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New Study Says Provincial Securities Commissions Lack Adequate Financial Accountability

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Release Date: November 19, 2001
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 industry.

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 financial autonomy.

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," says Mohindra.

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 Mohindra.