Double Trouble: Interpretations of ‘Fostering Competition’ as a Purpose of Securities Law in Ontario
Madison Kerr, 3L, Volume 80 Senior Editor
Introduction
On April 27, 2021, various amendments to the Securities Act (Ontario) came into effect, with one such change incorporating the fostering of capital market competition into the previously established purposes of the Act. The Securities Act purposes have substantial influence in the interpretation and enforcement of securities law in Ontario, but the brief and arguably vague language of this new purposive element makes it difficult to envision what fostering competition may look like in practice. This post identifies two types of intended effects on securities law enforcement: fostering intraprovincial competition through support or efficiency improvements targeted at smaller firms and competing globally to attract investment in Ontario.
Background
The Securities Act amendments were passed as part of the lengthy Bill 269, Protecting the People of Ontario Act (Budget Measures), 2021. Since a limited amount of legislative discussion focuses on the purposive changes specifically, it is necessary to draw legislative intent about the interpretation of s 1.1(b) from legislative comments surrounding the Securities Act amendments more generally.
The following are the purposes of the Securities Act under s 1.1, as it now appears, with added emphasis indicating the new additions. Note in particular the changes to s 1.1(b):
Purposes of Act
1.1 The purposes of this Act are,
(a) to provide protection to investors from unfair, improper or fraudulent practices;
(b) to foster fair, efficient and competitive capital markets and confidence in capital markets;
(b.1) to foster capital formation; and
(c) to contribute to the stability of the financial system and the reduction of systemic risk.
The Securities Act amendments arise out of recommendations of the Capital Markets Modernization Taskforce that were published in January 2021. The Taskforce’s final report consists of 74 recommendations on how securities regulation in Ontario could be modernized to increase efficiencies and boost the competitiveness of the province’s financial markets [Taskforce Final Report]. This report was expressly mentioned during the second reading of Bill 269 and has clearly incited the s 1.1 changes [1].
Intrajurisdictional Competition
The legislature most clearly intended for ‘fostering competition’ to be interpreted as increasing the number and types of investment opportunities offered by capital market participants in Ontario as regulated by the Act. During the second reading of Bill 269, some motivations for making amendments to the purposes were identified as “boost[ing] economic growth and create[ing] a level playing field for all market participants” (at 1550). The motivations behind increasing intrajurisdictional competition are explored in more depth within the final report of the Capital Markets Modernization Taskforce.
The intrajurisdictional competition purpose aligns with the Ford government’s advertised concern about protecting smaller businesses. In effect, this type of competition is a more targeted application of the existing efficiency purpose, streamlining regulatory processes specifically for issuing firms with relatively small market share. These types of firms may be new or simply smaller, and pose unique challenges to regulators when balancing efficiencies with continued investor protection.
On its face, it appears that Ontario is not unique among securities regulators for having a purpose of promoting intrajurisdictional competition. For instance, a similar objective appears within the UK’s Financial Services and Markets Act 2000 [FSMA]. The UK regulator, the Financial Conduct Authority (FCA), has three objectives in its operations, one of which is “promoting effective competition in the interests of consumers in the markets for…regulated financial services, or…services provided by a recognized investment exchange…” (FSMA s 1E(1)). With respect to this objective, the FCA considers multiple angles of consumer needs and ease of access to financial services, ability of new firms to enter into financial markets, and innovation being encouraged by competition (FSMA at s 1E(2)).
The FCA’s work to date under its competition mandate hints at what facilitating intrajurisdictional competition may look like in Ontario. Some of the Taskforce’s recommendations appear to draw from the FCA’s Project Innovate which promotes the introduction of innovative financial products and services in the UK. Project Innovate encourages innovative firms by providing direct support and consultation, and offers a sandbox for testing with real consumers [2]. The FCA has also used its competition mandate as justification for conducting market research to examine how certain financial markets are benefitting consumers [3].
What is crucial to note, however, is that the FCA has a much broader mandate than the OSC. Beyond its role as a securities regulator, the FCA is charged with regulating financial services and financial markets, and has the power to enforce competition law in these markets [4]. For instance, the FCA’s first enforcement of competition law arose following investigations into an asset management cartel, levying total fines of about £415,000 in 2019 [5]. This is not a universal power to consider the status of competition in any market, and critically, even if the FCA wishes to formally investigate for a breach of competition law within the financial markets, the UK’s competition law regulator (the Competition and Markets Authority) has final say on which regulator between them should investigate [6].
The danger of the OSC’s expansion into fostering capital markets competition stems from the regulator’s inexperience and lack of expertise within the area, which is especially apparent when compared to the better positioned FCA. The Capital Markets Modernization Taskforce, legislature, and OSC all lack competition expertise. Unlike the UK’s regulatory arrangement, competition experts have not been specifically empowered to provide consultation or step in where the OSC otherwise believes it has authority on competition issues.
Interjurisdictional Competition
In addition to intrajurisdictional competition, it appears the legislature also intended a second interpretation of ‘fostering competition’: making Ontario’s securities law regime more competitive compared with those in global jurisdictions. This interjurisdictional competition may arise in various forms, such as reducing barriers to raising capital or allowing for novel types of investment products. With this aspect of the new purpose, the OSC internalizes the goal of attracting more firms to issue securities in Canada.
Evidence for this interpretation arises most directly in statements from the Minister for Finance to the Standing Committee on Finance and Economic Affairs regarding Bill 269:
“Our government is taking steps to support long-term growth in our province. An important factor in that growth is a strong and modern capital market system that attracts businesses and competes for investment and talent worldwide” (42-1, F-65 (9 April 2021) at 0910) [emphasis added].
This interpretation is further supported by the approach taken by the Capital Markets Modernization Taskforce, where the group chair stated the aim of the taskforce was to provide “bold and innovative recommendations that will make Ontario one of the most attractive capital market destinations globally” (Taskforce Final Report at 1).
Following this interpretation, interjurisdictional competition will surely abrase the longstanding Securities Act principle that “the integration of capital markets is supported and promoted by the sound and responsible harmonization and co-ordination of securities regulation regimes” (s 2.1 para 5). In line with the principles of statutory interpretation, the purpose amendment must be interpreted as distinct from the this principle. Surely, then, the regulatory competition approach is a step beyondharmonization, and alone may very well be used to justify undercutting the regulations of other jurisdictions in an effort to attract capital. The existing principle values consistency in reporting requirements, implicitly incorporating the efficiencies that come with allowing firms to reuse the same materials across jurisdictions or access exceptions from requirements to file. The new purpose, however, goes a step further and broadly empowers the OSC to implement policies intended to attract or maintain investment in Ontario issuers.
The interjurisdictional competition intended by the legislature is likely focused on competing with jurisdictions outside of Canada. This reading draws from the desire to maintain consistency with other Canadian jurisdictions from the Taskforce’s report. In this way, the existing s 2.1 principle has not become obsolete, but may become most persuasive in suggesting consistency with other Canadian regulators [7].
The legislature and Taskforce’s objective of global competition is a further divergence from any standard set by the FCA. By contrast, global competitiveness of the UK’s financial markets is not within the purview of the FCA, though the regulator admits that global competitiveness can be a by-product of increased market efficiency (UK, Financial Conduct Authority, FCA Mission: Approach to Competition (London: 2018) at 6). Strong pursuit of interjurisdictional competition is a dangerous game, for fear of opening up a regulatory ‘race to the bottom’ similar to the competitive behaviour that has been observed with strategic reductions in tax rates [8].
Conclusion
The addition of a competition element to the purposes of the Securities Act will shape future interpretation, enforcement, and policymaking involving financial markets, a sector that is incredibly important to the Canadian economy. This change will impact securities law enforcement under the Securities Act but will have longer-lasting effects under its likely successor, the Capital Markets Act [9].
There is some precedent for the type of intrajurisdictional competition considered by this addition, but the allocation of competition expertise in Ontario raises questions about whether the OSC is the correct body to be performing the balancing between competition and investor protection. Further, the interjurisdictional competition that can be interpreted as also within the legislative intent sets a dangerous precedent for relaxing regulations in a way that will surely produce harm to consumers. Ultimately, the OSC has been provided with a new approach to justify an application of securities law that disadvantages consumers, but the extent to which this new power is wielded remains to be seen.
[1] See Ruth Sullivan, Sullivan on the Construction of Statutes, 5th ed (Markham, ON: LexisNexis Canada Inc, 2008) at 575-576 on the appropriateness of considering extrinsic aids in statutory interpretation, specifically materials noticed by the legislature.
[2] See also Deborah Jones, Mark Bethell & Ingrid Cameron, "Competition at the Financial Conduct Authority" (2015) 14:3 Competition LJ 179 at 180-181.
[3] Ibid at 180.
[4] Financial Services and Markets Act 2000 (UK), s 1F; UK, Financial Conduct Authority, FCA Mission: Approach to Competition (London: 2018) at 5, n 1.
[5] Diana Johnson, “A Competition Law First” (2019) 7848 New LJ 10 at 10.
[6] Ibid.
[7] See for example Taskforce at 24 for a recommendation that comes in line with CSA standards.
[8] See e.g. this phenomenon described by U.S. Treasury Secretary Janet Yellen in “130 countries back OECD plan to set global minimum corporate tax rate”, The Associated Press (1 July 2021), online: <https://www.cbc.ca/news/business/oecd-corporate-tax-rate-1.6087464>.
[9] The government of Ontario has released a draft version of the Capital Markets Act, legislation intended to replace both the Securities Act and Commodities Futures Act. The purposes of the draft Capital Markets Act exactly reproduce the ‘fostering competition’ purpose and ought to be similarly interpreted.