The BC, Alberta and Ontario securities commissions
may have gained too much financial autonomy when converted to
crown corporation status, according to a new study Commissions Unbound: The Changed Status of Securities Regulators in Canada
released today by The Fraser Institute. This has come at the
expense of low cost and efficient regulation of the securities
The study, written by Professor John Chant, Professor of
Economics, Simon Fraser University and Neil Mohindra, Senior
Economist, Financial Sector Regulation, Fraser Institute,
examines patterns in expenditures, employment levels, revenue,
salary growth and reserve levels of the BC, Alberta, and Ontario
securities commissions, all of which were recently given
Prior to 1995, the budgets of the securities commissions of
Alberta and BC were set by their provincial governments through
the appropriation process commonly used for all government
spending. That same year, the Alberta Securities Commission (ASC)
and the British Columbia Securities Commission (BCSC) were given
Crown corporation status, which gave the commissions the ability
to control the fee revenue generated from their activities and
determine their own budgets. In 1997, Ontario also converted its
securities regulator, the Ontario Securities Commission (OSC) to
a self-funded corporation.
"There were calls for the change in status of the commissions
because it would insulate them from the vagaries of negotiating
appropriations with governments for financing their activities,"
However, the study shows that the evidence suggests the reduced
financial accountability inherent in the commissions' changed
status appears to have had undesirable side-effects. The authors
found that since conversion in 1995, the ASC and BCSC have
increased spending on average by almost 20 percent and 14 percent
a year. Since its conversion in 1997, spending by the OSC has
more than doubled.
A major reason for this explosion in spending is staff increases.
The BCBS and ASC have increased their staff by approximately 50
percent in the five years since conversion, while the OSC
increased their staff by 67 percent. "In a speech last year, the
Chairman of the UK Financial Services Authority (FSA), Howard
Davies, indicated the FSA's philosophy was to work harder rather
than build further battalions of regulators. Some of our
provincial securities commissions appear to have taken the
opposite philosophy," says Mohindra.
Rising salaries have also contributed to higher expenditures.
Average salaries have been increasing at the BCSC by an average
of over 5 percent per year, while at the ASC they have been
increasing 13.5 percent per year. Between 1996 and 2000, these
two commissions beat private sector counterparts in investment
intermediaries, accounting, and law in salary growth. In 1996,
only two staff members received a salary greater than $100,000 at
the OSC. In 2000, sixty-four surpassed this mark.
Senior management at the commissions are beneficiaries of the
salary growth. In 2000, the salaries of the OSC Chair, the Vice
Chairs, and executive directors of both the OSC and ASC were more
than double 1996 levels. Comparisons with positions of similar
responsibility suggest salaries at the commissions are excessive.
The OSC Chair now earns 2.6 times the salary of the Chair of the
U.S. Securities and Exchange Commission (SEC).
Despite the higher spending, fees were set at excessive levels
that generated large surpluses. By the end of 2000, the three
commissions combined held over $60 million in reserves despite
transfers to their provincial governments of over $60 million by
the OSC and $12 million by the BCSC.
Since the study was written, the OSC has released its 2001 Annual
Report, which shows a further 13 percent increase in spending, a
large part of which is attributable to staff expansion. The
latest OSC annual report indicates the operating budget for 2002
is 16 percent higher than 2001 expenditures and that staff levels
will continue to expand significantly. Staff levels are
continuing to escalate at the OSC despite delegation of mutual
fund dealer regulation to a new self-regulatory organization.
"Overall, the conversion of the commissions into crown
corporations was not a success, but a lesson on why bureaucrats
should not have independence in setting budget and salary levels.
This isn't just true for securities regulators, but other
government bodies as well such as public utilities, hospital and
school boards. Measures are needed to restore financial
accountability, including subjecting the budgets of the
securities commissions to an arm's length review," concludes