la gestion financière) will be merged to form the Autorité des marchés financiers or AMF. The existence of a single organization will help France to participate in the regulation process in Europe of an integrated capital market. In addition, the French government is currently promoting greater similarity among, rather than a merger of, prudential authorities in the banking and insurance fields.
Securities
According to the project that has been announced, the new French regulatory body is an independent and financially self-sufficient administrative authority. In addition, the AMF performs the missions currently devolved to the three merged organizations. Accordingly, it has authority in three segments, namely the organization and operation of markets, public bids and the rules of professional practice applicable to players (issuers, intermediaries and managers).
65 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
According to the reform, the AMF consists of a plenary college (a board of directors) and, for certain attributions, two specialized commissions (for public bids and for sanctions). The plenary college of fifteen members consists of a majority of members of senior jurisdictions and qualified persons appointed by the state. Market players are represented, as are financial sector employees. Members of the plenary college are appointed for a term of four years, which is renewable once. A government commissioner, appointed by the responsible minister, has a seat on the plenary college and the two commissions without a vote in deliberations.
The chairman of the AMF is selected from the plenary college and is appointed by the French government. A vice chairman is appointed by the college from among its members. The AMF is headed by secretary general appointed by the plenary college, upon being nominated by its chairman, and approved by the minister.
The regulations made by the AMF must be approved by the responsible minister. This measure, together with the presence of the government commissioner, ensures that the rules of the AMF are consistent. There is also provision for the government to stand in for the AMF if it proves ineffective, meaning that ultimate responsibility lies with the government.
The commission on public bids consists of representatives of market players, half of whom are members of the plenary college and whose chairman is the chairman of the plenary college. The commission on sanctions consists of members of the plenary college and exercises the AMF’s powers of disciplinary and administrative sanction.
When the Task Force met with the French guest, Jacques Mistral,22 he mentioned that the securities regulatory bodies were consolidated in particular to improve the effectiveness of represention in international forums and in cases of cooperation with other jurisdictions, such as the supervision of Euronext.
Solvency regulatory authorities
Another purpose of the French reform is to create conditions for greater and more effective cooperation between the two existing oversight bodies regarding solvency regulation, namely the Commission bancaire and the Commission de contrôle des assurances. It includes the following three components.
- An “organizational” link has been formed: on the boards of directors, five of the members are common to the two commissions. The chairmen of the two bodies are ex officio members of the other body. The government also has a representative on each body.
22 Idem. 66 REFORMS UNDERTAKEN BY OTHER GOVERNMENTS Chapter 5
- Besides the interlocking links, the commissions hold joint meetings at least twice a year to deal with matters of common interest (for instance, a comprehensive examination of the situation of a mixed banking – insurance group).
- Membership of the Commission bancaire and of the Commission de contrôle des assurances is harmonized: the member of the Conseil d’État and that of the Cour de cassation are appointed members of the two bodies.
According to Mr. Mistral, organization of the regulatory structure of the financial sector must make allowance for the potential risk of conflict of interests between consumer protection activities and solvency regulation activities. He added that it is necessary to strengthen the links between regulatory bodies because many financial institutions are active in a variety of fields, such as banking and insurance (“bankinsurance”). One of the ways France has advocated to work towards this objective is to appoint common directors to the boards of these bodies. In addition, he insisted that regulatory bodies must be attentive to changes that occur in their industry, which encourages appropriate intervention that takes the specific features of their field of acitivity into account. Lastly, he concluded that the French reform is eminently pragmatic, that it must not be viewed as a rejection of a single organization but as the best scenario under the circumstances. He did not deny that a single organization might wield more authority and enjoy greater independence.
5.3 AUSTRALIA
Australia recently reformed the entire regulatory regime of its financial sector as well as its oversight structure. In 1996, the government instructed a task force, the Financial System Inquiry or Wallis Commission, to identify the driving forces of change in the financial system and recommend ways to improve the regulatory model in effect. The Wallis report was submitted to the Australian government in March 1997. The government acted on it by passing legislation setting up the new regulatory structure in 1998.
The reform led to the revision of all Australia’s legislation affecting the financial sector and to the development of a new regulatory structure. This structure is based on two bodies, the Australian Securities and Investments Commission (ASIC), responsible for regulating markets, i.e. the sales, advice and information disclosure activities relating to the financial products and services of brokerage houses, banks, insurers and pension plans, and the Australian Prudential Regulation Authority (APRA), responsible for the prudential regulation of financial institutions.
In addition to these two organizations, the Central Bank of Australia is responsible for controlling systemic risk, monetary policy and the payments system, and the Australian Competition and Consumer Commission is
67 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
responsible for competition legislation and consumer protection in general, but not financial products and services that are now the responsibility of ASIC. ASIC and APRA are so-called “functional” agencies that replace “institutional” regulatory bodies.
Prior to the reform, Australia’s financial sector was regulated by four federal organizations as well as state organizations. The Central Bank of Australia was responsible for monetary policy, the payments system and for regulating banks. The Insurance & Superannuation Commission was responsible for solvency and information disclosure rules applicable to insurers and to pension plans. The Australian Securities Commission was responsible for the rules applicable to stock exchanges and brokers, the integrity of securities markets, disclosure rules applicable to investment products and for regulations applicable to all Australian corporations. Lastly, the Australian Competition and Consumer Commission had the same responsibilities as it does now, namely promotion of healthy competition and consumer protection. The states were responsible for administering laws on Building Societies and credit unions. This made for a farily segmented regulatory structure.
Justification of the reform
To justify the reform, the Australian government pointed to the need to improve the performance and efficiency of its financial system, its concern regarding the disparate regulation of similar products and activities, as well as its concern regarding the efficiency of regulation by the states.
Other factors were also taken into consideration: the changing needs and profile of consumers, greater attention paid by companies to efficiency and competition, market globalization, the growing presence of conglomerates and disintermediation.
The Task Force’s guest from Australia, representing ASIC, Ms. Delia Rickard,23 mentioned that the scenario adopted by Australia gives preference to regulation by function but does not completely eliminate dual coverage by regulatory bodies. In addition, she noted that this reform was also consistent with the government’s intention to deregulate, which had been put forward in the early 1980s. Lastly, she maintained that there is no need to wait for a financial crisis to reform the financial sector. She maintains that recent changes in the financial sector justify a review of the oversight structure and regulatory framework.
5.4 ONTARIO
In the 2000-2001 Budget Speech, the Ontario government announced its intention to combine the regulation of its financial sector within a single body, namely the Ontario Financial Services Commission. This responsibility is
23 Idem. 68 REFORMS UNDERTAKEN BY OTHER GOVERNMENTS Chapter 5
currently split between two bodies: the Ontario Securities Commission and the Financial Services Commission of Ontario. The latter is itself the result of the consolidation, in July 1998, of the Ontario Insurance Commission, the Pension Commission of Ontario and the Deposit Institutions Division of the Ministry of Finance.
In September 2000, the Ontario government published a discussion paper entitled “Improving Ontario’s Financial Service Regulation: Establishing a Single Financial Service Regulator; a Discussion Paper”. In April 2001, draft legislation was released for discussion, showing the legislative amendments needed to combine these two bodies.
Publication of the draft legislation enabled a detailed examination of the reform Ontario has undertaken. Under the draft legislation, the Ontario Financial Services Commission is headed by a board of directors with a maximum of 18 directors, including a chairman and three vice chairmen. A superintendent of pension plans and a superintendent of insurance assume the regulatory duties for these sectors. A separate Pension Plans Tribunal has also been set up to hold hearings under the pension plan legislation. The new commission may recognize self-regulatory organizations. It would not hand its revenue over to the Ontario Treasury, except for amounts received in settlement of lawsuits.
The Ontario government justifies its reform by the changes in Canada’s financial sector that reflect the new needs of consumers and business, the demand for new products and services, the arrival of new technology and global competition of specialized financial establishments and financial markets. In addition, the supporters of the new regulatory body argue that the changes to the regulatory system in Canada have led to the disappearance of the rules that distinguished the traditional four pillars of finance, namely banking, trust companies, insurance and securities. It is now virtually impossible to distinguish between many financial products offered by insurers, deposit-taking institutions and brokerage houses. With respect to the distribution of financial products and services in Ontario, about 70% of life and health insurance agents are also registered as investment dealers.
Lastly, the Ontario government believes that the consumer finds it difficult to tell the difference between products and that he is entitled to comparable information and protection when he purchases similar products. To do so, it seemed necessary to combine the two commissions.
Other reforms
Besides these reforms, governments in many jurisdictions are entrusting or are in the process of entrusting responsibility for regulating the financial sector to a single body. Examples of such jurisdictions include Ireland, Denmark, Norway, Sweden, Japan, Singapore, South Korea and Saskatchewan.
69 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
70 REFORMS UNDERTAKEN BY OTHER GOVERNMENTS Chapter 5
KEY OBSERVTIONS OF THE BRIEFS SUBMITTED TO THE TASK FORCE
CHAPTER 6
71 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
72 CHAPTER 6 KEY OBSERVATIONS OF THE BRIEFS SUBMITTED TO THE TASK FORCE
After meeting with representatives of Québec regulatory bodies, the Task Force issued a public notice to invite individuals or organizations wishing to express an opinion to submit a brief. The same invitation was extended to targeted bodies and 24 briefs24 were submitted. While the consultation was general in scope, it was mainly regulated entities and regulated entities’ groups that responded to the invitation.
The briefs propose two types of analyses, i.e. comprehensive analyses that examine all fields in the financial sector, and sectoral analyses, focusing on only one specific field. Thirteen interveners prepared a comprehensive analysis, although it should be noted that the real estate brokerage and retirement plans fields are not always considered in these analyses. The 11 remaining analyses are sectoral.
Most of the interveners expressed support for the Minister of State for the Economy and Finance’s initiative to establish the Task Force. The Canadian Life and Health Insurance Association clearly expressed this support in the introduction to its brief:
In light of these changes, Québec has innovated by quickly and often in an original manner adapting the regulatory structure applicable to the sector. Québec was the first province in Canada to group together in 1978 bodies that oversee and regulate financial institutions under the aegis of the Inspector General of Financial Institutions, to allow the deregulation of financial institutions, in 1984, and implement the multidisciplinary distribution of products in 1989 and 1998. The establishment of the Task Force on Financial Sector Regulation reflects this tradition, especially, on this occasion, from the standpoint of consumer protection and the streamlining of the regulatory burden. [OUR TRANSLATION]
6.1 PINPOINTING THE PROBLEMS RAISED
Whether the analysis presented was comprehensive or sectoral, the main message was almost always the same, i.e. the high number of regulatory bodies in Québec is causing several problems.
The problems pinpointed can be divided into the following categories:
- the needlessly cumbersome administrative burden; - confusion among consumers; - problems stemming from the representation of the industry in regulatory bodies and self-regulatory organizations; - problems pertaining to regulatory power; - excessively high direct costs;
24 The briefs can be consulted on the Task Force’s Web site (www.gesef.gouv.qc.ca).
73 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
- impediments to participation in the harmonization process; - regulation-related problems; - problems stemming from the consolidation of regulatory functions.
6.1.1 The needlessly cumbersome administrative burden
The key factors pinpointed that make the administrative burden cumbersome are:
- overlapping responsibilities between various regulatory bodies; - costs engendered by interaction between a regulated entity and several of these regulatory bodies; - the lack of coordination of the bodies’ initiatives or administrative demands.
Overlapping responsibilities
The sharing of regulatory responsibility by several bodies causes overlapping that makes more cumbersome the administrative burden borne by regulated entities. The Insurance Bureau of Canada, which represents most damage insurers, made the following comment:
The regulation of insurers’ operations by two different bodies, whose mandates and powers occasionally overlap, is a significant administrative and regulatory burden for this industry. The regulatory structure governing the operations of Québec damage insurers is the most cumbersome and complex of all of the Canadian provinces (page 1 of the brief). [OUR TRANSLATION]
The Association québécoise de la planification financière, which is made up of Québec financial planners, commented as follows in its brief:
It is often difficult for practitioners to know where and to whom they should turn when problems arise or when they simply wish to obtain information.
The regulatory bodies are frequently confused about their respective mandates (page 11). [OUR TRANSLATION]
Costs engendered by interaction between a regulated entity and several regulatory bodies
Regulated entities must devote time and energy to their dealings with a regulatory body and the proliferation of such bodies increases the time and energy required accordingly.
The Conseil des fonds d’investissement du Québec, which represents most manufacturers and pooled investment fund firms, noted that:
The red tape generated by the need to take into account the numerous regulatory bodies is obvious. The firms in question must allocate significant
74 KEY OBSERVATIONS OF THE BRIEFS SUBMITTED TO THE TASK FORCE CHAPTER 6
resources to understanding, implementing and following the rules and procedures proposed by each of the bodies. It goes without saying that this red tape engenders costs that are inevitably passed on to the consumer. (page 4 of the brief) [OUR TRANSLATION]
The Canadian Bankers Association, made up of the Canadian banks, made the following comment:
As we noted earlier, we must now deal with three regulatory bodies instead of a single one, which only serves to needlessly complicate oversight and regulation in this sector and unduly increase the costs of all interveners. (page 35 of the brief) [OUR TRANSLATION]
The lack of coordination of the bodies’ initiatives or administrative demands
The multiplicity of bodies makes it very hard to coordinate initiatives and administrative demands.
The Mouvement des caisses Desjardins noted in this regard that:
whether from the standpoint of the protection of personal information, credit contracts, unclaimed deposits or information technology, the interveners are numerous and the user has trouble understanding the system. The same problem is apparent in financial institutions since the multiplicity of access points represents as many sources of requests for information, research or investigations as of the handling of complaints. (page 11 of the brief) [OUR TRANSLATION]
6.1.2 Confusion among consumers
Unfortunately, no voluntary consumer defence group submitted a brief. However, several interveners mentioned that the large number of bodies created a great deal of confusion among consumers.
The Conseil des fonds d’investissement du Québec made the following observation:
Various regulatory bodies are multiplying their initiatives aimed at the public, on their Web sites, in their brochures and even on television, some more vigorously than others, thus confusing the public. (page 5 of the brief) [OUR TRANSLATION]
The Réseau des notaires planificateurs financiers du Québec, comprising notaries who devote themselves, by and large, to financial planning, noted that:
In addition, this situation creates entirely absurd confusion for the consumer. (page 6 of the brief) [OUR TRANSLATION]
75 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
The Investment Dealers Association of Canada, which acts as a professional association and self-regulatory organization in respect of the Canadian securities industry, indicated that:
From the standpoint of consumer protection, we believe that it is desirable to submit these complaints, regardless of the financial product or service in question, to a central body, which, for the purpose of this letter, we will call the “new body.” We acknowledge that it is sometimes hard for consumers to identify among various regulatory and self-regulatory bodies that have jurisdiction over financial services the one to which they must submit complaints. (page 1 of the brief) [OUR TRANSLATION]
The Canadian Bankers Association made the following observation:
At present, the public is undoubtedly very confused when it is a question of lodging a complaint with a regulatory body, given the large number of self- regulatory and regulatory bodies. (page 16 of the brief) [OUR TRANSLATION]
There is no choice but to conclude that it is very hard for Québec consumers to ascertain where they must turn for assistance.
6.1.3 Problems stemming from the representation of the industry in regulatory bodies and self-regulatory organizations
Some briefs allude to problems stemming from the representation of the industry in regulatory bodies and self-regulatory organizations. They mention that the regulations adopted by certain bodies are unfair to regulated entities, which are poorly represented in such bodies. Other briefs note that industry representatives tend to favour the industry’s interests to the detriment of consumer protection.
For example, the Regroupement des consultants en avantages sociaux du Québec, comprising roughly 240 members that distribute fringe benefits, insurance and group annuities, commented as follows:
What do property insurance and life and health insurance have in common aside from the principles of insurance? To put representatives of each of these classes at the same table does not automatically raise the level of debate. Do the representatives of these two classes share any interests whatsoever and knowledge of the other class and does this not lead to the risk of voting alliances that are out of place in a regulatory body? (page 8 of the brief) [OUR TRANSLATION]
Partenaires Cartier, which groups together six brokerage firms, made this observation:
However, all too often, their associations are, basically, dedicated to defending their members’ economic interests, before fulfilling their self-
76 KEY OBSERVATIONS OF THE BRIEFS SUBMITTED TO THE TASK FORCE CHAPTER 6
regulatory functions. The system should not allow conflicts of interest in which the rules are established more often than not in light of economic considerations, competition between those who control these associations and those who belong to them simply because they have no other choice. (page 6 of the brief) [OUR TRANSLATION]
We note that it is very hard to ensure representation of the “industry” in regulatory bodies without conflicts of interest arising.
6.1.4 Problems pertaining to regulatory power
Several briefs mentioned that the multiplicity of regulatory bodies authorized to adopt regulations leads to considerable regulatory incoherence.
For example, the Canadian Bankers Association stated that:
In the same vein, we believe that the bodies responsible for administering the Act are needlessly numerous and that there is good reason to extensively review the regulatory structure pertaining to the intermediaries in question. Indeed, the multiplicity of oversight and regulatory bodies makes it very hard if not practically impossible to fully harmonize the rules between the disciplines regulated and to achieve cooperation among intermediaries because of often antagonistic interests. (page 8 of the brief) [OUR TRANSLATION]
6.1.5 Excessively high direct costs
Certain briefs pointed out that the large number of regulatory bodies engenders high costs for regulated entities, as the examples below suggest.
The Canadian Bankers Association observed that:
In this respect, there is no choice but to accept that the fee structure of various oversight bodies is cumbersome, costly and growing steadily. Moreover, it is directly proportional to the number of entities that intervene in the administration of the Act. (page 10 of the brief) [OUR TRANSLATION]
Le Groupe Promutuel, a federation that groups together 35 mutual insurance companies, noted that:
However, one drawback of this method of financing in some instances is that public agencies are compelled to strive increasingly to balance their budgets, which tends to significantly increase management fees and costs demanded of users. The number and size of the bodies that oversee the financial sector have, of course, exacerbated the problem. In recent years and in the course of various reforms of the legislation governing the financial sector, the cost of licences, accreditations and various fees have, in some cases, more than doubled, a reflection of the complexification of the regulatory system. (point 1 of the brief) [OUR TRANSLATION]
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The Mouvement des caisses Desjardins made the following remark:
The multiplicity of regulatory bodies imposes heavy fees on institutions and licence holders. (page 5 of the brief) [OUR TRANSLATION]
6.1.6 Impediments to participation in the harmonization process
A number of interveners maintained that the division of responsibilities, resources and powers among several bodies is reducing their ability to promote Québec’s viewpoint in Canadian or international forums.
The Corporation des assureurs directs de dommages du Québec, an association comprising 12 direct property insurers, noted that:
We believe that the division of Québec’s regulatory powers among a large number of bodies weakens the bodies and Québec’s image abroad. (page 5 of the brief) [OUR TRANSLATION]
The Regroupement des cabinets de courtage d’assurance du Québec, which represents 613 property insurance brokerage firms, issued the following warning:
Regulatory and institutional mimicry has its limits. A society should not relinquish the ideal that it has set for itself with respect to behaviour in a sector solely with a view to harmonization. (page 12 of the brief) [OUR TRANSLATION]
6.1.7 Regulation-related problems
Several interveners took advantage of the opportunity afforded them by the Task Force to criticize the regulations, regardless of the regulatory structure.
Essentially, they noted that the regulations:
- are overly cumbersome; - too complex; - inadequate in some instances; - engender substantial costs.
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6.1.8 Problems stemming from the consolidation of regulatory functions
Several briefs emphasized problems stemming from the consolidation of regulatory functions. A number of sectoral interveners pointed out that their fields are specific and that it is important for them to have access to competent individuals in their fields.
For example, the Investment Dealers Association of Canada commented:
In our view, the centralization of regulations must not be undertaken to the detriment of the maintenance of the in-depth expertise that it demands and must give priority to greater administrative efficiency. These two conditions are essential for the attainment of the two objectives set by the minister. (page 2 of the brief) [OUR TRANSLATION]
6.2 PINPOINTING THE SOLUTIONS PROPOSED
Most of the briefs suggest that change is necessary. The solutions proposed consist, by and large, in the consolidation of regulatory bodies.
6.2.1 A single body
Among the interveners who submitted a comprehensive analysis, six favour the establishment of a single body. However, it should be noted that the degree of elaboration of the proposals varies considerably. Some briefs described the body’s operation in detail, while other briefs provided very few details.
Five of the six briefs proposed the establishment of branches in the single body that would oversee specific fields or activities or would assume specific responsibilities in respect of consumers, e.g. the handling of complaints. Some interveners suggested that assistants to the head officer manage these units.
Three interveners said that one person should head the body.
Four interveners suggested relying on advisory committees, representing the industry and the public, which would help the body elaborate regulations and thus replace the boards of directors of the existing bodies.
6.2.2 Two bodies
Three interveners proposed that two regulatory bodies be established, which would share responsibility for regulation. However, the division of
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responsibilities differs depending on the model proposed. In two proposals, one of the bodies would oversee the solvency of financial institutions and the other body, the distribution of financial products and services. In the other proposal, one of the bodies would be responsible solely for consumer protection (information and complaints) and the other body, for regulating financial markets.
6.2.3 Reorganization of responsibilities
Ten interveners suggested a different division of responsibilities from what is now the case, either through the divisions of a single body or through existing bodies. For example, some suggested that the BSF be responsible for everything pertaining to distribution, including distribution by unrestricted practice brokers, and that the CVMQ be responsible solely for regulating the securities market. Other interveners proposed that the BSF be responsible only for regulating the distribution of insurance and that the CVMQ be responsible for all facets of securities.
6.2.4 Self-regulatory organizations
The viewpoints expressed on self-regulatory organizations vary. Some interveners called specifically for the possibility of resorting to self-regulatory organizations, while others completely eliminated recourse to such organizations and even participation by industry representatives in the management of regulatory organizations. Several interveners acknowledged the usefulness of self-regulatory organizations but emphasized that the regulatory body should exercise stringent control over their operations and the exercising of duties or functions attributed or delegated to them.
6.2.5 Sectoral consolidation
Some interveners operating in a single field confined their analysis to their own situation. They recommended sectoral consolidation, i.e. the merging of bodies that concern them or a change in the division of responsibilities among regulatory bodies in such a way that henceforth they are only regulated by a single body.
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THE TASK FORCE’S OBSERVATIONS
CHAPTER 7
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84 CHAPTER 7 THE TASK FORCE’S OBSERVATIONS
7.1 OBSERVATIONS
The Task Force was given the mandate to review the regulatory structure of the Québec financial sector and to formulate recommendations in order to enhance the structure’s efficiency both from the standpoint of consumer protection and streamlining for the industry of the administrative and regulatory burden within Québec’s fields of jurisdiction. Consequently, the Task Force examined the capacity of the existing regulatory structure to limit the administrative burden borne by the financial sector and effectively protect consumers while allowing Québec to fully exercise its regulatory jurisdiction over the sector. This examination has led the Task Force to make the following observations.
7.1.1 Source of the problems
Prior to deregulation and intersectoral convergence, various fields of the financial sector were separate and regulation was effected on an institutional basis. A single body was responsible for regulating each segment. At present, different fields of the financial sector are no longer clearly separate and several bodies are responsible for the regulation of most participants, which produce and also distribute a wide array of financial products and services.
Deregulation and intersectoral convergence are worldwide phenomena whose pace of development has hinged on changes in legislation in various countries. Those jurisdictions in which deregulation and intersectoral convergence occurred early on were confronted earlier on than other jurisdictions with the problems that they engender from the standpoint of the regulatory structure.
Québec is facing the same problems. It has constantly updated its sectoral legislation in order to reflect deregulation and intersectoral convergence. However, it has not yet updated the regulatory structure governing the financial sector overall. Today, Québec is facing the problems arising from the lag in its regulatory system in respect of deregulation and intersectoral convergence in the industry.
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7.1.2 Problems
The problems arising from the failure to bring into line the existing regulatory structure with changes in the financial products and services industry can be divided into three categories drawn from the Task Force’s mandate:
- the administrative burden; - consumer protection; - Québec’s jurisdiction.
7.1.2.1 The administrative burden
The array of regulatory bodies operating in Québec imposes an unduly heavy administrative burden on regulated entities. Moreover, we cannot overlook the constitutional overlapping that exacerbates this burden.
Indirect costs
We can pinpoint at least three sources of increases in the indirect costs borne by regulated entities that are regulated by more than one body:
- To deal with several regulatory bodies implies recourse to extensive human and physical resources, not to mention the considerable time devoted to dealings with such bodies.
- The division of jurisdiction between various bodies is not always clear, which leads to overlapping in their dealings with regulated entities and confusion among the latter.
- No procedure ensures the coordination of the regulatory bodies’ dealings with a given regulated entity, which again leads to overlapping and obliges the regulated entities to devote more time and resources to such dealings.
All of the foregoing factors necessarily lead to higher indirect costs that cannot be measured but are nonetheless confirmed by the briefs submitted to the Task Force.
Direct costs
The operation of each regulatory body engenders fixed costs and the proliferation of such bodies normally increases these fixed costs. Since administrative costs pursuant to legislation are passed on to regulated entities in the form of various fees, the regulated entities must assume higher indirect costs.
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The administrative burden and its attendant direct and indirect costs can make less competitive the financial products and services sold in Québec, which means that the cost is ultimately passed along to the consumer.
7.1.2.2 Consumer protection
Confusion among consumers
Given the growing complexity of the financial products and services industry, it is becoming increasingly hard for even informed consumers to ascertain which body is responsible for regulating the financial institutions with which they do business or the financial services they purchase. Consequently, it is hard to know to whom they should turn. Furthermore, it is hard for consumers to obtain assistance or information since they must contact several bodies. Since several bodies often regulate a regulated entity, consumers are at a loss.
Inconsistency in the regulations
Deregulation of the financial products and services industry and intersectoral convergence are engendering competition between different fields of the financial sector that used to compete solely with similar enterprises. To ensure that intersectoral competition is fair and that consumers are properly protected regardless of the origin of the products they purchase, regulations must be coherent and less fragmented. However, the proliferation of the bodies responsible for adopting regulations does not promote the adoption of coherent regulations. Bodies whose missions and interests are usually different can adopt different regulations, even in the case of analogous or related financial products or services.
For example, we have noted that the exemption enjoyed by certain members of the professional orders from the application of provisions in the Act respecting the distribution of financial products and services pertaining to financial planners causes unwarranted regulatory disparities.
Inadequate regulations
The current operating method of certain bodies responsible for elaborating regulations gives some interest groups regulatory power over other groups, which can lead to unfairness between these groups of regulated entities and between their clienteles.
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Effectiveness of regulations
Adequate consumer protection demands a regulatory structure that ensures effective oversight. The current division of regulatory responsibility makes it very hard to achieve comprehensive, integrated oversight of the financial sector applicable to an increasingly global, integrated industry. Intervention, when required, must no longer be partial in order to be effective.
Moreover, each field of the financial sector has its own traits and interests. Effective regulation means that experts must be found in regulatory bodies who fully comprehend the specific nature of each field and take account of it when performing their duties.
7.1.2.3 Québec’s jurisdiction
Respect for Québec’s fields of jurisdiction
Strong, credible regulatory bodies are one of the best ways for Québec to ensure respect for its fields of jurisdiction. The scope of any regulatory structure and the resources allocated to it obviously depend on the extent of the operations to be regulated. Given the relatively small size of Québec’s financial sector from an international perspective, the maintenance of numerous large regulatory bodies is unwarranted and it is essential to consolidate resources to adequately promote Québec’s constitutional fields of jurisdiction.
Participation in harmonization processes
Regulatory bodies elsewhere in Canada have engaged in consolidation in order to achieve broader harmonization between jurisdictions. Since Québec’s representatives are dispersed among several bodies, it is not certain that they can coherently exert significant influence through these bodies, which is essential against a backdrop of globalization.
The globalization of financial markets demands that Québec participate actively in various harmonization processes to ensure that its regulations are at least compatible with Canadian, North American and international regulations. While it is important for regulations applicable to Québec to fully satisfy Quebecers’ expectations and needs, such regulations must not lead to the isolation of its market.
To the contrary, Québec’s openness to the world compels the key players to participate in a concerted, orderly manner in order to better promote the interests of stakeholders in the Québec financial sector in all harmonization processes to which Québec must adhere.
It is important for Québec to participate diligently in various groups of regulatory bodies. However, the Québec body that takes part in such
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discussions must be able to influence deliberations and decision-making. Excessive dispersal of resources among various bodies reduces Québec’s ability to influence the outcome of harmonization processes.
This dispersal of resources is especially detrimental to Québec’s interests in the securities field, where it is becoming increasingly difficult for a jurisdiction to distinguish itself in terms of regulations, which continue to be a powerful tool for economic development.
7.1.3 Other observations
7.1.3.1 The administration of the Supplemental Pension Plans Act
The Régie des rentes du Québec fulfils a twofold mandate in respect of pension plans. The RRQ regulates pension plans and plays a promotional and advisory role in respect of such plans. Its regulatory responsibilities resemble those of other regulatory bodies in the financial sector. Elsewhere, regulatory bodies in the financial sector usually exercise such responsibilities, e.g. the Financial Services Commission of Ontario and the Office of the Superintendent of Financial Institutions Canada. As for promotional and advisory initiatives pertaining to pension plans, such initiatives are more closely related to the RRQ’s other functions since the RRQ is also the body responsible for managing the Québec Pension Plan pursuant to the Act respecting the Québec Pension Plan.
7.1.3.2 Administration of the Real Estate Brokerage Act
The Real Estate Brokerage Act has been included in the list of statutes governing the Québec financial sector because of brokerage operations in respect of loans secured by immovable hypothec, reserved for real estate brokers and agents, and because of the role that the IGFI plays in supervising the ACAIQ. However, some observers believe that the real estate brokerage industry must not be considered part of the Québec financial sector since, in the vast majority of cases, real estate agents or brokers are involved only accessorily in the brokering of loans secured by immovable hypothec.
In addition, the bulk of real estate brokerage regulations concern neither financial products nor services. Consequently, the regulation for which the ACAIQ is responsible differs entirely from financial sector regulation, in general, and the regulation of the distribution of financial products and services, in particular.
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7.1.3.3 Administration of other legislation
The existing regulatory bodies are responsible for the administration of several statutes governing sectors other than the financial sector. We note, however, that some of these statutes are of a predominantly financial nature, e.g. the Act respecting the Mouvement Desjardins (S.Q. 2000, c. 77), the Act to establish the Fonds de solidarité des travailleurs du Québec (F.T.Q.) (R.S.Q., c. F-3.2.1), the Act to establish Fondaction, le Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l'emploi (R.S.Q., c. F-3.1.2), while other statutes, e.g. the Act respecting the legal publicity of sole proprietorships, partnerships and legal persons (R.S.Q., c. P-45), have an incidental financial nature.
7.1.3.4 The Consumer Protection Act
The Consumer Protection Act (R.S.Q., c. P-40.1) applies to all contracts concluded between consumers and merchants. It does not apply to:
- contracts concerning operations governed by the Securities Act; - insurance contracts.
This statute applies to all credit contracts,25 even those concluded by an insurance company to finance a client’s insurance contract. It also applies to any contract pertaining to a loan concluded between a consumer and a financial services cooperative.
The Office de la protection du consommateur (OPC) is authorized to receive complaints concerning contracts, including contracts in respect of loans. However, it is not authorized to accept and handle complaints lodged against an insurance representative, broker or agent, a stockbroker or a financial planner. The OPC must refer the complaint to the appropriate body.
From the standpoint of its jurisdiction over the handling of complaints, the OPC deals only marginally with current regulation of the financial sector. Complaints concerning financial institutions, insurance, securities and the distribution of financial products and services are submitted to a regulatory body in the Québec financial sector.
7.1.3.5 Adoption of regulations
Some regulatory bodies exercise regulatory powers while others do not.
The elaboration of regulations governing financial products and services occasionally demands expertise usually found in regulatory bodies. Moreover, regulations are often established in conjunction with the Canada-
25 Specific rules apply to a credit contract (s. 66 et seq. of the Consumer Protection Act ).
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wide or international harmonization processes in which the regulatory bodies participate.
However, the regulatory body responsible for administering a given statute often tends to over-regulate in order to broaden its control. Furthermore, when regulations are elaborated, factors outside the ambit of a regulatory body must be considered in order to better serve the financial sector overall.
We believe that it is necessary for the government to control regulations overall in the financial sector in its fields of jurisdiction.
7.1.3.6 Canadian regulatory bodies
While the Task Force’s mandate does not include an examination of regulation imposed by the federal government, we cannot pass over in silence that several of the latter’s initiatives lead to overlapping and dubious encroachment into Québec’s fields of jurisdiction. Such overlapping and encroachment add to the regulatory and administrative burden borne by regulated entities and confuse consumers.
7.1.3.7 Quasi-judicial and judicial administrative processes
We briefly examined the decision-making, review and appeal processes stipulated in certain statutes administered by regulatory bodies in the Québec financial sector.
All regulatory bodies are responsible for accepting registrations or issuing authorizations, usually in the form of licences or certificates, in respect of the exercising of a specific activity. Such authorizations assume an administrative, quasi-judicial or judicial process governing their delivery or withdrawal. These processes are also used to ensure control over the exercising of the activity and impose remedial measures when needed, to grant exemptions from the applications of certain provisions in the regulations, and to review decisions.
In some instances, the legislation explicitly makes provision for the delegation of decision-making power. In other cases, no provision is made in this respect. Provision is made in one statute for a review process governing the decisions of certain regulatory bodies, although no such provision is made in another statute. Furthermore, in some instances, all decisions handed down by a body pursuant to a given statute are subject to review or appeal, while in other statutes, review or appeal is allowed only in specific cases.
Appeals of decisions are sometimes lodged with the Court of Québec and sometimes with the Tribunal administratif du Québec.
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Our review reveals that quasi-judicial and judicial administrative processes are disparate and considerably lacking in consistency.
7.2 GUIDELINES
Before we propose modifications to the existing regulatory structure, the Task Force established guidelines respecting the organization of such a structure. These guidelines obviously stem from the Task Force’s observations and comments drawn from the briefs discussed earlier in this report.
Once we established these guidelines, we used them to evaluate various scenarios and to elaborate the recommendations presented in Chapter 8.
The guidelines fall into the following categories:
- consumer protection; - streamlining the administrative burden; - respect for Québec’s fields of jurisdiction; - effectiveness and efficiency; - the limitations of self-regulation.
7.2.1 Consumer protection
§ The regulatory structure must enable consumers to ascertain from whom they can obtain information or with whom they must lodge complaints in a simple, efficient manner.
Consumers contact regulatory bodies when they encounter problems concerning financial products and services or to obtain information on products or producers. Consumers must know whom to contact regardless of the product or producer concerned. The procedure must be simple and efficient.
§ Consumers of financial products and services must have ready access to the regulatory structure.
The procedures for handling complaints and providing information adopted by the regulatory structure must be readily accessible.
§ The regulatory structure must ensure the consistency of regulations.
Regardless of the level at which regulations are established, i.e. government, regulatory body or self-regulatory organization, the regulatory structure must facilitate the adoption of consistent rules in respect of analogous products, e.g. segregated funds and pooled
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investment funds, and with regard to different types of regulated entities, e.g. insurers as opposed to deposit institutions.
7.2.2 Streamlining the administrative burden
§ The regulatory structure must minimize the number of interveners that deal with a given regulated entity.
A regulated entity must have dealings with as few people as possible when performing administrative tasks pertaining to regulation. The time required to perform such tasks will be limited and requirements can thus be better coordinated.
§ Jurisdiction must be clearly divided in the regulatory structure.
A regulated entity must know whom to contact concerning the administration of legislation, e.g. registration, authorization, information documents, and so on. Moreover, only one authorized body should have jurisdiction over a single facet of a regulated entity’s activities.
§ The regulatory structure must ensure the coordination of the initiatives of interveners dealing with a given regulated entity.
A regulated entity must not waste resources because different interveners do not coordinate their initiatives or administrative requirements, e.g. a financial institution that must submit three times the same information on three different forms to three different bodies.
§ The regulatory structure must minimize the administrative burden borne by the industry.
The regulatory structure must foster a reduction in the costs assumed by the industry in order to comply with regulations, primarily from the standpoint of human, physical and technological resources.
§ The regulatory structure must minimize operating costs (direct costs).
The administration by a regulatory body of legislation governing the financial sector must be achieved at the lowest possible cost to regulated entities.
7.2.3 Respect for Québec’s fields of jurisdiction
§ The regulatory structure must guarantee respect for Québec’s fields of jurisdiction.
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The regulatory structure must ensure that Québec fully, efficiently exercises all of its constitutional fields of jurisdiction.
§ The regulatory structure must enable Québec to play a significant role in cooperation and harmonization initiatives in Canada and at the international level.
The regulatory structure must ensure that Québec interveners are able to play a significant role in light of their competence and credibility in respect of North American and international cooperation and harmonization initiatives.
7.2.4 Effectiveness and efficiency
§ The regulatory body must follow the rules of effectiveness and efficiency and be fully accountable.
The regulatory structure must adopt appropriate management rules. The public must be aware of the manner in which the regulatory structure is administered. The executives must be responsible for their management.
§ The regulatory structure’s organization must enable it to respond promptly and appropriately to change in the financial sector.
All bodies within the regulatory structure must be able to adapt to change in the financial sector, deregulation, intersectoral convergence, and to disintermediation, e.g. hybrid products, the emergence of conglomerates and the gradual disappearance of distinctions between the fields.
§ All bodies within the regulatory structure must have a clear mission.
Each body must have clearly delineated objectives and responsibilities.
§ The regulatory structure must include an ongoing consultation process through which the interests of various stakeholders in the financial sector and consumers can be heard.
The regulatory structure must provide for procedures that allow consumers and the industry to present their viewpoints concerning regulations and other questions in order to have a clear notion of ongoing change.
§ The regulatory structure must administer in a disinterested manner statutes governing the financial sector.
The administration of legislation must be free of pressure from corporate, political or other interests.
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§ The regulatory structure must ensure the maintenance of the financial sector’s integrity.
The regulatory structure must allow for effective oversight of the financial sector to ensure the prompt detection of systemic financial problems.
§ The regulatory structure must adapt to the integration model of stakeholders in the financial sector.
The regulatory structure must be adapted to deregulation and intersectoral convergence.
§ The industry must assume the direct and indirect costs of administering legislation governing the financial sector.
All regulatory bodies must be financed through the fees collected from regulated entities and must not rely on government appropriations.
7.2.5 The limitations of self-regulation
§ A self-regulatory organization, when recognized, must bring together members with similar fields of competence and expertise and encompass a given operating activity.
When a responsibility is assigned to a self-regulatory organization, the latter must bring together members with similar fields of competence and expertise and encompass a given operating activity to ensure that conflicts between groups of members do not affect the self-regulatory organization’s regulatory activities. For example, an organization representing both the interests of stockbrokers (legal entities) and insurance representatives (individuals) could not be recognized since the interests of the various members are not convergent.
Obviously, when a self-regulatory organization is recognized, the entire range of guidelines must be taken into account from the outset.
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THE PROPOSED REGULATORY STRUCTURE
RECOMMENDATIONS
CHAPTER 8
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100 CHAPTER 8 THE PROPOSED REGULATORY STRUCTURE RECOMMENDATIONS
After hearing concerned parties, examining briefs, focusing on changes in the financial sector in Québec and elsewhere in the world and taking into account the existing regulatory structure, we are making the following recommendations to the Minister of State for the Economy and Finance.
8.1 ESTABLISHMENT OF THE AGENCE D’ENCADREMENT DU SECTEUR FINANCIER DU QUÉBEC
RECOMMENDATION 1
We recommend the establishment through legislation of the Agence d’encadrement du secteur financier du Québec, a single body to regulate the Québec financial sector.
This body would regulate the entire financial sector including, in particular, the fields of insurance, securities, deposit institutions, the distribution of financial products and services, brokerage of loans secured by immovable hypothec, and pension plans. The new body, called the Agence d’encadrement du secteur financier du Québec (Agence26), would have its head office in Québec’s national capital, Québec City, and would report to the Minister of Finance.
26 The organization chart of the Agence appears at the end of this chapter.
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8.2 FUNCTIONAL DIVISION OF THE AGENCE’S RESPONSIBILITIES
RECOMMENDATION 2
We recommend that the Agence’s regulatory responsibilities be determined by means of a functional approach and divided into five regulatory categories:
- consumer assistance; - solvency; - distribution; - securities markets; - compensation.
Five separate administrative divisions would assume these responsibilities, which should provide coordination services, especially in respect of relations with regulated entities, inspection, investigations and disclosure.
The regulatory structure should assume full responsibility for regulation of the Québec financial sector and could do so by function, e.g. regulation of solvency and regulation of distribution, or by field, e.g. regulation of deposit institutions, regulation of insurers, regulation of securities, and so on.
In light of the guidelines adopted by the Task Force, the division of responsibilities by function seems more appropriate than division by sector. Let us reiterate the following guidelines:
- The regulatory structure’s organization must enable it to respond promptly and appropriately to change in the financial sector.
- The regulatory structure must ensure the consistency of regulations.
- The regulatory structure must adapt to the integration model of stakeholders in the financial sector.
In the financial products and services industry, the institutional approach is gradually giving way to the functional approach. Various sectors are melding within the same organization just as products in these fields are doing. This trend warrants inclusion in the regulatory structure.
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The Agence would include the following divisions, in keeping with its main regulatory functions:
- the Direction de l’encadrement de l’assistance aux consommateurs; - the Direction de l’encadrement de la solvabilité; - the Direction de l’encadrement de la distribution; - the Direction de l’encadrement des marchés de valeurs; - the Direction de l’encadrement de l’indemnisation.
The Agence should also coordinate:
- relations with the industry; - its own disclosure requirements; - inspection and investigations.
The Bureau des examens et decisions,27 a quasi-judicial authority, would be set up within the Agence.
The establishment of separate divisions to oversee the regulation of solvency, distribution and securities markets would ensure the development of specialized skills in respect of each of the activities regulated, a measure greatly desired by many interveners.
The Direction de l’encadrement de l’assistance aux consommateurs would offer a one-stop service outlet for consumers and coordination of relations with the industry would make it possible to establish a one-stop service outlet for all regulated entities.
8.2.1 The Direction de l’encadrement de l’assistance aux consommateurs, a one-stop service outlet for consumers
Pursuant to the legislation, the Direction de l’encadrement de l’assistance aux consommateurs would be responsible for consumer assistance and simultaneously play a preventive and remedial role. The division would act as a veritable one-stop service outlet for consumers with regard to all facets of financial services. It would receive complaints and ensure follow-up, offer dispute settlement and mediation services, and promote consumer education in the realm of financial products and services. The Direction could rely on services provided by sectoral associations such as the IBC or the CLHIA were the Agence to eventually recognize them as self-regulatory organizations28 responsible for handing complaints.
We have adopted the expression “consumer assistance” to highlight the division’s proactive nature.
27 See section 8.11 devoted to the Bureau des examens et décisions. 28 See section 8.10 devoted to self-regulatory organizations.
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The Direction de l’encadrement de l’assistance aux consommateurs would report to a superintendent.
8.2.2 The Direction de l’encadrement de la solvabilité
The Direction de l’encadrement de la solvabilité would exercise oversight in respect of solvency and compliance, i.e. essentially the administration of provisions in the Act respecting insurance, the Act respecting financial services cooperatives, the Act respecting trust companies and savings companies (R.S.Q., c. S-29.01) and the Supplemental Pension Plans Act. It would also regulate the solvency of stockbrokers. The RRQ would continue to administer provisions in the Supplemental Pension Plans Act pertaining to promotion and counselling.
In particular, the Direction de l’encadrement de la solvabilité would be responsible for examining reports, inspection, the publication of guidelines, the issuing of orders (instructions, recovery plans) and the imposition of modifications to the right to practice.
The Direction de l’encadrement de la solvabilité would report to a superintendent.
8.2.3 The Direction de l’encadrement de la distribution
The Direction de l’encadrement de la distribution would regulate the distribution operations of insurers, insurance firms, securities brokers and advisors, and representatives. In particular, it would administer provisions governing the distribution operations of brokers, advisors and representatives stipulated in the Act respecting the distribution of financial products and services and the Securities Act.
In particular, the Direction would be responsible for:
- the management of eligibility for practice; - the examination of disclosure reports; - the issuing of orders (instructions and recovery plans); - the imposition of modifications to the right to practice; - inspection and investigations.
The Direction de l’encadrement de la distribution would report to a superintendent.
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8.2.4 The Direction de l’encadrement des marchés de valeurs
This division would regulate securities markets, i.e. share issues (receipts and continuous disclosure by issuers), public issues, takeover bids, issuer bids, exchange offers, waivers, stock markets and clearing agencies.
The Direction de l’encadrement des marchés de valeurs would report to a superintendent.
8.2.5 The Direction de l’encadrement de l’indemnisation
The Agence would manage the Fonds d’indemnisation des services financiers and the Régie de l’assurance-dépôts du Québec fund. Existing private compensation funds (the Canadian Life and Health Insurance Compensation Corporation, the Property and Casualty Insurance Compensation Corporation, and Canadian Investor Protection Fund) could eventually be recognized as self-regulatory organizations responsible for compensation. However, their operating structure should enable them to meet Québec’s specific requirements.
A regulatory division devoted to compensation should allow for better coordination of the numerous existing compensation mechanisms.
This division would report to a superintendent.
8.2.6 A one-step industry service outlet to coordinate relations with regulated entities
The Agence would undoubtedly be able to ensure the coordination keenly sought by regulated entities.
The Agence would coordinate all recurring administrative tasks such as registrations, the issuing of licences, the collection of fees, the issuing of statutes, and the publication of a bulletin or other information documents in order to provide regulated entities with a one-step service outlet.
The divisions responsible for regulation would oversee measures pertaining to failure to comply with standards.
The Agence should coordinate inspections and investigations in the realm of distribution and solvency aimed at financial institutions (insurers, trust companies, savings companies and financial services cooperatives), stockbrokers, pension plans and firms (occasionally financial institutions).
All disclosure obligations imposed by the Agence on a given regulated entity should be coordinated.
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8.3 FUNDING AND ADMINISTRATIVE SUPPORT
RECOMMENDATION 3
We recommend that financial sector stakeholders fund the Agence and that the government approve its budgets.
8.3.1 Funding
Regulated entities should assume the cost of funding the Agence’s operations, thus ensuring that the Agence is financially independent of governmental budgets. Several regulatory bodies, including the CVMQ, the BSF, the ChAD and the CSF, enjoy financial autonomy. It is hard to backtrack with respect to funding and the funds to administer such an agency should not be used for other purposes by the government. For this reason, the Agence’s funding should be non-budgetary.
Moreover, the Civil Service Act would not apply to the Agence, which would allow greater flexibility in hiring and in establishing employment conditions. However, according to a recent study conducted by the Fraser Institute,29 the operating costs of regulatory agencies have soared elsewhere in Canada. Since such an escalation is undesirable, the government would approve the annual budget, fees, rates, rates of remuneration and staffing plans submitted by the Agence following consultation of the industry and the Conseil de la régie administrative.30
8.3.2 Administrative support
The consolidation within a single agency of the regulation of the financial sector should reduce the administrative burden borne by regulated entities, including the Agence’s operating costs and the internal costs incurred by regulated entities.
Through the establishment of the Agence, it would normally be possible to streamline certain expenses related to regulatory support services, such as administrative, legal, computer, communications and other services now found in each existing regulatory body but which would now be confined solely to the Agence.
29 John F. Chant and Neil Mohindra, “Commissions Unbound: The Changed Status of Securities Regulators in Canada”, The Fraser Institute, Critical Issues Bulletin, November 2001, 50 pages. 30 See section 8.6 devoted to the Conseil de la régie administrative.
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8.4 SENIOR MANAGEMENT OF THE AGENCE
RECOMMENDATION 4
We recommend that a president and chief executive officer head the Agence and that the government appoint him for a five-year term, subject to one renewal of term.
8.4.1 The president and chief executive officer
There are three management models in regulatory bodies in the Québec financial sector.
- The Inspector General of Financial Institutions is a body headed by a government appointee to exercise the powers and assume the responsibilities stipulated in legislation that he administers. He alone is responsible for the body.
- The Commission des valeurs mobilières du Québec is a body headed by commissioners, including a chairperson, appointed by the minister to constitute a commission responsible for administering the Securities Act. It exercises powers and assumes responsibilities attributed to it by other statutes.
- The Bureau des services financiers is a body headed by a board of directors, 10 of whose members are appointed by the minister and of whom five are the presidents and vice-presidents of the Chambre de l’assurance de dommages and the Chambre de la sécurité financière, who are elected by the industry. The board of directors exercises the powers and assumes the responsibilities attributed to the BSF by the Act respecting the distribution of financial products and services. A board of directors also heads the chambers.
The guidelines stipulate that the regulatory structure must “must follow the rules of effectiveness and efficiency and be fully accountable,” that it “must administer in a disinterested manner statutes governing the financial sector,” and that “the regulatory structure’s organization must enable it to respond promptly and appropriately to change in the financial sector.”
We believe that management by a single senior executive would best respect these principles. Clear, accountable management would be desirable.
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8.4.2 The appointment, dismissal, term of appointment and remuneration of the president and chief executive officer
8.4.2.1 Appointment
We have considered three methods of appointing the president and chief executive officer, i.e. appointment by the National Assembly, by the government, and by the minister responsible.
Appointments by the National Assembly are normally reserved for persons who report to the National Assembly and must be completely independent of the government, e.g. the Ombudsman and the Auditor General. This method of appointment is not suitable for the head of the Agence, which is a government body reporting to a minister.
The usual method of appointing the director of a body reporting to a minister is appointment by the government, e.g. the Inspector General of Financial Institutions, the chairperson of the Commission des valeurs mobilières du Québec, the president of the Société de l’assurance automobile du Québec and the president of the Régie des rentes du Québec.
This situation prevails in other jurisdictions. For example, the federal government appoints the Superintendent of Financial Institutions. In Ontario, the government will appoint the president of the future Financial Services Commission of Ontario.
Appointments made by the minister are unusual in the financial sector. The chairperson of the board of directors of the Bureau des services financiers is the only appointment made by the minister, although it should be noted that the BSF is not a government body.
While government appointments are less rapid and more complex than appointments by ministers, they allow the minister, who usually proposes a candidate to the government, to more readily avoid pressure from interest groups or potential candidates. Moreover, appointment by the government gives the appointee greater credibility.
Provision could be made for guidelines respecting the appointment of the chief executive. For example, legislation could stipulate requirements concerning the candidates’ professional experience or require that the president and chief executive officer be chosen from a list of candidates drawn up by certain bodies. However, in the case at hand, interests are so diverse and divergent in the financial services industry that it would be very hard to reach a consensus regarding the professional experience required or a list of candidates. It therefore seems preferable to give the government as much leeway as possible to appoint the president and chief executive officer.
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8.4.2.2 Dismissal
Legislation usually stipulates that the executive appointed may be dismissed for valid reasons. Moreover, the person who appoints the executive is usually the person who may dismiss him. The Ombudsman is appointed by the National Assembly with the approval of two-thirds of its members and may be dismissed with the approval of two-thirds of MNAs.
However, to ensure that the executive enjoys greater independence from the government, one necessary—indeed, essential—condition is the executive’s ability to act impartially and certain specific measures could be adopted in respect of his dismissal.
For example, the Securities Act stipulates that the government may dismiss a commissioner only if the Court of Appeal recommends doing so once it has conducted an investigation at the minister’s behest. This requirement ensures, among other things, that the executive has an opportunity to be heard and that the hearing is public.
The Act respecting the Québec Pension Plan stipulates that the president of the RRQ, who is appointed by the government, may only be removed upon an address of the National Assembly.
To ensure that the president and chief executive officer of the Agence enjoys greater autonomy, without granting him unconditional security of tenure, it would be advisable for the government to be able to dismiss him for valid reasons, subject to a public procedure during which the executive could be heard. We therefore suggest that the president and chief executive officer only be dismissed upon the recommendation of a parliamentary committee.
8.4.2.3 Term of appointment
Québec legislation contains an array of provisions governing the terms of appointment of executives:
- a term of appointment of stipulated duration, e.g. five years in the case of the Ombudsman; - a term of appointment of minimum duration, e.g. at least five years in the case of the Inspector General of Financial Institutions; - a term of appointment of maximum duration, e.g. not more than five years in the case of the chairperson of the Commission des valeurs mobilières du Québec or not more than 10 years in the case of the presidents of the Office des professions, the Régie des rentes du Québec and the Société de l’assurance automobile du Québec.
To ensure that the body enjoys some degree of stability, it would be preferable to grant a sufficiently long term of appointment to the president and chief executive officer. A five-year term of appointment renewable for one
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additional term would be appropriate. Renewal for one additional term strikes us as sound and desirable in an organization to ensure its steady development and the renewal of its staff.
8.4.2.4 Remuneration
The president and chief executive officer’s remuneration should take into account the remuneration of individuals occupying comparable positions and accorded executives exercising similar responsibilities.
8.5 MANAGEMENT OF THE AGENCE’S REGULATORY DIVISIONS
RECOMMENDATION 5
We recommend that the president and chief executive officer appoint superintendents responsible for assisting him in the execution of his duties and ensuring the management of the Agence’s regulatory divisions.
The superintendents would be appointed to assist the president and chief executive officer in managing the Agence and would head the body’s five divisions.
We examined two options with respect to the appointment of the superintendents:
- the chief executive would choose the superintendents; - the superintendents would be appointed in the same way as the chief executive.
The relevance of each appointment method depends on the superintendents’ role. Since their role would be to act as managers in the Agence, it would be preferable for the president and chief executive officer to appoint them. Moreover, the president and chief executive officer could delegate powers to them.
When the regulatory structure is reorganized, use should be made of the skills of the executives of existing regulatory bodies who administer legislation governing the financial sector.
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8.6 THE CONSEIL DE LA RÉGIE ADMINISTRATIVE
RECOMMENDATION 6
We recommend the establishment through legislation of a Conseil de la régie administrative in the Agence, comprising seven members, including a chairperson, appointed by the Minister of Finance, for a term of appointment of three years, renewable for one additional term.
The Conseil de la régie administrative, a permanent advisory board, would be set up to advise the Agence on questions concerning the conformity of the Agence’s initiatives with its mission and any question concerning its corporate governance, such as the budget, the annual activity plan, the staffing plan, the appointment of superintendents, and so on. The Conseil de la régie administrative would comprise seven members, including a chairperson, with experience in the financial sector and, in particular, management expertise. The members would be subject to rules governing confidentiality and conflicts of interest.
Without playing the role of a board of directors, the Conseil de la régie administrative would advise the president and chief executive officer on all questions pertaining to the Agence’s internal operation and administration. It would not have any decision-making power but could offer occasional advice to the minister responsible. It would report each year on its operations in the Agence’s annual report.
8.7 ADVISORY COMMITTEES
RECOMMENDATION 7
We recommend that the Agence establish ad hoc or permanent advisory committees to maintain close relations with consumers and regulated entities.
The Agence should, as part of its mission, maintain close relations with the consumers of financial products and services and with regulated entities. Depending on needs, the Agence could set up one or more ad hoc or permanent advisory committees within each of its operating divisions.
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The Agence could set up an advisory committee in the Direction de l’encadrement de la solvabilité, which would offer advice on the division’s proposed guidelines governing regulated financial institutions. The Agence could also decide that an advisory committee is called for with respect to a more limited category of regulated entities, e.g. life and health insurers. The Agence’s needs would dictate the number and mandate of the advisory committees.
Since the Agence’s needs would change over time, to avoid an unwieldy administrative structure, it would be preferable to establish advisory committees through organizational initiatives, with the obvious exception of the Conseil de la régie administrative described in the previous section. The establishment of advisory committees through legislation causes major problems: when the legislation establishing the Agence is drafted, the Agence’s advisory needs, which are far from static, must be ascertained. It seems more opportune to allow the Agence to decide upon the establishment of the advisory committees, their composition and mandate.
To ensure the committees’ public accountability, the Agence should indicate in its annual report the composition of its advisory committees, their mandate, the number of meetings held and the topics discussed.
8.8 ACCOUNTABILITY OF THE BODY AND ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER
RECOMMENDATION 8
We recommend that the Agence be publicly accountable.
Given the significant responsibility vested in a single body headed by a single senior executive, Quebecers should be assured that the Agence and the president and chief executive officer exercise judiciously and reasonably the powers attributed to them. It is imperative that the Agence be publicly accountable. One of the guidelines adopted by the Task Force stipulates that the regulatory structure must follow the rules of effectiveness and efficiency and be fully accountable. Such accountability should include the following components:
- The Agence would make public a three-year plan, comprising its policy directions, priorities and financial outlook.
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- Each year, the Agence would submit for approval by the minister responsible an activity plan, which would first be vetted by the Conseil de la régie administrative.
- The government should approve the Agence’s financial outlook, staffing plans and rates of remuneration. The budget estimates would first be subject to public consultation as is now the case with the CVMQ.
- Each year, before the end of June, the Agence would submit to the minister responsible a report on its activities focusing, in particular, on the results achieved in relation to the plan submitted. The minister would then table this report in the National Assembly.
- Each year, and when the government so decrees, the Québec Auditor General would audit the Agence’s books and accounts.
- Pursuant to the Standing Orders of the National Assembly, the Commission des finances publiques could ask the Agence to appear before the committee to discuss its policy directions, activities and management.
Some facets of the proposed system are drawn from the new management framework proposed by the Québec government in the wake of the implementation of the Public Administration Act (S.Q. 2000, c. 8).
8.9 STRATEGIC POLICY DIRECTIONS
RECOMMENDATION 9
We recommend that the legislation governing the Québec financial sector and establishing the Agence stipulate the objectives to be achieved and that the Agence obtain the powers necessary to help it attain the objectives set by the legislation.
Given the key role played by the Agence in the financial sector, it is essential to guide its initiatives by means of strategic policy directions stemming from the objectives stipulated in the legislation.
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8.9.1 Objectives of the legislation
- Legislation governing the financial sector would ultimately seek to foster the smooth operation and orderly development of the Québec financial sector.
- The legislation should ensure that consumers and businesses are confident that each financial institution is solvent, that each advisor is competent, and that the information they receive is relevant, true and complete.
- The legislation should facilitate the delivery of quality, competitively priced financial products and services to all consumers and businesses, which assumes a high level of competition and the possibility for the financial sector to develop steadily and rapidly.
- The legislation should provide consumers with adequate assistance through access to simple, effective, inexpensive information sources and recourse.
The attainment of these objectives would enable the financial sector to genuinely support economic development.
8.9.2 The Agence’s strategic policy directions
- The Agence should, through the manner in which it administers the legislation and exercises its powers, contribute to the achievement of the objectives stipulated in the legislation.
- The Agence should enable consumers:
• to be served diligently; • to be properly informed; • to ascertain how to obtain assistance; • to be able to lodge complaints and receive the necessary attention; • to be compensated when they are wronged by a regulated entity engaged in its authorized activities.
- The Agence should act in a way that minimizes the administrative burden borne by regulated entities. To this end, the body should:
• operate efficiently, i.e. make optimum use of resources; • coordinate all administrative requirements (registration, contributions, disclosure, and so on) in respect of a given regulated entity; • act openly and diligently; • facilitate communication with regulated entities.
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- The Agence should exercise its powers efficiently and should, therefore, obtain the resources needed to do so, i.e. competent employees and adequate physical resources.
- The Agence should adapt to changes in the sector and keep in close contact with it. In particular, it should establish consultative mechanisms that allow it to monitor new trends, the latest developments and the concerns of consumers, regulated entities and the general public.
8.9.3 Elaboration of regulations
The Agence would be responsible for the elaboration of regulations. Its expertise and knowledge of the financial sector would make it the body best qualified to adequately respond to changes in different fields in the financial sector by means of effective regulations geared to the entire industry’s needs.
When elaborating regulations and its guidelines and instructions, the Agence should bear in mind that:
- consumers ultimately assume the cost of regulation and that the benefits they derive therefrom must clearly outweigh this cost; - consumers can make enlightened choices when they obtain the relevant assistance and information, combined with adequate protection; - competition among businesses operating in Québec must be encouraged and conditions conducive to the development of such businesses operating inside and outside Québec must be created; - businesses are mainly responsible for their own management; thus, it is preferable to establish objectives instead of imposing means to be adopted and rules to be followed; - regulation must allow for changes in management and business practices; - the government has adopted a regulatory streamlining policy.
While the Agence would be responsible for drawing up regulations, the government would maintain regulatory power by approving the Agence’s regulations, rejecting them, or imposing new rules. The government would control the body of regulations governing the financial industry, thus ensuring that the regulations are appropriate, coherent and geared to the financial sector overall and that they do not duplicate existing regulations or legislation.
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8.10 SELF-REGULATORY ORGANIZATIONS
RECOMMENDATION 10
Insofar as self-regulatory organizations are contemplated in the regulatory structure, we recommend that the mechanism for recognizing such organizations be governed by the principles stipulated in the legislation and that it be applied in the same manner to all fields of the financial sector.
In the United Kingdom, the reform of financial sector regulation eliminated self-regulatory organizations engaged in regulatory operations on behalf of authorized regulatory bodies in the financial sector. In Canada and Québec, several self-regulatory organizations continue to engage in regulatory operations on behalf of regulatory bodies.
A self-regulatory organization, as defined by a number of regulatory bodies,31 is an organization to which has been delegated responsibilities stipulated in legislation or which has been empowered to oversee the good conduct of business in a given field. Mention should be made of stock markets and clearing corporations recognized by the CVMQ, the only Québec agency authorized to recognize self-regulatory organizations according to a framework clearly defined in the legislation.32 Several other organizations operating in the various fields of the financial sector assume roles and functions similar to those of a self-regulatory organization, but are not recognized as such.
8.10.1 Principles of recognition
Consumer assistance demands that the Agence assume most functions, duties and responsibilities pertaining to market regulation, although it could, in some instances, delegate regulatory duties to self-regulatory organizations. Before it delegates duties, the Agence should ensure compliance with the following principles of recognition, to be included in the legislation, in order to respect the objectives of the new regulatory structure and Québec’s jurisdiction over the regulation of its financial sector.
- The inclusion of self-regulatory organizations in the regulatory structure should not override the benefits stemming from the revision of regulation of the financial sector, especially by once again subjecting financial sector interveners to a multitude of bodies.
31 See the definitions in Appendix 5. 32 Ss. 169-170, Securities Act (R.S.Q., c. V-1.1).
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- The inclusion of self-regulatory organizations should comply with the principles inherent in the regulatory structure. Since the government should approve the regulations drawn up by the Agence, it should also approve the regulations elaborated by a self-regulatory organization.
- Self-regulatory organizations should undertake to comply with requests from the Agence to amend their regulations when the Agence deems such regulations to be unsuited to the Québec financial sector even if this leads to the adoption of rules applicable solely to Québec.
- Self-regulatory organizations should make provision for a mechanism geared to taking into account conditions in the Québec financial sector. For example, a Canada-wide self-regulatory organization could establish a specific committee for Québec reporting to its board of directors or set up a Québec territorial body to which powers would be delegated. This committee or body would exercise genuine decision-making power in respect of questions that directly affect the Québec financial sector from the standpoint of Québec regulation of the financial sector.
- The Agence or the government could at any time suspend, revoke or modify the status of a self-regulatory organization should the latter fail to comply with the commitments that led to its recognition.
- As a corollary, if the Investment Dealers Association of Canada wishes to pursue its activities in Québec, it must obtain the status of a self- regulatory organization from the Agence, which must apply the principles of recognition stipulated in the legislation.
8.10.2 Recognition procedure
The recognition procedure in respect of self-regulatory organizations could apply to all organizations that assume regulatory duties in the Québec financial industry in the fields of insurance, financial planning, compensation and securities. For example, the Agence could delegate the regulation of property insurance sales representatives to organizations representing the latter. Such organizations would make provision for rules governing their representatives, which the government would approve, in order to ensure that the public receives quality services. The rules would be compulsory and restrictive since the government would ultimately approve them.
Moreover, the recognition procedure would be discretionary in that it would be incumbent upon the Agence to consider the advisability of delegating regulatory duties to an organization. An organization would be recognized as a self-regulatory organization solely in respect of the duty delegated to it and its other activities would not be deemed part of the regulatory functions pertaining to the Québec financial sector. Furthermore, such recognition should be established in light of the self-regulatory organization’s ability to objectively, fairly and effectively perform the duty or duties delegated to it by
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the Agence, which should assess the relevance of delegating regulatory duties to an organization and the organization’s ability to perform such duties without creating internal conflicts of interest.
8.11 THE BUREAU DES EXAMENS ET DÉCISIONS
RECOMMENDATION 11
We recommend the establishment within the Agence of the Bureau des examens et décisions as a separate authority to hand down quasi-judicial decisions.
The regulatory bodies studied issue, modify, suspend or withdraw authorizations that control the exercising of various activities and enjoy extensive discretionary leeway, depending on the legislation that governs them. Each regulatory body that the Task Force studied maintains its own decision-making process and a separate administrative procedure in respect of these acts. Moreover, each body maintains separate review and appeal processes. Appeals of decisions handed down by the CVMQ and the BSF are lodged with the Court of Québec, while appeals of decisions of the IGFI and the RRQ are lodged with the Tribunal administratif du Québec.
The establishment of the Agence should encourage the government to harmonize decision-making, administrative, review and appeal processes. Faced with the market, the Agence could neither support nor justify disparate processes. However, this would not prevent it from establishing different conditions, if need be, to grant or withdraw authorizations or licences depending on the activity regulated and the degree of discretion granted. In addition, rights of review or appeal could vary depending on the type of decision handed down but should follow a single process to ensure consistency.
These harmonization rules, from the standpoint of the processes mentioned earlier, should apply to the entire regulatory structure. The establishment of the Bureau des examens et décisions is in keeping with such harmonization.
The Bureau des examens et décisions would make decisions, review and override decisions made by the Agence and take disciplinary action against market stakeholders following investigations conducted by the Agence. Such disciplinary action could range from the suspension of licences or authorizations to fines or legal proceedings. The Bureau des examens et décisions should make decisions that would more significantly affect the rights of stakeholders to ensure their independence in relation to decisions made by the Agence’s general administration. The relevant legislation should specify the Bureau des examens et décisions’ jurisdictional responsibilities.
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The Agence must enjoy solid recognition and credibility on domestic and international markets and, to this end, the Bureau des examens et décisions should be competent, multidisciplinary, responsive and efficient.
Certain conditions must be met to ensure that the Bureau des examens et décisions is able to hand down quasi-judicial decisions and review the decisions handed down by the Agence’s divisions and that it is thus recognized by all subjects and stakeholders in the financial sector. Specifically, the Bureau must:
- ensure unfailing compliance with the audi alteram partem rule whereby a subject is entitled to be heard before a decision on his case is handed down; - be impartial; - act fairly; - be independent.
This reflects the principles of natural justice.
The Bureau des examens et décisions must satisfy these conditions in appearance and in fact and, to this end, it would be isolated from the Agence’s other operations. A separate group of people should staff the Bureau des examens et decisions and its activities should be kept separate from those of the Agence.
Appeals of decisions handed down by the Bureau des examens et décisions would be lodged directly with a court of law. Given the significant financial impact that the decisions may have in Québec and elsewhere, appeals should be lodged with the Court of Québec, an ordinary law court.
8.12 OTHER RECOMMENDATIONS
8.12.1 The Real Estate Brokerage Act
RECOMMENDATION 12
We recommend that only the regulatory duties now performed by the ACAIQ with respect to the brokerage of loans secured by immovable hypothec be assigned to the Agence.
As for the regulatory duties that the IGFI now assumes in respect of the ACAIQ, it is incumbent upon the government to decide to whom it wishes to assign them.
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8.12.2 The Supplemental Pension Plans Act
RECOMMENDATION 13
We recommend that only the administration of regulatory provisions governing the solvency of pension plans be assigned to the Agence.
The RRQ would continue to administer provisions respecting the promotion of pension plans and counselling.
8.12.3 The Consumer Protection Act
RECOMMENDATION 14
We recommend maintaining the status quo with respect to the OPC.
8.12.4 The administration of other statutes
RECOMMENDATION 15
We recommend that the Agence be responsible for administering other financial legislation.
Regulatory bodies in the financial sector now administer several statutes other than those governing the financial sector. Some of these statutes are predominantly financial in nature, e.g. the Act respecting the Mouvement Desjardins, the Act to establish the Fonds de solidarité des travailleurs du Québec (F.T.Q.) and the Act to establish Fondaction, le Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l'emploi, while other statutes, e.g. the Companies Act and the Act respecting the legal publicity of sole proprietorships, partnerships and legal persons have an incidental financial nature.
It is incumbent upon the government to decide to which body it assigns the administration of legislation that is not predominantly of a financial nature.
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8.12.5 Regulation of financial planning
RECOMMENDATION 16
We recommend that the Agence regulate all financial planners, including the members of professional orders.
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123 A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR
124 THE IMPLEMENTATION OF THE NEW STRUCTURE
CHAPTER 9
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126 CHAPTER 9 THE IMPLEMENTATION OF THE NEW STRUCTURE
9.1 LEGISLATION
If our recommendations are adopted, the Agence will be established through legislation and the assumption by the Agence of the functions of existing bodies will require amendments to current legislation and regulations. Once the transition has been made, the Agence will administer all legislation governing the financial sector.
The establishment of the Agence will require the government to coherently organize the decision-making (including the delegation of regulatory responsibilities), administrative and quasi-judicial powers attributed to this financial sector regulatory body.
9.2 THE BUREAU DE TRANSITION AND TRANSITIONAL MEASURES
To ensure a smooth transition, we recommend the establishment of a Bureau de transition, vested with a juridical personality and responsible for carrying out the transition according to a precise timetable. The president and chief executive officer of the Agence would be appointed in a timely manner during the mandate of the Bureau de transition, which would exercise powers stipulated by the legislation. In particular, it would be responsible for pinpointing the human and physical resources that would be transferred and procedures governing the transfer.
The following guidelines should be applied to the establishment and operation of the Bureau de transition:
- The Bureau de transition should be made up of between five and seven members whose credibility is recognized in the financial sector and by the general public who are independent of existing bodies and are appointed by the government to perform their duties full time.
- The Bureau should have attributed or delegated to it the powers necessary to consolidate regulatory functions within a single body.
- The Bureau should have its own budget established according to its responsibilities and the timetable adopted.
- The Bureau should adopt a detailed action plan covering the responsibilities attributed by the government action plan.
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- The Bureau should seek to complete the transition within not more than 12 months.
- The Bureau should clearly indicate that the body to be established would rely, first and foremost, on expertise found in existing bodies.
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129 CHAPTER 9 THE IMPLEMENTATION OF THE NEW STRUCTURE
130 APPENDICES
APPENDIX 1
Biographical notes on members of the Task Force
Yvon Martineau, Chairman
Yvon Martineau is senior partner with Fasken Martineau, a law firm. He obtained a law degree from Université Laval and was admitted to the Barreau du Québec in 1970. He is a member of the Canadian Bar Association and the Barreau du Québec and has served on the latter’s administrative committee and general council.
Mr. Martineau specializes in corporate and commercial law, mainly in the realms of mergers and acquisitions and securities. He has contributed in Québec and abroad to the development of several big Québec companies. Moreover, he has directed major transactions that have had a significant impact on the restructuring of Québec financial institutions.
He also holds an MBA in finance. He has served as chairman of the board of Hydro-Québec and sits on the boards of directors of a number of private and public companies, in particular those in Groupe Canam Manac inc. and Groupe Jean Coutu (PJC) inc.
From 1982 to 1985, while he was senior partner with another big law firm, he practised in London, England. Prior to that, he taught company law at the Université de Montréal and the École de formation professionnelle du Barreau du Québec. He is the author of the Manuel des corporations du Québec, published in 1983.
Dominique Vachon
Dominique Vachon holds a master’s degree in economics and a bachelor’s degree in industrial relations from the Université de Montréal.
She is Vice-President and Chief Economist at the National Bank of Canada, where she previously served for over five years as principal economist. She has also taught macroeconomics and labour economics at the École des Hautes Études Commerciales and has written numerous financial columns in Les Affaires and Finance et Investissement.
Ms. Vachon became a member of the board of directors of the Université du Québec à Montréal in 2000 and a member of the board of directors of the Export Development Corporation 2001. In 1997, she received the Businesswoman of the Year award granted by the Board of Trade of Metropolitan Montreal.
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Claude Béland
Claude Béland is a visiting professor at the Université du Québec à Montréal, where he holds the chair in economics and humanism. He is also the President and CEO of the Société d'implantation du Centre hospitalier de l'Université de Montréal and Deputy Chairman of the board of directors of the Régie des rentes du Québec. Mr. Béland holds a Licentiate in Laws, with a specialization in commercial law and cooperative law.
Between 1959 and 1985, Mr. Béland taught law in several institutions. In 1971, he gave up private practice to serve as legal advisor to the Fédération des caisses d'économie du Québec. He became director general of the Fédération in 1979 and oversaw its affiliation with the Mouvement des caisses Desjardins the same year. In 1986, he was elected president of the Mouvement des caisses Desjardins; he was reelected in 1994 for a new term of appointment, which was renewed in 1997 and ended in 2000.
Mr. Béland has carried out numerous strategic initiatives that have contributed to the institution’s expansion and development. Mention should be made of the sweeping restructuring of the Mouvement, through which the credit unions have become co-owners of all of the agencies and corporations that make up the Mouvement Desjardins. The subsequent addition of new subsidiaries rounded out the range of services offered to individuals and businesses. In 1989 and 1990, he oversaw the affiliation of credit union federations in Ontario, Manitoba and Acadia. He is also responsible for the establishment in 1994 of the Société financière Desjardins-Laurentienne
Mr. Béland continues to participate actively in Québec society. He is a member of the boards of directors of a number of Québec businesses and has been appointed by the Conseil général du Barreau du Québec to the position of President of the Fonds d'assurances professionnelles du Barreau du Québec.
Pierre Carrier
Pierre Carrier obtained the title of certified management accountant in 1966 and that of a fellow (FCMA) in 1987. Since 1992, he has studied ancient civilizations, history and archaeology. He is also studying philosophy.
Throughout his career, Mr. Carrier has occupied various positions with a number of organizations. He served as director of administrative services and communications with the Conseil de la langue française until 1992. Between 1977 and 1981, he was the secretary of the Office de la protection du consommateur. He worked for the Commission des accidents de travail (CAT) from 1957 to 1977, where he occupied the positions of director general of compensation and director of the review board.
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Mr. Carrier continues to be active in several professional corporations. Since 1999, he has been a member of the administrative committee of the Bureau de l'Ordre des infirmières et des infirmiers du Québec. He also sits on the board of directors of the Institut de réadaptation en déficience physique de Québec. He has also served as a member of the administrative committee and the Bureau de l'Ordre des traducteurs, interprètes et terminologues.
Yvon Charest
Yvon Charest holds a bachelor’s degree in actuarial science and is a fellow of the Society of Actuaries (FSA) and a fellow of the Canadian Institute of Actuaries (FCIA).
Mr. Charest has been with Industrial Alliance since 1979; he was appointed President and Chief Executive Officer of the company in May 2000. Previously, he occupied various positions with the company, including chief operating officer and actuary in charge of actuarial valuation responsible for ensuring budget monitoring in life insurance subsidiaries, specifically in respect of product pricing.
Throughout his career, he has been a member of numerous Canadian Institute of Actuaries (CIA) committees, commissions and task forces. In particular, he was a member of the CIA board from 1989 and 1992 and deputy chairman of the board from 1992 to 1994. Since 1989, he has been a member of various committees of the Canadian Life and Health Insurance Association.
Mr. Charest is member of the board of directors of Industrial Alliance, National Life of Canada, Industrial Alliance Pacific and, since January 2001, the board of directors of MD Life.
Pierre Comtois
Pierre Comtois holds a bachelor’s degree in commerce with an option in administration, and a diploma from the Institute of Canadian Bankers, obtained at the École des Hautes Études Commerciales. He is a financial planner and certified administrator. He has also taken a course at the Canadian Securities Institute.
Mr. Comtois is Deputy Chairman of the board of Optimum gestion de placements inc. From 1992 to 1996, he served as executive vice-president, finance and treasury, with Groupe Optimum inc. From 1982 to 1992, he occupied the position of vice-president and director general, finance, with General Trust of Canada.
Mr. Comtois is a member of the investment committee and the marketing committee of the Fonds des professionnels du Québec inc. He is also a
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member of the board of directors of the Opéra de Montréal and the board of directors of the Banque Martin-Maurel (France), and is a member of the board of directors and of the investment committee of Fondation Centraide.
Pierre Laurin
Pierre Laurin holds a doctorate in administration from Harvard University and a doctorate honoris causa from Concordia University. He also holds a business degree from the École des Hautes Études Commerciales and a BA from the Séminaire de philosophie de Montréal.
Since January 1999, Mr. Laurin has been executive in residence at the École des Hautes Études Commerciales. Previously, he served for 12 years as vice-chairman and president for Québec of Merill Lynch Canada. From 1982 to 1987, he was vice-president and director of planning and administration with Alcan. He was also founding president and CEO of Soccrent, a venture capital company dedicated to establishing new companies in the Saguenay— Lac-Saint-Jean region.
He is Chairman of the Board of Procréa Biosciences and Atrium Biotechnologies. In addition, he sits on the boards of directors of Laboratoires Aeterna, Quebecor, Boomerang and various non-profit organizations.
In recognition of his extensive professional and social commitment, he was named an officer of the Order of Canada in 1982 and Chevalier de l'Ordre national du Mérite de la République française in 1997. Mr. Laurin is also the author of several publications and the founder of Revue Gestion, an international management journal.
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APPENDIX 2
Interveners who submitted briefs to the Task Force
The Task Force received 24 briefs, the complete contents of which can be consulted on the Task Force’s Web site (www.gesef.gouv.qc.ca).
- Association des cabinets gestionnaires de courtage en assurance de personnes du Québec - Association des experts en sinistre indépendants du Québec inc. - Association québécoise de la planification financière - Bourse de Montréal Inc. - Canadian Bankers Association - Canadian Federation of Independent Business - Canadian Life and Health Insurance Association Inc. - Cartier Partners Financial Group Inc. - Comité Consultatif Juridique en valeurs mobilières - Conseil des fonds d'investissement du Québec - Corporation des assureurs directs de dommages du Québec - Fédération des Chambres immobilières du Québec - Fiscal and Financial Planning Association - Gilles Thouin. - Groupe Promutuel - Insurance Bureau of Canada - Investment Dealers Association of Canada - Mouvement des caisses Desjardins - Office de la protection du consommateur - Ordre des administrateurs agréés du Québec - Regroupement des assureurs de personnes à charte du Québec - Regroupement des cabinets de courtage d'assurance du Québec - Regroupement des consultants en avantages sociaux du Québec - Réseau des notaires planificateurs financiers du Québec
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APPENDIX 3
Biographical notes on experts invited by the Task Force
Delia Rickard
Delia Rickard is a graduate in law and is studying for an MBA degree. She is Deputy Executive Director, Consumer Protection, with the Australian Securities and Investments Commission. For the past two and a half years she has, among other things, chaired the task force responsible for revising and expanding the Electronic Funds Transfer Code. Previously she worked for five years in the consumer protection division of the Australian Competition and Consumer Commission (ACCC). During this time, she also collaborated for one year in the deliberations of the Wallis Commission, which examined the Australian regulatory system.
Prior to joining the ACCC, she served as advisor and senior advisor with two Commonwealth Ministers of Consumer Affairs. Ms. Rickard has considerable experience in the realm of consumer protection and is thoroughly familiar with issues in the financial services sector, especially codes of conduct and conflict-resolution methods. From 1996 to 1998, she was a member of the Australian Payments System Council.
William Blair
William Blair is a graduate of Balliol College, Oxford and is now practising in the financial sector. He has defended a number of cases before the courts and has an extensive consulting practice. He was appointed Queen’s counsel in 1994 and is the author of several publications, in particular, The Encyclopedia of Banking Law and Banking and Financial Services Regulations. He is also a visiting professor at the London School of Economics and at the Centre for Commercial Law Studies in London. Since the beginning of 2001, he has sat part-time on the Financial Services and Markets Tribunal recently established in the United Kingdom.
Jacques Mistral
Jacques Mistral holds a PhD in economics. He has taught at the Université des Antilles, the Université de Paris Nord, the École Normale Supérieure and the Institut d’Études Politiques de Paris. From 1988 to 1991, he served as a technical advisor responsible for economic affairs in the office of Prime Minister Michel Rocard. From 1992 to 2000, he held several key positions with the French group Axa, including central director. He subsequently served as a special advisor for economic policy and international relations with the
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minister of the economy, finance and industry. He is currently the minister financial counselor at the French Embassy in Washington and financial advisor at the French Embassy in Canada.
Jean Roy
Jean Roy obtained a PhD in finance from the Wharton School of the University of Pennsylvania in 1985. He taught finance at Université Laval from 1983 to 1990 and served as director of the department of finance and insurance from 1985 to 1988. Since 1990, he has been a full professor of finance at the École des Hautes Études Commerciales, where he specializes in the management of financial institutions. He has served as a consultant with the Mouvement Desjardins, the ministère des Finances du Québec, the Commission des valeurs mobilières du Québec, the Office de la protection du consommateur, the federal Department of Finance, and the Canada Deposit Insurance Corporation.
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APPENDIX 4
Working groups of Canada-wide forums
The Canadian Council of Insurance Regulators
Over the past two years, the CCIR has examined through sub-committees various issues, including:
- consumer protection from the standpoint of insurance; - the market conduct of personal insurance companies; - the different categories of insurance policies; - E-commerce in the insurance sector; - the capital test for property insurers.
The Canadian Association of Pension Supervisory Authorities
Over the past two years, CAPSA has examine through sub-committees various issues, including:
- a study of Canadian and foreign pension plan regulation; - the development, in consultation with the industry, of the principles underlying a pension plan legislative model; - the development and communication of policies, guidelines and recommendations pertaining to pension plan investments; - the development of guidelines concerning electronic information exchange between the members and administrators of pension plans; - a review of pension plan funding requirements; - the development of common guidelines for corporate governance.
Canadian Securities Administrators
Over the past two years, Canadian Securities Administrators have examined through sub-committees various issues, including:
- the modification of the System for Electronic Document Analysis and Retrieval (SEDAR) for prospectuses and annual information forms; - the proposed norm concerning parallel negotiating systems and operating rules; - the Mutual Reliance Review System in respect of the registration of the member advisors and brokers of a self-regulatory organization; - the reformulation of the policy concerning the sales or purchase program for the owners of small blocks of shares; - the relationship between the member and his clients;
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- the directive for engineers and geologists concerning the presentation of reports on oil and gas; - the modification of the standard concerning rights offerings; - the review of the standard governing scholarship plans; - the proposal for a national escrow regime applicable to initial public distributions; - the standardization of disclosure timing and content; - the standard concerning financial forecasts; - the standard concerning the use of the monetary unit with regulatory authorities; - the standard concerning the replacement of external auditors; - the standard concerning the change of date of the fiscal year end; - the standard concerning communication with the true holders of the securities of a reporting issuer; - the change in the definition of “material fact” and “material change;” - the norm concerning communication to shareholders of quarterly financial statements; - the exemption from certain insider report obligations; - the standard concerning the System for Electronic Data on Insiders (SEDI); - the standard concerning the distribution of controlling interests; - the standard concerning information on outstanding stock; - the standard concerning the warning system and related questions affecting public offerings and insider reports; - the standard concerning the distribution of securities outside the main jurisdiction; - the standard concerning mutual fund prospectuses; - the standard concerning mutual funds; - the standard concerning term market funds; - the standard concerning mutual fund business practices.
Joint Forum of Financial Market Regulators
Over the past two years, the Joint Forum has set up sub-committees to examine various issues, including:
- consumer complaint management and dispute resolution; - regulatory principles governing investment disclosure in capital accumulation plans; - harmonization of regulations governing segregated funds and pooled investment funds; - the proficiency of intermediaries and the granting of licences; - the structure of the Joint Forum.
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APPENDIX 5
Definitions of self-regulatory organizations (SROs)
Neither the Securities Act nor any other statute governing the financial sector in Québec precisely defines the concept of the self-regulatory organization (SRO). However, the Derivatives Institute of the Bourse de Montréal,33 the Investment Dealers Association of Canada (IDA),34 the National Association of Securities Dealers Inc. (NASD),35 and the Commodity Futures Trading Commission (CFTC)36 provide explicit definitions.
Derivatives Institute
An organization that has been delegated certain regulatory and compliance functions by the regulatory authorities.
IDA
A self-regulatory organization is an organization that has been given the authority and the responsibility to regulate its members.
National Association of Securities Dealers Inc.
An entity, such as the NASD, responsible for regulating its members through the adoption and enforcement of rules and regulations governing the business conduct of its members.
33 Established in March 2001 by the Bourse de Montréal, the Derivatives Institute is responsible for training and informing the public in the use of derivatives for effective portfolio management. 34 As a Canadian self-regulatory organization in the securities industry, IDA regulates the activities of stockbrokers from the standpoint of the capital required and the conduct of business. To become a member, a company must comply with rigorous requirements governing capital, demonstrate that it is willing and able to conduct its operations according to the Association’s by-laws, regulations and guidelines, and agree to submit to constant oversight. 35 The NASD is the American self-regulatory organization that oversees the registration and regulation of stockbrokers and investment salesmen throughout the United States. It is mainly responsible for elaborating regulations and rules of conduct in respect of the securities market, auditing its members’ operations, imposing penalties on offenders, and operating and regulating the securities market. 36 The CFTC is an independent agency established by the US government to regulate and protect investors on American derivatives markets.
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Commodity Futures Trading Commission
Self regulatory organizations (i.e., the commodity exchanges and the National Futures Association) must enforce minimum financial and reporting requirements for their members, among other responsibilities outlined in the CFTC's regulations. When a futures commission merchant (FCM) is a member of more than one SRO, the SROs may decide among themselves which of them will be responsible for assuming these regulatory duties and, upon approval of the plan by the Commission, be appointed the “designated self regulatory organization” for that FCM.
141 142 ANNEXES
RECOMMENDATION 1
We recommend the establishment through legislation of the Agence d’encadrement du secteur financier du Québec, a single body to regulate the Québec financial sector.
RECOMMENDATION 2
We recommend that the Agence’s regulatory responsibilities be determined by means of a functional approach and divided into five regulatory categories:
- consumer assistance; - solvency; - distribution; - securities markets; - compensation.
Five separate administrative divisions would assume these responsibilities, which should provide coordination services, especially in respect of relations with regulated entities, inspection, investigations and disclosure.
RECOMMENDATION 3
We recommend that financial sector stakeholders fund the Agence and that the government approve its budgets.
RECOMMENDATION 4
We recommend that a president and chief executive officer head the Agence and that the government appoint him for a five-year term, subject to one renewal of term.
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RECOMMENDATION 5
We recommend that the president and chief executive officer appoint superintendents responsible for assisting him in the execution of his duties and ensuring the management of the Agence’s regulatory divisions.
RECOMMENDATION 6
We recommend the establishment through legislation of a Conseil de la régie administrative in the Agence, comprising seven members, including a chairperson, appointed by the Minister of Finance, for a term of appointment of three years, renewable for one additional term.
RECOMMENDATION 7
We recommend that the Agence establish ad hoc or permanent advisory committees to maintain close relations with consumers and regulated entities.
RECOMMENDATION 8
We recommend that the Agence be publicly accountable.
RECOMMENDATION 9
We recommend that the legislation governing the Québec financial sector and establishing the Agence stipulate the objectives to be achieved and that the Agence obtain the powers necessary to help it attain the objectives set by the legislation.
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RECOMMENDATION 10
Insofar as self-regulatory organizations are contemplated in the regulatory structure, we recommend that the mechanism for recognizing such organizations be governed by the principles stipulated in the legislation and that it be applied in the same manner to all fields of the financial sector.
RECOMMENDATION 11
We recommend the establishment within the Agence of the Bureau des examens et décisions as a separate authority to hand down quasi-judicial decisions.
RECOMMENDATION 12
We recommend that only the regulatory duties now performed by the ACAIQ with respect to the brokerage of loans secured by immovable hypothec be assigned to the Agence.
RECOMMENDATION 13
We recommend that only the administration of regulatory provisions governing the solvency of pension plans be assigned to the Agence.
RECOMMENDATION 14
We recommend maintaining the status quo with respect to the OPC.
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RECOMMENDATION 15
We recommend that the Agence be responsible for administering other financial legislation.
RECOMMENDATION 16
We recommend that the Agence regulate all financial planners, including the members of professional orders.
146