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......................................................................