Canada's Little Bang: Deregulation or Reregulation
![handle is hein.journals/intfinr7 and id is 260 raw text is: Canada's 'Little Bang':
deregulation or reregulation?
When Canada opened up its securities industry, both domestic and
foreign banks rushed to take advantage. They soon found themselves
caught in a federal-state power struggle. By Andrea Wood
Canada's deregulation of its financial services
industry began with a 'Little Bang' on June 30, 1987,
when significant amendments to the federal Bank Act
and to Ontario's Securities Act Regulations came into
force. For the first time since the 1930s, banks, both
domestic and foreign, were allowed to acquire more
than 10 per cent of any class of shares of a securities
dealer, with the approval of the Minister of Finance.
Foreign banks and securities dealers were also per-
mitted to own up to 50 per cent of securities dealers in
Ontario (up to 100 per cent from June 30,1988). In sum,
distinctions between the four pillars of the financial
services industry were to fall away and participation
in the industry by foreigners was welcomed.
The legislative changes triggered a flurry of press
releases from investment dealers and banks, both
domestic and foreign. Within six months, three of
Canada's Big Five chartered banks announced that
they had agreed to secure control of Canadian invest-
ment dealers. A fourth made a similar announcement
slightly later, and several foreign securities firms had
made it clear that they intended to set up shop in
Ontario on receiving the appropriate approvals.
Slow start
But by early March, the process had stalled. Only
one of the Big Five, the Bank of Montreal (BMO), had
obtained the regulatory approvals needed to finalise
its investment in a securities dealer (BMO acquired 75
per cent of Nesbitt Thomson Deacon Inc). And, by
early April, only three foreign dealers (SG Warburg
Group PLC; Mirabaud Co; and Goldman Sachs & Co)
had received approval to start Canadian securities
operations.
Canada's Little Bang got off to a slow start largely
because of a dispute between the federal and provin-
cial governments over which level of government
would regulate federal financial institutions entering
the securities industry. Under Canadian constitu-
tional law, provincial and federal regulatory powers
over the financial services industry overlap. The fed-
eral government has jurisdiction over banks and fed-
erally incorporated trust, loan, and insurance com-
panies. The provinces, meanwhile, have jurisdiction
over securities regulation and over provincially incor-
porated trust, loan, and insurance companies.
Only Ontario and the federal government had
made an attempt prior to the Little Bang to clarify how
their overlapping regulatory powers were to be exer-
cised. In April, 1987, they had entered into an accord
which confirmed that the federal government,
through its regulatory arm, the Office of the Superin-
tendent of Financial Institutions (OFSI), would super-
vise the in-house securities activities of federally
incorporated financial institutions, including banks.
These institutions, however, would be forced to carry
out certain key securities activities through provin-
cially-regulated subsidiaries. According to Stanley
Beck, Chairman of the Ontario Securities Commis-
sion (OSC), these activities comprised 'the heartof the
securities business... [they included] the corporate
bond underwriting, the equity trading, the mutual
fund dealing'.
Thomas Hockin, the Federal Minister of State for
Finance, had hoped that the accord would serve as a
model for agreements with the other provinces. But
other provinces felt Ontario had given up too much.
Quebec, in particular, felt that the provinces shouldbe
responsible for monitoring all securities activities,
even those carried on in-house byfederally-regulated
financial institutions. As a result none of the other
provinces followed Ontario's lead.
And so the issue of who would regulate the new par-
ticipants in the securities industry remained unresol-
ved in all provinces but Ontario when Canada took its
first step towards deregulation. It was not long before
the latent conflict became patent. In August, 1987, the
federal governmentpassedtwo guidelines settingout
the federal government's criteria for reviewing appli-
cations by banks for permission to participate in the
securities industry. Guideline G-17(a) applied to
Canadian banks (both Schedule A and Schedule B)
while guideline G-17(b) applied to 'foreign banks' as
defined by the Bank Act.
Both guidelines set out terms and conditions which
the OFSI would insist be observed by federally-regu-
lated financial institutions investing in securities
dealers. The terms and conditions related to, among
other things, conflicts of interest, capital adequacy,
capital leverage, access to records, and indirect owner-
ship of other corporations through the dealer. Both
also stated that in reviewing the application of either
foreign controlled Canadian chartered banks or
foreign banks, the OFSI would consider whether
Canadian banks are able to carry on securities
businesses in the home jurisdictions of the foreign
entities.
Quebec was incensed by the guidelines. Shortly
after they were published, Paul Guy, Chairman of the
Quebec Securities Commission (QSC), announced
that the Commission would refuse to register any
bank takeovers of securities firms if the participants
had adhered to the guidelines or if they had provided
any of the undertakings required. According to
Antony Dandonneau, General Counsel of QSC,
because the guidelines, in effect, imposed rules con-
ceived for banks on securities dealers, 'We opposed
International Financial Law Review June 1988](ViewImageLocal?handle=hein.journals/intfinr7&div=113&collection=&method=preview&ext=.png&size=3)
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Canada's Little Bang: Deregulation or Reregulation
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