A Streamlined Regulatory Structure for Québec's Financial ...

A Streamlined

Regulatory Structure

for Québec's

Financial Sector

Report of the Task Force on

Financial Sector Regulation

D e c e m b e r 2 0 0 1

A Streamlined Regulatory Structurefor Québec’s Financial SectorISBN 2-550-38533-0Legal DepositBibliothèque nationale du QuébecPublication: December 2001

Montréal, December 2001

Ms. Pauline MaroisDeputy Premier andMinister of State for the Economy and FinanceMinistère des Finances12, rue Saint-Louis, 1er étageQuébec (Québec) G1R 5L3

Madam,

We are pleased to submit the report of the Task Force on Financial SectorRegulation, entitled “A Streamlined Regulatory Structure for Québec’sFinancial Sector”.

This report is more than the product of our deliberations; it represents theefforts and contributions of interested people, industry stakeholders inparticular, to fulfil the mandate you gave us last May 2. This mandate isparticularly opportune in view of the disintermediation,decompartmentalization and inter-sectoral convergence in Québec’s financialsector.

Our proposal to create a single regulatory body, namely the Agenced’encadrement du secteur financier du Québec, satisfies, in our view, theclear need for simplicity and efficiency of a constantly changing financialsector.

The recommendations in this report should make it possible to effect tangibleimprovement 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

i

The Task Force on Financial Sector Regulation, constituted by order-in-council on May 2, 2001, was instructed to analyze the regulatory structure ofQuébec’s financial sector and recommend measures to the Minister of Statefor the Economy and Finance regarding regulatory bodies and theimprovement of this structure. The Task Force’s mandate also stipulated thatthe recommendations focus primarily on protection of consumers of financialproducts and services and on reducing the administrative burden on thissector.

The Task Force wanted to know the concerns of industry stakeholders andthe public at large. Accordingly, as part of its mandate, it made the effortneeded to gather extensive information and data. The Task Force met withrepresentatives of the regulatory bodies it studied. It undertook a generalconsultation to obtain the views of interested parties (producers, distributorsand consumers) on the regulatory structure and met with representatives ofcertain organizations that filed briefs in order to discuss certain issues andquestions with them at greater length. In addition, the Task Force met withguests from Québec, Great Britain, France and Australia, most of which hadparticipated in the reform of financial sector regulation in their respectivecountries. The Task Force continued its intensive deliberations during manymeetings, right up to the tabling of this report.

We wish to acknowledge the contribution of the individuals and organizationsthat offered their views. We also want to thank the guests who enabled us notonly to discuss reforms that have been implemented elsewhere, but also todeepen our analysis.

FOREWORD

i

SUMMARY

iii

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 theEconomy and Finance to improve the regulatory structure of Québec’sfinancial sector so that it is better able to protect the consumer and minimizethe administrative burden on the industry, while at the same time allowingQuébec to protect its fields of jurisdiction regarding this vital sector of itseconomy.

After having studied how many regulatory systems operate, more particularlyQuébec’s, the Task Force consulted broadly and collected comments andsuggestions.

The essential message is clear: the administrative burden is excessive andthe regulatory structure overly complex. Consumers find the structureconfusing and regulated entities complain.

The Task Force observes that, in spite of Québec’s innovative policies, theregulatory structure has yet to be adapted to the transformation of thedecompartmentalized 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 theclash of cultures and corporate interests often hinder cooperation amongstakeholders.

The Task Force then examined how Québec’s regulatory structure can beimproved. Drawing on the reforms undertaken in jurisdictions that havealready updated their regulatory structure, the Task Force adopted a series ofguiding principles that any regulatory structure should satisfy to achieve theobjectives of its mandate.

The Task Force proposes setting up the Agence d’encadrement du secteurfinancier du Québec (Agence). The Agence would be responsible for theentire financial sector regulatory system. It would be headed by a presidentand chief executive officer, assisted by superintendents, and would have fivedivisions 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 beable to adequately administer the specific regulatory requirements of eachfield of the financial sector.

A STREAMLINED REGULATORY STRUCTURE FOR QUÉBEC’S FINANCIAL SECTOR

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The Agence would thus provide the consumer of financial products andservices 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 divisionsconcerning registration, issuing of licenses, disclosure requirements,inspections and investigations.

As a strong and credible organization, the Agence would be in a position tomake Québec’s case on various Canadian and North Americanharmonization forums and thus act as a counterweight to the centralizedregulatory bodies of other jurisdictions.

It is impossible to escape the tensions resulting from the ongoing conflictbetween the interests of consumers and the development of the industry. TheAgence would remain sensitive to their needs through consultationmechanisms, including a “Conseil de la régie administrative”.

Relieved of an excessive administrative burden, the financial sector will beable to devote more time, resources and energy to its development. Theresult will be a more competitive industry, the primary guarantee of betterconsumer protection.

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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'SFINANCIAL SECTOR ....................................................................................................5

2.1 THE INDUSTRY.......................................................................................................72.1.1 THE SIZE OF THE INDUSTRY ...............................................................................72.1.2 MAJOR TRENDS..................................................................................................82.1.3 GROWTH IN DEPOSITS AND MUTUAL FUNDS.....................................................102.1.4 THE INSURANCE MARKET ................................................................................102.1.5 THE CREDIT AND CORPORATE FINANCING MARKET..........................................112.1.6 INVESTMENT DEALERS.....................................................................................122.1.7 PORTFOLIO MANAGERS....................................................................................132.1.8 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........................................233.1.1 TYPES OF ACTIVITIES: PRODUCTION AND DISTRIBUTION..................................233.1.2 REGULATION ...................................................................................................243.1.3 TYPES OF REGULATION ....................................................................................24

3.1.3.1 Solvency regulation ......................................................................................... 253.1.3.2 Securities markets regulation ........................................................................... 263.1.3.3 Distribution regulation ..................................................................................... 273.1.3.4 Consumer assistance regulation ....................................................................... 283.1.3.5 Compensation regulation ................................................................................. 29

3.2 QUÉBEC’S REGULATORY BODIES .................................................................293.2.1 THE ASSOCIATION DES COURTIERS ET AGENTS IMMOBILIERS DU QUÉBEC.......303.2.2 THE BUREAU DES SERVICES FINANCIERS .........................................................313.2.3 THE CHAMBRE DE L’ASSURANCE DE DOMMAGES ............................................323.2.4 THE CHAMBRE DE LA SÉCURITÉ FINANCIÈRE ...................................................333.2.5 THE COMMISSION DES VALEURS MOBILIÈRES DU QUÉBEC ..............................343.2.6 THE INSPECTOR GENERAL OF FINANCIAL IINSTITUTIONS ................................353.2.7 THE INSTITUT QUÉBÉCOIS DE PLANIFICATION FINANCIÈRE ..............................363.2.8 THE RÉGIE DES RENTES DU QUÉBEC ................................................................363.2.9 COMPENSATION FUNDS....................................................................................38

3.2.9.1 The Fonds d’indemnisation du courtage immobilier........................................ 383.2.9.2 The Fonds d’indemnisation des services financiers ......................................... 38


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3.2.9.3 The Régie de l’assurance-dépôts du Québec.................................................... 39

3.3 CANADIAN REGULATORY BODIES................................................................40

3.4 PAN-CANADIAN FORUMS..................................................................................413.4.1 THE CANADIAN COUNCIL OF INSURANCE REGULATORS..................................423.4.2 THE CANADIAN INSURANCE SERVICES REGULATORY ORGANIZATIONS..........423.4.3 THE CANADIAN ASSOCIATION OF PENSION SUPERVISORY AUTHORITIES ........433.4.4 THE CANADIAN SECURITIES ADMINISTRATORS...............................................433.4.5 THE JOINT FORUM OF FINANCIAL MARKET REGULATORS...............................44

3.5 METHODS OF REGULATION ............................................................................463.5.1 DELEGATED REGULATION................................................................................463.5.2 SELF-REGULATION...........................................................................................473.5.3 VOLUNTARY SELF-REGULATION ......................................................................473.5.4 THE SPECIAL FEATURE OF THE INVESTMENT DEALERS ASSOCIATION..............48

3.6 THE QUASI-JUDICIAL PROCESS .....................................................................483.6.1 THE CONCEPT OF THE QUASI-JUDICIAL FUNCTION............................................483.6.2 EXERCISE OF THE QUASI-JUDICIAL FUNCTION..................................................493.6.3 ADVANTAGES OF THE QUASI-JUDICIAL FUNCTION ...........................................493.6.4 THE QUASI-JUDICIAL FUNCTION AND THE REGULATORY FUNCTION .................493.6.5 PROBLEMS FOR A REGULATORY BODY IN EXERCISING THE

QUASI-JUDICIAL FUNCTION ..............................................................................50

4. UNIVERSAL REGULATORY PRINCIPLES ............................................................53

4.1 INTERNATIONAL ORGANIZATIONS AND REGULATORYPRINCIPLES...........................................................................................................554.1.1 THE INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS..................554.1.2 THE BASEL COMMITTEE ..................................................................................564.1.3 THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS ..............584.1.4 THE NORTH AMERICAN SECURITIES ADMINISTRATOR ASSOCIATION..............59

5 REFORMS UNDERTAKEN BY OTHER GOVERNMENTS...................................61

5.1 THE UNITED KINGDOM.....................................................................................63

5.2 FRANCE ..................................................................................................................65

5.3 AUSTRALIA............................................................................................................67

5.4 ONTARIO ................................................................................................................68

6. KEY OBSERVATIONS OF THE BRIEFS SUBMITTED TOTHE TASK FORCE .......................................................................................................71

6.1 PINPOINTING THE PROBLEMS RAISED .......................................................736.1.1 THE NEEDLESSLY CUMBERSOME ADMINISTRATIVE BURDEN ............................746.1.2 CONFUSION AMONG CONSUMERS.....................................................................756.1.3 PROBLEMS STEMMING FROM THE REPRESENTATION OF THE INDUSTRY IN

REGULATORY BODIES AND SELF-REGULATORY ORGANIZATIONS .....................766.1.4 PROBLEMS PERTAINING TO REGULATORY POWER ............................................776.1.5 EXCESSIVELY HIGH DIRECT COSTS ...................................................................77

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6.1.6 IMPEDIMENTS TO PARTICIPATION IN THE HARMONIZATION PROCESS ...............786.1.7 REGULATION-RELATED PROBLEMS ..................................................................786.1.8 PROBLEMS STEMMING FROM THE CONSOLIDATION OF REGULATORY FUNCTIONS ......................................................................................................79

6.2 PINPOINTING THE SOLUTIONS PROPOSED................................................796.2.1 A SINGLE BODY ...............................................................................................796.2.2 TWO BODIES ....................................................................................................796.2.3 REORGANIZATION OF RESPONSIBILITIES ..........................................................806.2.4 SELF-REGULATORY BODIES .............................................................................806.2.5 SECTORAL CONSOLIDATION.............................................................................80

7. THE TASK FORCE'S OBSERVATIONS ...................................................................83

7.1 OBSERVATIONS...........................................................................................................857.1.1 SOURCE OF THE PROBLEMS .............................................................................. 857.1.2 PROBLEMS ....................................................................................................... 86

7.1.2.1 The administrative burden ............................................................................... 867.1.2.2 Consumer protection........................................................................................ 887.1.2.3 Québec’s jurisdiction ....................................................................................... 90

7.1.3 OTHER OBSERVATIONS ................................................................................... 917.1.3.1 The administration of the Supplemental Pension Plans Act ......................... 917.1.3.2 Administration of the Real Estate Brokerage Act .......................................... 917.1.3.3 Administration of other legislation ................................................................ 927.1.3.4 The Consumer Protection Act........................................................................ 927.1.3.5 Adoption of regulations ................................................................................. 927.1.3.6 Canadian regulatory bodies............................................................................ 937.1.3.7 Quasi-judicial and judicial administrative processes...................................... 93

7.2 GUIDELINES ..........................................................................................................947.2.1 CONSUMER PROTECTION..................................................................................947.2.2 STREAMLINING THE ADMINISTRATIVE BURDEN ...............................................957.2.3 RESPECT FOR QUÉBEC’S FIELDS OF JURISDICTION ...........................................957.2.4 EFFECTIVENESS AND EFFICIENCY ....................................................................967.2.5 THE LIMITATIONS OF SELF-REGULATION..........................................................97

8. THE PROPOSED REGULATORY STRUCTURE RECOMMENDATIONS.........99

8.1 ESTABLISHMENT OF THE AGENCE D’ENCADREMENT DU SECTEURFINANCIER DU QUÉBEC ..................................................................................101

8.2 FUNCTIONAL DIVISION OF THE AGENCE’S RESPONSIBILITIES .......1028.2.1 THE DIRECTION DE L’ENCADREMENT DE L’ASSISTANCE AUX CONSOMMATEURS,

A ONE-STOP SERVICE OUTLET FOR CONSUMERS .............................................1038.2.2 THE DIRECTION DE L’ENCADREMENT DE LA SOLVABILITÉ.............................1048.2.3 THE DIRECTION DE L’ENCADREMENT DE LA DISTRIBUTION ...........................1048.2.4 THE DIRECTION DE L’ENCADREMENT DES MARCHÉS DE VALEURS.................1058.2.5 THE DIRECTION DE L’ENCADREMENT DE L’INDEMNISATION..........................1058.2.6 A ONE-STEP INDUSTRY SERVICE OUTLET TO COORDINATE RELATIONS WITH

REGULATED ENTITIES.....................................................................................105

8.3 FUNDING AND ADMINISTRATIVE SUPPORT.............................................1068.3.1 FUNDING........................................................................................................1068.3.2 ADMINISTRATIVE SUPPORT............................................................................106


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8.4 SENIOR MANAGEMENT OF THE AGENCE.................................................1078.4.1 THE PRESIDENT AND CHIEF EXECUTIVE OFFICER............................................1078.4.2 THE APPOINTMENT, DISMISSAL, TERM OF APPOINTMENT AND REMUNERATION

OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER .......................................1088.4.2.1 Appointment ................................................................................................ 1088.4.2.2 Dismissal ..................................................................................................... 1098.4.2.3 Term of appointment ................................................................................... 1098.4.2.4 Remuneration............................................................................................... 110

8.5 MANAGEMENT OF THE AGENCE’S REGULATORY DIVISIONS ...... ................................... 110

8.6 THE CONSEIL DE LA RÉGIE ADMINISTRATIVE ...................................... 111

8.7 ADVISORY COMMITTEES ...............................................................................111

8.8 ACCOUNTABILITY OF THE BODY AND ITS PRESIDENT AND CHIEFEXECUTIVE OFFICER.......................................................................................112

8.9 STRATEGIC POLICY DIRECTIONS...............................................................1138.9.1 OBJECTIVES OF THE LEGISLATION ............................................................1148.9.2 THE AGENCE’S STRATEGIC POLICY DIRECTIONS.......................................1148.9.3 ELABORATION OF REGULATIONS ..............................................................115

8.10SELF-REGULATORY ORGANIZATIONS ......................................................1168.10.1 PRINCIPLES OF RECOGNITION .....................................................................1168.10.2 RECOGNITION PROCEDURE.........................................................................117

8.11THE BUREAU DES EXAMENS ET DÉCISIONS ............................................118

8.12OTHER RECOMMENDATIONS .......................................................................1198.12.1 THE REAL ESTATE BROKERAGE ACT .........................................................1198.12.2 THE SUPPLEMENTAL PENSION PLANS ACT ................................................1208.12.3 THE CONSUMER PROTECTION ACT ............................................................ 1208.12.4 THE ADMINISTRATION OF OTHER STATUTES ............................................... 1208.12.5 REGULATION OF FINANCIAL PLANNING ......................................................121

9. THE IMPLEMENTATION OF THE NEW STRUCTURE .....................................125

9.1 LEGISLATION .....................................................................................................127

9.2 THE BUREAU DE TRANSITION AND TRANSITIONAL MEASURES......127

APPENDIX 1........................................................................................................................131BIOGRAPHICAL NOTES ON MEMBERS OF THE TASK FORCE

APPENDIX 2........................................................................................................................135INTERVENERS WHO SUBMITTED BRIEFS TO THE TASK FORCE

APPENDIX 3........................................................................................................................136BIOGRAPHICAL NOTES ON EXPERTS INVITED BY THE TASK FORCE

APPENDIX 4........................................................................................................................138WORKING GROUPS OF CANADA-WIDE FORUMS

APPENDIX 5 ........................................................................................................................ 140DEFINITIONS OF SELF-REGULATORY ORGANIZATIONS (SROS)

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THE TASK FORCE ON FINANCIALSECTOR REGULATION

CHAPTER 1


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CHAPTER 1THE TASK FORCE ON FINANCIAL SECTOR REGULATION

1

1.1 MANDATE

The Task Force on Financial Sector Regulation received a mandate to reviewthe regulatory structure of Québec’s financial sector. More specifically, themandate consisted in:

- analyzing the current regulatory structure of Québec’s financial sector inthe context of decompartmentalized financial institutions and marketglobalization; and

- recommending measures to the Minister of State for the Economy andFinance relating to the regulatory bodies and the improvement of thisstructure, within Québec’s fields of jurisdiction.

Members of the Task Force were to formulate recommendations to improvethe efficiency of financial sector regulation, in terms of both consumerprotection and reduction of the administrative and regulatory burden on theindustry.

1.2 MEMBERSHIP

The Task Force on Financial Sector Regulation has seven members1 and ischaired by Yvon Martineau, senior partner with the law firm of FaskenMartineau.The other members are:

- Dominique Vachon, Vice President and Chief Economist with the NationalBank of Canada;

- Claude Béland, guest professor, Université du Québec à Montréal, andformer chairman of the Mouvement Desjardins;

- Pierre Carrier, member of the executive committee and of the Bureau del'Ordre des infirmières et des infirmiers du Québec and former secretaryof the Office de la protection du consommateur;

- Yvon Charest, President and Chairman of the Board of Industrial AllianceLife Insurance Company;

- Pierre Comtois, Vice Chairman of the Board of Optimum AssetManagement Inc.;

- Pierre Laurin, guest director at the École des hautes étudescommerciales and former president for Québec of Merrill Lynch Canadaand vice chairman of the board.

1 Biographical notes of the members of the Task Force can be found in Appendix 1.


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1.3 APPROACH

The chief priority of the Task Force was to specify an approach that wouldenable it to achieve its objectives. The members of the Task Force agreedthat the approach should be transparent and reflect the concerns ofconsumers and the industry.

From the outset of its mandate, the Task Force made it a point to establishopen and transparent communications with industry stakeholders andconsumers and accordingly it set up a website (www.gesef.gouv.qc.ca) inJune 2001 to lay out its approach and show how work was advancing. Thewebsite includes the mandate of the Task Force, its membership, a publicnotice, briefs received, other useful information relating to the work of theTask Force, as well as this report.

In June 2001, following a number of working sessions, members met withrepresentatives of the eight financial sector regulatory bodies,2 targeted bytheir deliberations, to ascertain the issues facing these bodies. Eachorganization was invited to describe its mission, its structure, how it is funded,its clientele and its relations with other regulatory bodies in Québec andCanada. Each was also invited to explain its outlook, its strategic plan and itsrelations with the entities it regulates and with consumers.

Public notices were published in many regional and national newspapers andin specialized media to invite financial sector stakeholders and interestedconsumers to file briefs with the Task Force. The Task Force accordinglysought their opinions, comments and suggestions on the existing regulatorystructure, more particularly on the themes of consumer protection and relieffrom the administrative burden on a constantly changing sector. In addition,the Task Force directly invited many consumer protection and financial sectorstakeholder organizations in Québec to file a brief.

Briefs had to be filed with the Task Force secretariat no later than August 17,2001. A total of 24 briefs were received.3 The great majority were filed byorganizations in the financial sector. We want to express our heartfelt thanksfor their contribution.

After studying the briefs, members of the Task Force decided to meet therepresentatives of certain organizations that had made a submission. Thepurpose of the meetings was to discuss at greater length specific issues andquestions raised in certain briefs, such as the various regulatory modelsunder consideration, consumer protection, safeguarding Québec’s jurisdictionregarding its financial sector and compliance costs. Accordingly, members ofthe Task Force held meetings with representatives of ten organizations4

between September 20 and 24, 2001. 2 See section 3.2 that focuses on the eight Québec regulatory organizations.3 Appendix 2 gives a list of the organizations that filed a brief.4 The Canadian Life and Health Insurance Association Inc., the Investment Dealers Association of

Canada, the Canadian Bankers Association, the Insurance Bureau of Canada, the Comité Consultatif

THE TASK FORCE ON FINANCIAL SECTOR REGULATION

3

During October 2001, members of the Task Force welcomed guests from theUnited Kingdom, France and Australia involved in reforming financial sectorregulation in their countries.5 They also met with a professor of the École deshautes études commerciales.6 These meetings afforded members of theTask Force a better understanding of the experience in other jurisdictions,which enriched their analysis. The discussions concerned the situation offinancial regulation before the reforms, what was at stake, the reformsthemselves, the role played by government in the reforms and efforts toachieve harmonization with regional and international regulatory standards.

The analysis and deliberation continued over the course of many meetingsand conferences, from the beginning of the mandate until the tabling of thisreport.

Juridique en valeurs mobilières, the Mouvement des caisses Desjardins, the Office de la protection duconsommateur, Partenaires Cartier, the Regroupement des assureurs de personnes à charte du Québecand the Regroupement des cabinets de courtage d’assurance du Québec.

5 Biographical notes for these guests are given in Appendix 3.6 See the biographical note in Appendix 3.


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THE TASK FORCE ON FINANCIAL SECTOR REGULATION

5

QUÉBEC'S FINANCIAL SECTORAND ITS DEVELOPMENT

CHAPTER 2


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CHAPTER 2QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT

7

This chapter gives a brief description of Québec’s financial sector over the lastfew years.

The financial sector plays an essential role in the economy and wealthcreation. In addition to the operation of the transactions settlement andpayments system used to exchange financial products, services and goods, itcollects and aggregates savings it then transfers to users of capital as loans orinvestments in bonds or stock.

The financial sector also helps redistribute risk on the basis of each person’spreferences, through a variety of financial products, and promotes theefficiency of the real sector by allocating resources between regions andsectors and providing a system of information on the value of these resources.

Lastly, the financial system supplies mechanisms that help to minimize thecosts relating to information asymmetry such as, for instance, theassessments of rating firms and the prospectuses of issuers.

2.1 THE INDUSTRY

2.1.1 The size of the industry

The financial industry accounts for close to 14% of all economic activity inQuébec, i.e. its gross domestic product (GDP). This puts it in third place inQuébec after the socio-cultural, commercial and personal services industryand the manufacturing industry. The annual growth of the financial industryhas averaged 2.2% from 1990 to 2000, slightly above the 2% average growthof Québec’s GDP.

TABLE 2.1.1aQUÉBEC GDP AT FACTOR COST(Millions of 1992 dollars)

1990 2000 Average annual growth(%)

Finance, insurance and realestate

18 265 22 727 2.2

Québec GDP 136 587 165 752 2.0Share of Québec GDP(%) 13.3 13.7 n.a.

Source: Institut de la statistique du Québec, Produit intérieur brut par industrie au Québec.

Employment in the “finance and insurance” sector declined slightly, while totalemployment in Québec has risen by an average of close to 1% a year. Thisdecline may be attributed to the significant penetration of technology in thissector.


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TABLE 2.1.1bJOBS IN QUÉBEC(Thousands)

Finance and insurance 1990 2000

Average annualgrowth (%)

Financial intermediation andrelated activities

76.7 69.9 -0.9

Securities, commodity contractsand related financial investmentactivities

10.8 16.9 4.6

Insurance companies and relatedactivities

50.0 49.2 -0.2

Total finance and insurance 137.5 136.0 -0.1Jobs in Québec 3 141.0 3 438.0 0.9

Share of jobs in Québec (%) 4.4 4.0 n.a.

Source: Statistics Canada, Labour Force Survey.

The transformation of the financial sector resulting from major trends, such asmarket globalization and decompartmentalization of financial institutions, hascaused some movement of jobs in this sector in Québec. Accordingly, duringthe last decade, employment grew by an average of 4.6% a year in thesecurities field, including mutual fund distribution, while employment in thefinancial intermediation field, i.e. deposit-taking institutions, fell slightly by anaverage of 0.9% a year, and employment in the insurance field remainedbasically steady.

2.1.2 Major trends

Globalization

In the context of market globalization in which, increasingly, Québeccompanies are active internationally and can acquire products and servicesoffered by multinational companies, Québec’s financial sector must offerworld-class products and services.

Competition has become global, for savings and financing products as muchas for other types of products, such as insurance policies or portfoliomanagement. Companies looking for financing now have access toincreasingly integrated international financial markets.

QUÉBEC’S FINANCIAL SECTOR AND ITS DEVELOPMENT Chapter 2

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Decompartmentalization

Québec-based financial groups have emerged following regulatory initiativesdesigned to decompartmentalize the financial sector. These groups nowoperate in a number of fields of activity, often through subsidiaries. Theseinstitutions have adjusted their methods of operation to offer an integrated lineof products and services adapted to the needs of their customers. Even whileoperating through subsidiaries, these financial groups have centralized manyfunctions involving, in particular, risk management and product development,complicating the work of each regulatory body whose jurisdiction is confined toa single field of activity.

Inter-sectoral convergence

Another trend in recent years is inter-sectoral convergence, i.e. thedevelopment of similar products and services by different types of financialinstitutions that compete against each other. An example is the market formutual funds and segregated funds of insurers. In addition to targeting thesame client group, the producers of these funds sometimes use commondistribution networks. Another example of this trend is the competitionbetween pension plans and registered retirement savings plans, two productsaimed at the same client group and the same need, but with completelydifferent regulatory regimes.

Inter-sectoral convergence even exists regarding financial advisory activities,which have become highly valued in recent years. Consumers are offeredfinancial advice by a multitude of representatives from various sectors:financial security representatives, investment advisers or dealers, financialplanners or even members of professional corporations.

The multitude of financial products and services available on the market hashelped make the advisory function more important. In recent years, the rangeof financial products and services available on the market has expandedconsiderably. Advances in risk management have enabled institutions to offerfinancial products tailored to the needs of users, in particular the many hybridsavings products and derivatives.

Technological development

Advances in technology have encouraged a redeployment of financialproducts and services distribution networks: ATMs, the Internet, telephoneservices, etc. More powerful computer systems have also enabled financialinstitutions to develop integrated management systems to manage theiractivities more efficiently and offer more complex and better-adapted products.The same is true for securities markets where advances in technology haveenabled greater trading volumes and faster execution and settlement.


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Overall, the global environment of the financial sector has changedsubstantially in recent years and this sector of the economy has beentransformed. Québec has not been unaffected.

2.1.3 Growth in deposits and mutual funds

In recent years, deposits have been much less attractive than mutual funds inQuébec, mainly because of low interest rates and significant returns onequities. Between January 1996 and June 2000, mutual funds rose by 236%,compared with 8.9% for deposits.

TABLE 2.1.3SAVINGS HELD IN DEPOSITS AND MUTUAL FUNDS IN QUÉBEC(Billions of dollars)

December 31, 1995

June 30, 2000

Change(%)

Deposits

118.2

128.7

8.9

Mutual funds 18.9 63.5 236.0

Sources: Institut de la statistique du Québec, L’activité des institutions de dépôts, 3rd quarter2000. Institut de la statistique du Québec, Les fonds communs de placements auQuébec, 2nd quarter 2000.

Canadian banks as a whole receive the largest share of deposits in Québecwith 52.7% of the market, closely followed by the Mouvement des caissesDesjardins which alone collects 44.6%. Among the banks, the National Bankof Canada ranks first with about 16% of deposits in Québec.

Turning to mutual funds, the independents, i.e. those not affiliated with afinancial institution (deposit-taking institution or life and health insurer) rankfirst by a good margin, with 66.8% of the total of $63.5 billion held in Québecin 2000. Mutual funds affiliated with deposit-taking institutions come next with29.7%, followed by mutual funds affiliated with life and health insurers, with3.5%.

2.1.4 The insurance market

Direct premiums collected in Québec by life and health insurers during 2000amounted to $6.7 billion compared with $5.8 billion in 1996, an increase of15%. The primary beneficiaries of the general increase in the market areQuébec-chartered insurers, with 26.8% growth, followed by Canadian-chartered insurers with an increase of 21.7% while premiums collected byinsurers chartered in another province or with a foreign charter fell 36%.


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Overall, as a result of these changes, the market share of Québec-charteredinsurers has risen from 39% in 1996 to 43% in 2000. This is even moreremarkable given the smaller size, in terms of assets, of Québec-charteredinsurers ($572 million on average at the end of 2000) compared to thosechartered elsewhere ($1 766 million).

TABLE 2.1.4DIRECT PREMIUMS COLLECTED IN QUÉBEC(Millions of dollars)

1996 2000

(%) (%)

Life and health insurers - Québec-chartered 2 261 39 2 868 43 - Canadian-chartered 2 651 46 3 226 49 - Other 875 15 562 8

Total 5 787 100 6 656 100 Property insurers - Québec-chartered 1 698 40 2 036 42 - Canadian-chartered 1 960 46 2 131 43 - Other 569 14 733 15

Total 4 227 100 4 900 100

Sources: Inspector General of Financial Institutions, Le système financier 1996, December 1997.Inspector General of Financial Institutions, Rapport annuel sur les assurances 2000.

In the property insurance sector, the volume of direct premiums collected inQuébec rose 15.9% between 1996 and 2000. In this regard, Québec-chartered insurers registered growth of 19.9% compared with 8.8% forinsurers with a Canadian charter. These growth rates enabled Québec-chartered insurers to increase their market share to 42% in 2000 from 40% in1996. As with life and health insurers, the good performance of Québec-chartered property insurers is especially remarkable since they are smaller interms of assets ($61 million on average at the end of 2000) than theircompetitors ($410 million).

2.1.5 The credit and corporate financing market

The following table shows traditional bank financing (outstanding businessloans) in Québec and bond financing (net bond issues) by companies inCanada from 1992 to 1999. Assuming that the movement in net bond issuesby companies in Québec is the same as in Canada as a whole, it can be seenthat the growth of net bond issues was much greater than the growth intraditional bank financing. This change would confirm that companies aremaking less and less use of traditional financing and are tending to otherforms of financing.


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TABLE 2.1.5CORPORATE FINANCING(Millions of dollars)

Outstanding businessloans in Québec

Net corporate bond issues in Canada

1992 25 912 2 1161993 23 836 9 8321994 24 214 5 8081995 25 918 20 0241996 25 432 20 6501997 27 668 38 6531998 30 471 36 2581999 29 555 40 553

Sources: Institut de la statistique du Québec, Institutions de dépôts 1995-1999 and Bank of Canada,Banking and Financial Statistics, October 2001

In the corporate lending sector in Québec in 1999, Canadian banks held 65%of the market followed by the Mouvement des caisses Desjardins, whoseshare rose to 27% from 24.5% in 1995. This increase was largely at theexpense of foreign banks since the market share of Canadian banks remainedrelatively stable.

2.1.6 Investment dealers

The securities brokerage industry in Québec and Canada has undergonesignificant changes in recent years. Following the wave of acquisitions at theend of the 1980s, during which the large brokerage houses were acquired bythe banks, many other transactions occurred in this industry. Some recenttransactions involved Québec companies, including the acquisition of FirstMarathon by National Bank of Canada in 1999 and that of Tassé et Associésby BLC Securities in 2000.


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TABLE 2.1.6MAJOR BROKERAGE HOUSES ACTIVE IN QUÉBEC1

(In 2000) Jobs in

Québec Gross world

income

Number $ million Largest Québec firms National Bank Financial 1 862 883.0 Valeurs mobilières Desjardins 574 116.3 Laurentian Bank Securities 253 43.4 Groupe Option retraite 169 16.3 Valeurs mobilières Courvie 130 12.8

Partial total 2 988 1 071.8 Largest Canadian firms RBC Dominion Securities 706 1 732.3 Merrill Lynch Canada 600 n.a. BMO Nesbitt Burns 444 1 475.9 Scotia Capital 328 1 578.3 CIBC World Markets 236 1 134.9 TD Securities 149 2 700.0 Canaccord Capital Corporation 125 n.d.

Partial total 2 588 8 621.4

Note 1. Firms with at least 100 employees in Canada.Source: Le Journal Les Affaires, “Les 500 plus grandes entreprises”, 2001 edition.

Brokerage houses have also positioned themselves in the discount brokerageand online brokerage growth industry. For Canada as a whole, suchbrokerage activities generated revenue in 2000 approaching half that earnedfrom full-service retail brokerage activities. In addition, brokerage revenuerelating to mutual funds now accounts for about one quarter of total brokeragerevenue, compared to less than 10% in the early 1980s.

On the basis of their gross world income, the largest Québec-based brokeragehouses are small compared with the largest Canadian firms. However, five ofthese large brokerage houses employ over 100 people in Québec for a total of2 988 jobs, while only seven Canadian firms employ over 100 people inQuébec for a total of 2 588 jobs.

2.1.7 Portfolio managers

Portfolio management corporations in Québec manage total assets of close to$696 billion, including $327 billion by corporations whose head office is inQuébec. This pool of $327 billion represents almost 27% of the funds


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managed in Canada. However, it should be mentioned that the Caisse dedépôt et placement du Québec alone manages assets that amount to 10.2%of the assets of funds managed in Canada.

TABLE 2.1.7ASSETS UNDER MANAGEMENT OF FUND MANAGERS1 IN QUÉBEC (May 2001)(Billions of dollars)

Corporation Total assets

Caisse de dépôt et placement du Québec 124.9T.A.L. Investments 51.2Jarislowsky & Fraser Ltd. 26.1State Street Global Advisors 18.6Bimcor Inc. 14.2Natcan (National Bank) 14.1Standard Life Portfolio Management Ltd. 12.9Others 433.9Total funds managed by corporations in Québec2 695.9Total funds managed in Québec by such corporations3 326.9Total funds managed in Canada 1 229.1Funds managed in Québec- as a % of total funds managed in Canada 26.6- excluding the Caisse de dépôt et placement du Québec, as a

% of total funds managed in Canada 16.4

Note 1. Includes mutual funds, segregated funds and pension plans.Note 2. Represents funds managed by corporations with an establishment in Québec.Note 3. Represents funds managed by corporations whose head office is in Québec.Sources: Canadian Investment Manager Financial Database, spring 2001; Paltrak database of

Portfolio Analytics Ltd., December 2000; and ministère des Finances du Québec.

2.1.8 Pension plans

In 2000, 183 pension plans with assets in excess of $1 million, of 1 062 suchplans in Canada, were headquartered in Québec, i.e. 17.2%, compared with15.2% in 1996. However, Québec’s share is more significant when pensionplans with assets in excess of $1 billion are considered. This share stands at24% of such funds, which corresponds to Québec’s share of Canada’spopulation.


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TABLE 2.1.8GEOGRAPHIC DISTRIBUTION OF PENSION PLANS(As at December 31)

Assets of $1 million or more Assets of $1 billion or more 1996 2000 1996 2000 Number % Number % Number % Number %

Québec 169 15.2 183 17.2 16 24.0 22 24.0

Ontario 590 53.1 488 46.0 25 38.0 35 38.0

Other provinces 352 31.7 391 36.8 25 38.0 35 38.0

Total 1111 100.0 1062 100.0 66 100.0 92 100.0

Sources: Canadian Pension Fund Investment Directory, spring 2001, CFP Publishing, Toronto for 2000; J. Roy, Rapport sur ledéveloppement du secteur financier, École des hautes études commerciales, 1997, for 1996.

It is apparent then that there has been tangible development in Québec’sfinancial industry and that government must continue to support itsdevelopment.

2.2 THE GOVERNMENT

The Québec government has always paid close attention to the developmentof the financial sector, a major sector for Québec’s economy. And thegovernment has been a constant legislative innovator. In the early 1980s, theQuébec government identified the major trends that continue to influence thefinancial sector today and did not hesitate to move quickly, with innovativelegislation, to encourage the decompartmentalization of financial institutions.The innovative nature of Québec’s legislation is widely recognized.

Prior to 1990, various laws affecting the financial sector were amended toenable financial institutions to broaden their range of products and services.Québec was the first province to allow financial institutions to acquiresecurities brokerage houses. During this period, the Mouvement des caissesDesjardins and insurers were given the right to own subsidiaries and,accordingly, the power to be involved in activities in fields referred to as thetraditional four pillars of the financial sector. In addition,decompartmentalization was quickly initiated in the distribution of financialproducts and services by allowing market intermediaries to hold a variety oflicences in order to broaden the range of products and services offered toconsumers in Québec.

During the 1990s, the regulatory framework of Québec’s financial sector wasadapted on a regular basis to a rapidly changing context. However, fewchanges were made to the regulatory structure before 1997. In that year, theCommission des valeurs mobilières du Québec (CVMQ) was transformed intoan independent body with extra-budgetary funding, and was no longer subject


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to the Civil Service Act (R.S.Q., c. F-3.1). In 1998, the Act respecting thedistribution of financial products and services (R.S.Q., c. D-9.2) was passed.This legislation, which replaced the Act respecting market intermediaries(R.S.Q., c. I-15.1), governs the distribution of financial products and services,with or without a representative. In particular, it reduced the number ofregulatory bodies by creating the Bureau des services financiers (BSF), theChambre de l’assurance de dommages (ChAD) and the Chambre de lasécurité financière (CSF) as well as the Fonds d’indemnisation des servicesfinanciers (FISF), which replaced two councils, two associations and fourcompensation funds.

In 1999, the government passed the Act respecting international financialcentres (R.S.Q., c. C-8.3), designed to bring the various rules relating tointernational financial centres (IFCs) under a single piece of legislation tofacilitate the promotion of IFCs and encourage foreign, Canadian and Québeccompanies to develop their international activities in Montréal. The legislationstipulates a package of tax benefits available to a company operating an IFC.To encourage the development of Québec’s financial sector and of Québec’seconomy in general, the government also passed, in 2000, the Act respectingNasdaq stock exchange activities in Québec (S.Q. 2000, c. 28). Thislegislation sets out the terms and conditions concerning the establishment ofthe Nasdaq stock market in Québec.

The government remains vigilant in adapting its legislation to provideadequate protection for consumers of financial products and services, whileencouraging the development of the financial industry. In 2000, the Act toamend the Supplemental Pension Plans Act and other legislative provisions(S.Q. 2000, c. 41) was passed to update and simplify the legislative frameworkapplicable to pension plans. The government also passed the Act respectingfinancial services cooperatives (S.Q. 2000, c. C-29) that replaced the Savingsand Credit Unions Act (R.S.Q., c. C-4.1). This legislation sets out the termsand conditions concerning the merger of the Confédération des caissespopulaires et d’économie Desjardins du Québec and the eleven federations toform the Fédération des caisses Desjardins du Québec as well as measuresrequiring that financial services cooperatives follow sound and prudentmanagement practices instead of rules tied to maintaining financial ratios. Inaddition, in 2001, the Act to amend the Securities Act (S.Q. 2000, c. 38),which, in particular, gives the CVMQ the means to react to the rapidemergence of new financial products and new players in the context of marketglobalization, was assented to. Lastly, the Act to establish a legal frameworkfor information technology (S.Q. 2001, c. 32), which seeks to harmonize thetechnical systems, norms and standards for communication usingtechnological documents, was passed.

All these changes to the legislative framework were formulated bearing inmind international practices and regulatory principles.

In addition, the Québec government undertook to provide relief from theregulatory burden on companies, including those in the financial sector. In


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1997, it formed the Advisory Panel on Regulatory Reform, and created theSecrétariat à l’allégement réglementaire within the Conseil exécutif. TheQuébec government’s policy is to make Québec companies more productiveand more competitive to foster job creation.

In recent years, the Québec government has also formulated a series of taxmeasures and other incentives to promote the development of Québec’sfinancial sector. Besides the IFC program, there are programs to foster thecreation of mutual funds administered and managed in Québec, theapprenticeship of portfolio managers, the apprenticeship of employeesspecializing in international transactions, communications betweencorporations and investors, the hiring of junior financial analysts specializing inthe securities of Québec companies and the hiring of junior financial analystsspecializing in financial derivatives.

Lastly, once again to find ways to better protect the consumer and support thedevelopment of Québec’s financial sector, the government formed the TaskForce on Financial Sector Regulation on May 2, 2001.

2.3 THE CONSUMER

The consumer of financial products and services has changed substantiallyover the last twenty years: he is now more experienced and better informed.He is increasingly becoming an investor.

Consumers are looking for more financial information. This information isbecoming more accessible through specialized newspapers, televisionprograms and electronic networks. In addition, financial institutions themselvesmust invest more in producing explanatory material to satisfy this need forinformation, either voluntarily, for competitive reasons, or in compliance withnew regulatory requirements.

This flow of information and the efforts of governments and regulatory bodiesin the popularization of financial products and services and their regulationhave in turn helped consumers to become more knowledgeable in this area.

Québec consumers are investing increasingly in financial vehicles thatpreviously were of no interest to them. This change in consumers’ habits hascontributed to the phenomenal growth in holdings of mutual funds or stock, asshown by a survey7 carried out by the CVMQ in 1999. Consumers arebecoming more open to new products, services and methods of distribution.They are more selective and their loyalty cannot be taken for granted. At timesthey acquire various products from the same place, from a number ofintermediaries or directly, with no intermediary.

7 According to the “Sondage sur l’actionnariat au Québec: Les Québécois et l’investissement font-ils bon

ménage?” published in March 2000, 31% of Quebecers owned stock in 1999 compared with 16% in1989 and 4% in 1977.


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The ageing of Québec’s population is a demographic phenomenon that willhave a significant impact on the financial sector. A large share of thepopulation, the baby-boomers, is currently in the capital-accumulation phasein preparation for retirement. This phenomenon, combined with the many taxincentives, such as registered retirement savings plans and others, makessubstantial funds available for investment, contributing to the financial sector’sgrowth.

Given consumers’ growing interest in obtaining information and given theincrease in the number of complaints, many regulatory bodies, in Québec andelsewhere in Canada, as well as many sectoral organizations, have set upinformation and complaint processing services or other mechanisms forsettling disputes. However, in view of the large number of such organizations,the consumer finds himself in a labyrinth and, paradoxically, is helpless.

TABLE 2.3REQUESTS FOR INFORMATION AND COMPLAINTS FROM CONSUMERS IN QUÉBEC

1

Number ofrequests forinformation

Number ofcomplaints

Bureau des services financiers 8 000 67

Chambre de l’assurance de dommages − 117

Chambre de la sécurité financière − 148

Insurance Bureau of Canada and GAA 2 52 8063 n.a.

Canadian Life and Health InsuranceAssociation 23 9954 684

Inspector General of Financial Institutions 2 000136

Commission des valeurs mobilières duQuébec 19 732 1855

Office de la protection du consommateur 37 616 7456

Investment Dealers Association of Canadan.a. 807

1. Annual basis2. GAA: Groupement des assureurs automobiles3. Canada as a whole4. Québec’s share of the 56 090 requests (46%) in Canada5. New investigations6. Complaints on financial matters7. For the period from January 1 to November 27, 2001Source: Ministère des Finances compilation; information taken from the annual report or supplied directly

by the body

The large number of requests for information and complaints received fromconsumers by various organizations shows that consumers are seekinginformation from and complaining to a host of organizations. It can also be


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assumed that this host of organizations forces consumers to deal initially withmany agents in the financial sector before obtaining an answer to their requestand obtaining satisfaction if they are complaining. The consumer, increasinglysolicited by various players in the financial sector, must find satisfaction.Accordingly, the proposed regulatory structure seeks to use every opportunityfor possible improvement of consumer protection.


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21

EXISTING FINANCIAL SECTOR REGULATIONIN QUÉBEC

CHAPTER 3


22

CHAPTER 3EXISTING FINANCIAL SECTOR REGULATION INQUÉBEC

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3.1 FINANCIAL SECTOR REGULATION INQUÉBEC

3.1.1 Types of activities: production and distribution

Two types of activities can be identified in the financial sector: the productionof financial products and services, and their distribution.

Insurers, deposit-taking institutions, investment dealers and pension plansare producers of financial services. They very often also handle thedistribution of their products.

An important distinction can be made between the methods of production ofvarious financial products. While deposit-taking institutions, insurers andpension plans can create their products on their own, the production ofsecurities necessarily involves a number of players. It requires an issuer, abroker, if necessary, and an exchange mechanism, such as a stockexchange, to set the price of the security. All of these players form the marketwhen the security is produced.

Distribution encompasses various activities: advice, brokerage (theintermediary role) and information. Brokerage and information are always partof distribution: the purchase of a financial product always requires that a formbe filled out and information obtained concerning the product and the termsand conditions of the commitment made by the financial institution. Advice ispart of the role of a specialized adviser (representative).

Financial products and services are distributed by financial institutions, bylegal persons that are not financial institutions and by independent naturalpersons. In this regard, representatives and firms governed by the Actrespecting the distribution of financial products and services are simplyintermediaries in the distribution process.

The consumer can use the services of an adviser who will recommendcertain products that satisfy the consumer’s needs. He can also purchase aproduct using the “self-serve” approach, with no help from an adviser; this isknown as direct distribution.

Some products are more suitable for direct distribution, others for distributionby a representative. In general, deposit-taking institutions distribute their ownproducts while insurers often act through intermediaries. The nature of theseactivities obviously requires that the government regulate them with rules thatprotect the public and allow development for the industry.


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3.1.2 Regulation

In Québec, the rules regulating the financial sector take various forms:

− statutes of the National Assembly;− government regulations;− government orders-in-council;− ministerial decisions;− regulations of a regulatory body;− directives, instructions and decisions (authorizations, approvals,

exemptions) of a regulatory body.

The state sets out the major rules in a statute and entrusts the power to setother rules, in particular by regulation, to the government and regulatorybodies. The role of the government and the regulatory body in setting therules depends on the statutes and the nature of the activity to be regulated.

3.1.3 Types of regulation

The nature of the regulation imposed by the legislation governing the financialsector depends on the type of activity to be regulated.

There are three types of regulation for the financial sector:

− solvency regulation;− securities markets regulation;− distribution regulation.

The first two types of regulation govern the production of financial productsand services while the last type governs their distribution.

In addition, certain measures specific to consumer protection are generallyapplied by regulatory bodies:

− consumer assistance regulation (for handling complaints, information andeducation);

− compensation regulation (in the event of insolvency or fraud).

The production of financial products and services is a highly regulated activityin the financial sector mainly because confidence in the financial servicesindustry is essential to the efficient operation of the economy. Since thefinancial product or service is an intangible good, its quality cannot bemeasured by conventional means. The quality of a financial product isassessed by the producer’s ability to meet its obligations or, in the case of asecurity, by the fairness of its price (that must adequately reflect the risk andexpected return features of the security).

EXISTING FINANCIAL SECTOR REGULATION IN QUÉBEC Chapter 3

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Accordingly, production is an activity reserved to certain participants and onlyduly authorized participants (enrolled or registered) can exercise it. Inaddition, each authorized participant must satisfy a set of rules designed toensure that its products and services meet certain quality standards.

3.1.3.1 Solvency regulation

Regulation of an insurer, a deposit-taking institution or a pension plan iscentred on maintaining solvency and, increasingly, the solvency ofinvestment dealers is also regulated, in view of their financial commitments toinvestors. The purpose of this regulation is to guarantee that the regulatedentity is in a position to satisfy its obligations, i.e. pay deposits when theymature or retirement benefits or indemnities in the event of loss. Accordingly,these producers must satisfy requirements to maintain capital and liquidassets as well as prudential rules for their investments and adequatemanagement practices (record keeping, prevention of fraud, control ofconflicts of interest, etc.).

The regulatory body is concerned especially with oversight (inspection andexamination of reports). If it notes that the producer’s financial situation isdeteriorating, it acts so that recovery measures are applied.

Tasks relating to solvency regulation

The tasks of solvency regulation bodies can be divided into three categories:

− control of access to the activity;− control of the activity;− action in the event of non-compliance.

To exercise control of access to the activity, the body must, in particular:

− administer the process of incorporation of producers and check theirfinancial soundness;

− study applications for incorporation and issue incorporation documents;− issue a license in the case of insurers, trust companies and savings

companies incorporated in Québec or elsewhere;− collect the fees paid by regulated entities;− maintain a register of participants.

To control the activity, the regulatory body must ensure that regulatedentities comply with legislative requirements. To do so, it must, in particular:

− determine, and inform regulated entities of, certain requirements, eitherby publishing guidelines or administrative directives;

− inspect regulated entities itself or have them inspected;


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− require regulated entities to prepare activity reports and examine them;− audit financial statements or have them audited;− carry out any investigation required.

Lastly, to enable it to enforce legislative requirements, the regulatory bodyhas intervention powers. In particular, it can:

− order the cancellation of a transaction, impose corrective measures or aremedial action plan;

− assume or have assumed the interim management of a regulated entity;− withdraw or restrict a license as well as impose conditions thereon.

3.1.3.2 Securities markets regulation

The market, i.e. the issuer, the broker and the exchange mechanism, isregulated to allow a “fair price” to be set continuously for a security.

Securities markets regulation is designed to secure access to relevant,truthful and complete information (for instance, the prospectus in the case ofmutual funds, or the information documents in the case of a segregatedfund). Another objective of regulation is to ensure that the exchangemechanism (trading, clearing and settlement) operates efficiently so that theprice set by this exchange mechanism is “fair” and that the execution of thetransaction is guaranteed.

The role of the securities markets regulatory body is to oversee the processof production of the security, since the quality of the security depends on thequality of this process.

The regulatory body also supervises the operation of markets. To do so, itmust regulate in particular:

− the securities issuance process;− takeover bids, exchange offers and issuer bids;− securities markets (stock exchanges) and clearing and settlement

organizations.

To supervise the securities issuance process, the regulatory body must inparticular:

− register issuers;− authorize the use of information documents (prospectus);− assemble information relating to markets (financial statements, insider

reports, etc.).

When the body regulates take-over bids, exchange offers and issuer bids,it must in particular:


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− control how long they remain open;− control the information disclosed.

When it regulates stock exchanges and clearing and settlementorganizations, the body can in particular:

− authorize clearing and settlement organizations to exercise their activities;− delegate powers and responsibilities to them;− oversee their activities (inspection);− approve their regulations;− intervene if need be by order;− review the decisions of these organizations taken regarding their

members.

3.1.3.3 Distribution regulation

The main purpose of distribution regulation is to help the consumer to buyproducts that are suitable for him and provide him with ways to make fullyinformed choices.

The need to regulate the distribution of financial products and servicesdepends on the product distributed. For example, distribution by deposit-taking institutions of their savings products is much more loosely regulatedthan that of insurance products or securities for which the legislationregulates the activities of representatives (disclosure of sources ofremuneration, competence, continuing education, code of ethics, etc.).

Representatives and their activities are regulated essentially to ensure thatthey are in a position to properly advise the consumer. Accordingly,regulation seeks, first, to ensure that the adviser has the necessarycompetence to give advice and, second, that the adviser puts the client’sinterests before his own.

To ensure the competence of the person giving advice, some minimumeducation is generally required or the passing of an exam or the completionof a training period. These requirements are normally sufficient to ensure anacceptable level of competence.

When it is a matter of the consumer’s interests taking precedence, regulationbecomes more difficult, especially when the adviser’s remuneration dependson the products he sells the consumer (remuneration by commission). Theadviser is then in a situation where his personal interests may conflict withthose of the consumer. Regulation of the advisory activity is based on a codeof ethics. This code sets out the duties of the adviser towards his client.Committees, generally consisting of specialists in the field, are charged withassessing the conduct of the adviser and, if necessary, imposing sanctionswhen, following an investigation, a complaint is lodged with thesecommittees.


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The tasks of distribution regulation bodies are generally divided into threecategories:

− control of access to the activity;− control of the activity;− action in the event of non-compliance.

To control access to the activity, the body must in particular:

− administer the participant registration process;− analyze registration applications and issue the documents certifying such

registration;− issue a license;− collect the fees paid by regulated entities;− maintain a register of participants.

When it controls the activity, the regulatory body must ensure thatregulated entities comply with legislative requirements. To do so, the bodymust in particular:

− determine certain requirements, either by passing regulations, bypublishing guidelines or administrative directives, and inform regulatedentities accordingly;

− itself inspect regulated entities or have them inspected;− request activity reports from regulated entities and examine them;− audit the financial statements in certain cases or have them audited;− carry out an investigation, generally following a complaint.

To enforce the requirements of the legislation, the regulatory body hasintervention powers. In particular, it can:

− assume or have assumed the interim management of a regulated entity;− withdraw or restrict a license as well as impose conditions thereon;− impose fines;− bring a regulated entity before a committee that may impose various

sanctions, in particular fines and suspensions or withdrawals of licenses.

3.1.3.4 Consumer assistance regulation

The regulatory structure offers two types of services to consumers of financialproducts and services:

− assistance in the processing of complaints;− assistance in obtaining information or education services.

Regarding processing of complaints, regulatory bodies have the authority tointervene in cases where the law has been violated. However, even if there is


29

no legal obligation to intervene, their initiative can often improve the balanceof power between the consumer and the regulated entity concerned: forinstance, they can correct the asymmetry in the availability of information.

The regulatory body is generally in a particularly good situation to help theconsumer in terms of distribution of information and education services. It isacknowledged that these two areas offer excellent means of prevention in thefield of consumer protection.

Accordingly, the body may set up a consumer assistance service that canprovide relevant information. The body is also able to distribute informationand offer education services to the consumer. In addition, it can inform theconsumer on how to have his rights respected. Lastly, it may also beresponsible for following up on complaints.

3.1.3.5 Compensation regulation

A variety of compensation mechanisms have been set up to bolsterconsumer confidence, which is essential to the efficient operation of thefinancial sector. These compensation mechanisms come into play in thefollowing two situations:

− if a financial institution or an investment dealer is unable to meet itsobligations to its customers;

− if a representative or broker certified under certain laws is guilty of fraud inthe exercise of his functions.

Some of these mechanisms are public or stem from legal measures (forinstance, the Régie de l’assurance-dépôts du Québec (RADQ) and the Fondsd’indemnisation des services financiers). Others are private and stem frominitiatives of the industry concerned (for instance, the Canadian Life andHealth Insurance Compensation Corporation or COMPCORP, the Propertyand Casualty Insurance Compensation Corporation and the CanadianInvestor Protection Fund or CIPF).

In practice, the organization collects assessments, administers the fund, ruleson compensation claims and pays compensation.

3.2 QUÉBEC’S REGULATORY BODIES

In Québec, the regulatory activities described above are distributed amongmany regulatory bodies. The Task Force examined eight Québecorganizations that exercise regulatory functions in the financial sector andthree organizations that provide compensation for consumers of financialproducts created by Québec legislation. These bodies currently operate invarious fields of the financial industry (insurance, securities, deposit-taking,pension plans, etc). The mission, objectives and funding methods vary fromone organization to the next.


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This section briefly describes the chief activities, functions, responsibilitiesand revenue of these organizations.

3.2.1 The Association des courtiers et agents immobiliers duQuébec

The Association des courtiers et agents immobiliers du Québec (ACAIQ)began operating in 1994 when the Real Estate Brokerage Act (R.S.Q., c. C-73.1) became effective. It succeeded the Association de l’immeuble duQuébec. Membership in this body is compulsory, it is self-financing and itsmission is to protect the public by enforcing rules of ethics and theprofessional inspection of its members to ensure, in particular, that theyconduct their activities in compliance with the legislation. It provides itsmembers with continuing professional education courses and awards thespecialist titles members can use. It also administers a financial activity,namely the brokerage of loans secured by a mortgage, under the Real EstateBrokerage Act. Its membership consists of 10 500 real estate agents andbrokers.

For the fiscal year ended December 31, 2000, the total revenue of the ACAIQstood at $5.3 million, mostly from fees imposed by the legislation. Thisrevenue breaks down as follows:

TABLE 3.2.1ACAIQ(Revenue in dollars, fiscal year ended December 31, 2000)

Fees 3 421 887 Sale of supplies and services 502 142 Penalties and disbursements received (discipline) 168 216 Fees and penalties (illegal practice) 514 550Partial total 4 606 795Investment income and other revenue 293 148 Interest 377 140

TOTAL 5 277 083

An 11-member board of directors administers the affairs of the ACAIQ. Twoof the directors, who are neither real estate agents nor brokers, are appointedby the government after consulting with various socio-economic groups. Theother nine directors are elected by their peers. The ACAIQ has about 50employees.


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3.2.2 The Bureau des services financiers

The Bureau des services financiers was formed under the Act respecting thedistribution of financial products and services. It is neither a publicorganization, a government organization nor a government enterprise for thepurposes of legislation in effect in Québec. It is a self-financing financialsector regulatory body whose mission is to ensure that the public is protectedin the fields under its authority, in particular in the following disciplines:

− life and health insurance;− group life and health insurance;− property insurance;− claims adjustment;− financial planning;− group savings plan brokerage;− investment contract brokerage;− scholarship plan brokerage.

The BSF administers the Act respecting the distribution de financial productsand services and its regulations for all regulated entities. In addition, itreceives complaints filed against firms, independent representatives,independent partnerships and distributors of financial products and servicesand carries out investigations in their regard. It also acts as an insurance andreference centre in the insurance field.

According to its annual report for 2000, about 35 000 representatives arecertified by the BSF and close to 2 500 firms are registered. For the fiscalyear ended December 31, 2000, the BSF’s total revenue amounted to $7.5million, mostly from fees imposed by the legislation. This revenue breaksdown as follows:


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TABLE 3.2.2BSF(Revenue in dollars, fiscal year ended December 31, 2000)

Contributions 5 528 119Other services 61 423Analysis of distribution guides 26 120Examinations 497 729Study of files 741 331Sale of manuals and forms 465 986Dues – Centre collégial de formation à distance 44 760Fees of the Chambers and of the Regroupement descabinets de courtage du Québec

27 422

Loss on the disposal of assets (440)Partial total 7 392 450Other income – interest 143 698

TOTAL 7 536 148

A 15-member board of directors administers the affairs of the BSF. Ten of thedirectors, including the chairman, are appointed by the Minister of Finance.The other members of the board are ex officio the president and vice-president of the Chambre de l’assurance de dommages and those of theChambre de la sécurité financière. The BSF has over 150 employees, 90 ofthem permanent and 60 casual.

3.2.3 The Chambre de l’assurance de dommages

The Chambre de l’assurance de dommages, formed under the Act respectingthe distribution of financial products and services, is a legal person that is nota government mandatary. It is a self-financing organization whose mission isto protect the public by maintaining discipline, enforcing the code of ethicsand ensuring the training of its members. Accordingly, it sets rules of ethicsand continuing professional education and oversees the operations of adiscipline committee.

For the fiscal year ended December 31, 2000, the total revenue of the ChADamounted to $2.7 million, mainly from dues imposed by legislation. Thisrevenue breaks down as follows:


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TABLE 3.2.3ChAD(Revenue in dollars, fiscal year ended December 31, 2000)

Dues 2 477 061Clerk 73 950Professional development 16 444Publications 7 958Partial total 2 575 413Interest 36 290Interest on the brokers reserve fund 39 750

TOTAL 2 651 453

An 11-member board of directors administers the affairs of the ChAD. TheMinister of Finance appoints two directors to represent consumers; the othernine directors are elected by various groups of ChAD members, of whichthere are just over 10 000. The ChAD has 19 permanent employees.

3.2.4 The Chambre de la sécurité financière

The Chambre de la sécurité financière, formed under the Act respecting thedistribution of financial products and services, is a legal person that is not agovernment mandatary. It is a self-financing organization whose mission is toprotect the public by maintaining discipline, enforcing the code of ethics andensuring the training of its contributors. Accordingly, it sets rules of ethics andcontinuing professional development and oversees the operations of adiscipline committee. It has just over 25 000 members.

For the fiscal year ended December 31, 2000, the total revenue of theCSF amounted to $4.8 million, mainly from dues imposed by legislation.This revenue breaks down as follows:

TABLE 3.2.4CSF(Revenue in dollars, fiscal year ended December 31, 2000)

Dues 4 086 229Clerk 157 798Training 480 178Preventive audit 13 539Partial total 4 737 744Other revenue 1 782Interest 49 558

TOTAL 4 789 084


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An 11-member board of directors administers the affairs of the CSF. TheMinister of Finance appoints two directors to represent consumers; the othernine directors are elected by various groups of members. The CSF has 40employees.

3.2.5 The Commission des valeurs mobilières du Québec

The Commission des valeurs mobilières du Québec is incorporated under theSecurities Act (R.S.Q., c. V-1.1). It is a self-financing regulatory organization,mandated by the government, and is responsible for enforcing the SecuritiesAct. Its mission is to foster the efficient operation of the securities market,protect investors against unfair, abusive and fraudulent practices, overseeinformation to holders of securities and the public on persons making a publicoffering and on the securities they issue, and monitor the activity of securitiesmarket professionals, their associations and the organizations responsible forinsuring the operation of a securities market.

For the fiscal year ended March 31, 2001, the total revenue of the CVMQamounted to $38.7 million, mainly from fees imposed by the legislation. Thisrevenue breaks down as follows:

TABLE 3.2.5CVMQ(Revenue in dollars, fiscal year ended March 31, 2001)

Fees:Corporate financing 24 170 056Enrolment 8 496 574Financial information 3 450 310Inspections 151 725Other 17 700Settlement agreements and fines 332 750

Partial total 36 619 115Interest on bank deposits 2 073 692

TOTAL 38 692 807

The CVMQ has a maximum of nine members including a chairman and nomore than three vice-chairmen who hold their positions on a full-time basisand are all appointed by the government. It has slightly more than 200employees.


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3.2.6 The Inspector General of Financial Iinstitutions

The Inspector General of Financial Institutions (IGFI) is incorporated underthe Act respecting the Inspector General of Financial Institutions (R.S.Q.,c. I-11.1). He is charged with exercising the functions and powers attributedto him by a number of statutes and administering any law or provision of alaw whose administration is entrusted to him by the government.8

Accordingly, he is charged with overseeing and inspecting financialinstitutions and advising the minister concerning the legislation whoseadministration is entrusted to him or under which functions or powers areattributed to him. He is also charged with administering and operating acentral registry of businesses set up by the government.

Under the Real Estate Brokerage Act, which he administers, the IGFImonitors the ACAIQ and the Fonds d'indemnisation du courtage immobilier.

For the fiscal year ended March 31, 2001, the total revenue of the IGFIamounted to $54 million, with $9.4 million from the financial sector. TheIGFI’s main source of revenue is fees imposed on enterprises, accounting forabout 83% of his revenue. Total revenue breaks down as follows:

TABLE 3.2.6IGFI(Revenue in dollars, fiscal year ended March 31, 2001)

Field ofactivity Dues1 Licenses

Constitutionof

companies

Annualand initial

reports

Legalpersons Misc. TOTAL

Insurance 5 138 534 299 229 118 482 - - - 5 556 245Real estatebrokerage 69 241 (2 045)

- - - -67 196

Deposit-takinginstitutions

3 620 898 39 920 83 028- - -

3 743 846

Enterprises - - - 35 077 496 9 226 864 304 9552 44 609 315

TOTAL 8 828 673 337 104 201 510 35 077 496 9 226 864 304 955 53 976 602

1. Dues for 2000-2001 are based on expenditures for fiscal year 1999-2000.2. Interest on arrears, penalties for NSF cheques and othe revenue.

The senior officers, namely the Inspector General of Financial Institutions andthe Deputy Inspector General are appointed by the government. The IGFI is

8 The following in particular: Act respecting insurance (R.S.Q., c. A-32), Act respecting the

caisses d'entraide économique (R.S.Q., c. C-3), Act respecting certain caisses d'entraideéconomique (R.S.Q., c. C-3.1), Act respecting financial services cooperatives (S.Q. 2000,c. 29), Companies Act (R.S.Q., c. C-38), Real Estate Brokerage Act (R.S.Q., c. C-73.1),Winding-up Act (R.S.Q., c. L-4), Act respecting special corporate powers (R.S.Q., c. P-16),Act respecting the legal publicity of sole proprietorships, partnerships and legal persons(R.S.Q., c. P-45), Loan and Investment Societies Act (R.S.Q., c. S-30), and many others.(See section 1 of the Act respecting the Inspector General of Financial Institutions).


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funded by appropriations voted by the National Assembly and the amounts itcollects are paid directly into the government’s Consolidated Revenue Fund.It employs 298 people, with 122 working on tasks relating to the regulation ofthe financial sector and 176 on those relating to the enterprises’ sector.

3.2.7 The Institut québécois de planification financière

The Institut québécois de planification financière (IQPF) is a non-profitorganization responsible, under the Act respecting the distribution of financialproducts and services, for granting the diploma required to obtain thecertificate authorizing the use of the title of financial planner and setting thecontinuing professional development requirements for financial planners.

For the fiscal year ended December 31, 2000, the revenue of the IQPFamounted to almost $2 million. This revenue breaks down as follows:

TABLE 3.2.7IQPF(Revenue in dollars, fiscal year ended December 31, 2000)

Training 1 259 573Annual convention 228 350Teaching material 179 317File set-up 116 400Single exam 107 000Annual dues (voluntary, 2000) 37 028Reference service 4 651Diploma equivalency 4 000Advertising 3 737Partial total 1 940 056Interest 23 355

TOTAL 1 963 411

The IQPF obtains its revenue from its activities rather than from fees imposedby legislation.

It has awarded diplomas to over 4 800 financial planners in Québec. A boardof directors of 11 financial planners, elected by their peers, administers itsaffairs. It has 12 permanent employees.

3.2.8 The Régie des rentes du Québec

The Régie des rentes du Québec (RRQ) is incorporated under the Actrespecting the Québec Pension Plan (R.S.Q., c. R-9). The RRQ is a self-


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financing organization mandated by the government. Its mission is tocontribute to income security, chiefly at retirement.

The RRQ also has a specific mission to promote financial planning forretirement, in particular by encouraging the establishment of new pensionplans under the Supplemental Pension Plans Act (R.S.Q., c. R-15.1). Toensure that these plans are administered in accordance with the law, it mustin particular:

− register pension plans and the changes made to them;− verify the information sent to it annually by plan administrators;− ensure that participants’ rights are respected when plans terminate;− provide the pension plan clientele with information and support;− ensure that an actuarial valuation is carried out on each pension plan;− authorize changes to pension plan investment policies;− assume the provisional administration of all or part of a pension plan, or

entrust it to a person it designates.

For the fiscal year ended March 31, 2001, the RRQ’s total revenue fromsupplemental pension plans amounted to $4.6 million, mostly from feesimposed by the legislation. This revenue breaks down as follows:

TABLE 3.2.8RRQ(Revenue in dollars, fiscal year ended March 31, 2001)

Fees 4 508 000Interest 37 000Other 62 000

TOTAL 4 607 000

The RRQ is administered by a board of directors consisting of 12 members,including a chairman, all appointed by the government. Two members areappointed after consulting with the most representative organizations of thebusiness world, two after consulting with the most representativeorganizations of labour, two after consulting with the most representativesocio-economic groups, one after consulting with organizations of business orindividuals working in the field of social benefits for employees and two areappointed from among recipients of benefits paid by the RRQ. Two othermembers are appointed from among officials of the government or itsorganizations.

The RRQ has 1 100 employees of whom 37 work at monitoring supplementalpension plans.


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3.2.9 Compensation funds

3.2.9.1 The Fonds d’indemnisation du courtage immobilier

The Fonds d’indemnisation du courtage immobilier (FICI) is incorporatedunder the Real Estate Brokerage Act. Its mission is to compensateconsumers who are victims of fraud, a dishonest transaction ormisappropiration of funds from a trust account by a real estate agent orbroker.

For fiscal year 2000, the total revenue of the FICI amounted to $423 570.This revenue breaks down as follows:

TABLE 3.2.9.1FICI(Revenue in dollars, fiscal year ended December 31, 2000)

Contributions 188 560

Investment income 235 010

TOTAL 423 570

The FICI is managed by a board of directors of seven members appointed bythe government, four of whom are chosen from among holders of thecertificate issued by the Association des courtiers et agents immobiliers duQuébec; the other three directors are individuals with a particular contributionto make to the advancement of the profession.

3.2.9.2 The Fonds d’indemnisation des services financiers

The Fonds d’indemnisation des services financiers is incorporated under theAct respecting the distribution of financial products and services. Itsucceeded the corresponding funds that existed under the Act respectingmarket intermediaries. It is mandated to administer the monies deposited inthe fund, rule on compensation claims and compensate victims of fraud,deceitful practice or misappropriation of funds for which a firm, independentrepresentative or independent corporation is liable.


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For fiscal year 2000, the total revenue of the FISF amounted to $3.1 millionincluding contributions of $2.9 million paid pursuant to the legislation. Thisrevenue breaks down as follows:

TABLEAU 3.2.9.2FISF(Revenue in dollars, fiscal year ended December 31, 2000)

Contributions 2 931 804Interest 144 379

TOTAL 3 076 183

The FISF is administered by a seven-member board of directors, including achairman and vice-chairman, appointed by the BSF for a three-year term.Two members of the board are chosen to represent the public. The FISF hasseven employees.

3.2.9.3 The Régie de l’assurance-dépôts du Québec

The Régie de l’assurance-dépôts du Québec is incorporated under theDeposit Insurance Act (R.S.Q., c. A-26). It is mandated by the state and theproperty in its possession belongs to the state. It is charged with overseeing,under the Deposit Insurance Act, the solicitation and acceptance of depositsof money from the public, guaranteeing the payment of deposits of money tothe extent and as stipulated by the Act and its regulations, managing thedeposit insurance fund and administering the regime of licenses necessaryfor a financial services cooperative, trust company, savings company or othereligible institution to receive deposits under the regulations.

For the fiscal year ended March 31, 2001, the total revenue of the RADQamounted to $25.9 million including $14.7 million in premiums collectedpursuant to the legislation. This revenue breaks down as follows:

TABLE 3.2.9.3RADQ(Revenue in dollars, fiscal year ended March 31, 2001)

Premiums 14 703 800Investment and interest income 11 064 703Other 122 374

TOTAL 25 890 877

The RADQ is administered by a board of directors consisting of theincumbents of the positions of Inspector General of Financial Institutions,


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Deputy Inspector General of Financial Institutions and the Deputy Minister ofFinance, as well as two other persons who are not public servants nor headsof a government organization, and appointed by the government. TheInspector General of Financial Institutions is the President and ChiefExecutive Officer. The RADQ has five employees.

Overview of the revenue of organizations

To summarize, the revenue from fees, fines and other amounts charged tothe financial sector by the eight regulatory bodies and the threecompensation funds amounted to a total of $89.6 million for the last fiscalyear. This revenue is broken down in the following table:

SUMMARY TABLEFEES, FINES AND OTHER AMOUNTS CHARGED TO THE FINANCIAL SECTOR(In dollars, last fiscal year)

Regulatory bodies

ACAIQ 4 606 795BSF 7 392 450ChAD 2 575 413CSF 4 737 744CVMQ 36 619 115IGFI 9 367 287IQPF 1 940 056RRQ 4 508 000

Partial total 71 746 860

Compensation fundsFICI 188 560FISF 2 931 804RADQ 14 703 800

Partial total 17 824 164

TOTAL89 571 024

3.3 CANADIAN REGULATORY BODIES

In addition to Québec regulatory bodies of the financial sector, variousCanadian regulatory bodies oversee financial institutions active in Québec.The major ones are the Office of the Superintendent of Financial Institutions,Canada Deposit Insurance Corporation and the new Financial ConsumerAgency of Canada.


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Many functions and responsibilities of these organizations overlap, not to sayencroach on, Québec’s fields of jurisdiction. For instance, insurance contractsand consumer protection fall within Québec civil law.

The Office of the Superintendent of Financial Institutions regulates Canadian-chartered financial institutions within Québec.

Canada Deposit Insurance Corporation is responsible for insuring deposits inbanks and other Canadian-chartered deposit-taking institutions.

The mission of the Financial Consumer Agency of Canada is to superviseCanadian-chartered financial institutions to ensure, among other things, thatthey comply with the provisions of the legislation regarding consumerprotection, oversee the implementation of voluntary codes of conductregarding consumer protection, and educate and inform consumers.

In addition to this agency, a new body might be created whose mission wouldbe to implement and administer a system to examine claims from personswho have requested or obtained financial products or services from memberinstitutions of the organization and are dissatisfied with them. This systemwould be compulsory for banks, but optional for other Canadian-charteredfinancial institutions. However, the latter institutions would be required to jointhe system if they do not participate in an equivalent dispute settlementsystem.

The creation of such federal organizations operating within Québec adds tothe consumer’s confusion and to the administrative burden on regulatedentities. It is not our task to determine the extent of this overlap orencroachment. The courts alone are competent to determine theconstitutionality of legislative texts.

3.4 PAN-CANADIAN FORUMS

Over the years, provincial regulatory bodies in their fields of competence,such as insurance, securities and pension plans, have initiated the creation ofinformal field-based forums in order to work to harmonize regulations invarious jurisdictions.

These forums are:

− for insurance, the Canadian Council of Insurance Regulators (CCIR) andthe Canadian Insurance Services Regulatory Organizations (CISRO);

− for pension plans, the Canadian Association of Pension SupervisoryAuthorities (CAPSA);

− for securities, the Canadian Securities Administrators (CSA).


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3.4.1 The Canadian Council of Insurance Regulators

Structure

The Canadian Council of Insurance Regulators is an informal and voluntaryassociation of various provincial regulatory bodies in the insurance field, withfederal participation through the Office of the Superintendent of FinancialInstitutions. It recently set up a secretariat to support its initiatives. Theorganization is currently chaired by the representative from Newfoundland,whose successor will be determined according to an alternating jurisdictionrule.

Mandate

The CCIR’s mission is to encourage and promote an effective regulatorysystem for insurance in Canada to promote the public’s interest.9

3.4.2 The Canadian Insurance Services RegulatoryOrganizations

Structure

The Canadian Insurance Services Regulatory Organizations (CISRO) form avoluntary, informal and pan-Canadian group of certain regulatory bodies orself-regulatory organizations that regulate the distribution of insurance. Thegroup plans to eventually set up a more formal structure with a secretariatand staff. It is currently chaired by the director general of Québec’s Chambrede la sécurité financière, whose successor will be chosen according to analternating jurisdiction rule.

Mandate

CISRO’s mission is to promote harmonization of standards of qualificationand practice among insurance intermediaries through cooperation. Morespecifically, its objectives are:

− to standardize and propose Canadian standards of training forintermediaries;

− to facilitate information sharing among various jurisdictions;− to develop greater expertise of resources by discussing common issues;− to create a single voice to intervene on issues affecting other financial

services regulatory authorities and to communicate with the media,consumers and intermediaries;

− to cooperate with other regulatory bodies.

9 See Appendix 4 for a list of work by its sub-committees.


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3.4.3 The Canadian Association of Pension SupervisoryAuthorities

Structure

The Canadian Association of Pension Supervisory Authorities is a formal andvoluntary group, incorporated as a legal person, of provincial pension plansupervisory bodies and the Office of the Superintendent of FinancialInstitutions. The secretariat has its office at the headquarters of the FinancialServices Commission of Ontario, but is under the authority of the chairpersonof CAPSA. Currently, CAPSA is chaired by the Superintendent of Pensions ofAlberta, whose successor will be chosen according to an alternatingjurisdiction rule.

Mandate

The mission of CAPSA10 is:

− to promote improvement in pension plan policy in Canada;− to promote simpler and harmonized pension plan regulation throughout

Canada;− to make pension plan commitments more secure;− to improve communication between pension plan supervisory

organizations and interested parties and to intervene on issues ofcommon interest.

3.4.4 The Canadian Securities Administrators

Structure

The Canadian Securities Administrators form an informal group consisting ofsecurities commissions and other authorities of the provinces and territories,that have exclusive competence in this area. The group has no formalstructure and studies proposals on which the representatives of interestedprovinces and territories take a position. The CSA is currently chaired by therepresentative of the British Columbia Securities Commission, whosesuccessor will be chosen according to an alternating jurisdiction rule.

Mandate

The CSA’s mission is to provide Canada with a securities regulatory systemthat both protects investors against unfair, abusive and fraudulent practices,and promote a dynamic, efficient and honest capital market.11

10 Idem.11 Idem.


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3.4.5 The Joint Forum of Financial Market Regulators

In view of financial sector decompartmentalization and inter-sectoralconvergence, the forums described above have formed the Joint Forum ofFinancial Market Regulators (Joint Forum) to work to harmonize regulationsaffecting more than one field. No regulatory body is formally bound by thedecisions the Joint Forum may make.

Structure

The Joint Forum consists of groups of regulatory bodies from three fields(insurance, securities and pension plans). The CCIR, CAPSA and the CSAeach appoint four representatives, while the BSF and CISRO each appointone representative to the Joint Forum (see the table at the end of this sectionsetting out the membership of the pan-Canadian forums).

The Joint Forum is an informal voluntary group planning to set up an office tostudy various proposals, to which staff would be assigned. The office wouldreport to the chairman of the Joint Forum and is to be located in the premisesof the Ontario Securities Commission.

The Joint Forum is currently chaired by the Superintendent of Pensions ofBritish Columbia, whose successor will be chosen according to an alternatingjurisdiction rule.

Mandate

The Joint Forum seeks to coordinate and rationalize the regulation offinancial products and services in Canada.12

Its objectives are:

− to improve consumer protection;− to rationalize (simplify) the regulation of financial services and make it

more effective;− to adapt the regulatory system to a rapidly changing market to make the

market more efficient, limit its costs and increase consumer confidenceregarding regulated sectors.

It also works to harmonize regulation in the following areas:

− proficiency requirements for financial planners;− individual variable contracts and mutual funds;− information on investments in capital accumulation plans;− the proficiency of intermediaries and granting of licenses.

12 Idem.


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TABLE 3.4.5REGULATORY BODIES BELONGING TO PAN-CANADIAN ORGANIZATIONS1

Participants

Pan-Canadianforums Québec Ontario British Columbia Alberta Other provinces Canada

CCIR IGFI OFSC2 FICOM Superintendent ofInsurance

Superintendents OSFI

CSA CVMQ OFSC2 BCSC ASC Commissions andauthorities

CAPSA RRQ OFSC2 Superintendent ofPensions

Superintendent ofPensions

Superintendents OSFI andFinanceCanada

CISRO CSFChADBSF

OFSC2

RIBOInsurance Council ofBritish Columbia

Alberta InsuranceCouncil

Various provincialorganizations

Members of theJoint Forum

CSA CVMQ OFSC2 BCSC NSSC

CCIR IGFI Superintendent ofNewfoundland,Superintendent ofSaskatchewan andSuperintendent ofManitoba

BSF BSF

CAPSA OFSC2 Superintendent ofPensions

Superintendent ofPensions

Superintendent ofPensions ofSaskatchewan

CISRO CSF

1. The acronyms of pan-Canadian organizations and regulatory bodies are:

Pan-Canadian organizationsCSA: Canadian Securities AdministratorsCCIR: Canadian Council of Insurance RegulatorsCAPSA: Canadian Association of Pension Supervisory AuthoritiesCISRO: Canadian Insurance Services Regulatory Organizations

Regulatory bodiesASC: Alberta Securities CommissionBCSC: British Columbia Securities CommissionBSF: Bureau des services financiersOSFI: Office of the Superintendent of Financial InstitutionsChAD: Chambre de l'assurance de dommagesOFSC: Ontario Financial Services CommissionCSF: Chambre de la sécurité financièreCVMQ: Commission des valeurs mobilières du QuébecFICOM: Financial Institutions Commission of British ColumbiaIGFI: Inspector General of Financial InstitutionsNSSC: Nova Scotia Securities CommissionRIBO: Registered Insurance Brokers of OntarioRRQ: Régie des rentes du Québec

2. Currently, the regulatory body for the securities sector is the Ontario Securities Commission (OSC) while the Financial ServicesCommission of Ontario (FSCO) is the regulatory body for other sectors. These two bodies are expected to merge in the near futureand will be called the Ontario Financial Services Commission. This commission would be Ontario’s sole representative on these pan-Canadian forums.


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3.5 METHODS OF REGULATION

The National Assembly is responsible for passing laws and, as a general rule,the government is responsible for regulations. As far as the regulation of thefinancial sector is concerned, certain tasks and functions are generallyentrusted, under the legislation, to regulatory bodies13 such as theCommission des valeurs mobilières du Québec and the Bureau des servicesfinanciers. To carry out these tasks and functions, regulatory bodies aresometimes instructed to formulate relevant regulations to set out rules tocontrol and oversee certain activites. These regulations must generally beapproved by the government before they become effective: this is calleddelegated regulation.

In other cases, the legislation authorizes a regulatory body to delegate certaintasks and functions to self-regulatory organizations (SROs) under thesupervision of regulatory bodies. Accordingly, certain private associations ororganizations obtain a mandate to regulate or enforce the regulation of asector of activity on behalf of the regulatory body or the government. Thisway of structuring tasks and functions in the financial sector is called self-regulation.

There is a third situation, in which associations or organizations elect tovoluntarily regulate the activities of players in the financial industry, withouthaving received a mandate to that effect from a regulatory body or from thegovernment. Such voluntary self-regulation of the industry applies only tomembers of such associations or organizations.

It is important to clearly identify, within the regulatory structure of the financialsector, which from among the government, the regulatory bodies or theassociations of the financial sector, will be responsible for carrying outregulatory tasks and functions, to avoid increasing the administrative burdenon market players and provide the best protection for the public and ensurethat Québec’s fields of jurisdiction in financial matters are safeguarded.

Briefly, here is how the regulatory tasks and functions in Québec’s financialsector are currently divided.

3.5.1 Delegated regulation

Delegated regulation obtains when the legislation grants a financial sectorregulatory body the power to make regulations. The body is accordingly theassignee of the regulatory power that usually rests with the government.

The terms and conditions, results and effects of regulations made by suchbodies generally remain under the government’s control. In most cases, thegovernment must approve the regulation made by a regulatory body before it 13 See section 3.2 on Québec regulatory bodies.


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can become effective. Such regulation is applicable to all regulated entitiesjust like any other regulation made by the government. The CVMQ, the BSFand the Chambers (CSF and ChAD) have been delegated, by legislation, thepower to formulate regulations on certain matters within their jurisdiction.

3.5.2 Self-regulation

One form of self-regulation occurs when a regulatory body delegates certainregulatory tasks or functions to a private organization. Such sub-delegation offunctions or tasks must be stipulated in the legislation. The regulatory rulesor, in other words, the regulations and methods of regulation formulated byself-regulatory organizations generally remain under the control of theregulatory body that must approve them.

One example of a self-regulatory organization is the Montréal Exchange,which received such recognition regarding the regulation of its members.Accordingly, the CVMQ delegated to the ME the regulation of participants inthe ME’s market, and its regulatory rules must be approved by the CVMQ.

3.5.3 Voluntary self-regulation

Another form of self-regulation, which we call voluntary, occurs when themembers of an association choose on their own initiative to adopt operatingrules or regulations they will observe. These rules are applicable only to themembers of the association and are not recognized either by a regulatorybody or by the government. This collective way of proceeding is anassociative form of self-regulation.

The rules decided by such associations cannot take precedence over thoseof the government or a regulatory body for two reasons: first, because theseassociations are not recognized under the legislation as self-regulatoryorganizations, and second, because they do not necessarily represent all theparticipants in the sector to be regulated. For example, the rules ofprofessional associations, other than those subject to the Professional Code(R.S.Q., c. C-26), correspond to this form of self-regulation. Membership inthese associations is voluntary. Persons who do join undertake to observecertain rules formulated by their association. These rules do not bind all theparticipants in a field of activity, only the members of the association arebound to observe the rules established on a contractual and non-legal basis.


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3.5.4 The special feature of the Investment DealersAssociation

The role played by the Investment Dealers Association (IDA) in regulatinginvestment dealers in Québec, even though it does not have SRO statusunder the law, should be mentioned.

The IDA is a professional association of brokers founded in 1916. It has takenon the responsibility of regulating the activities of Canadian investmentdealers, particularly regarding their business practices and regarding capitalrequirements. In addition, it receives complaints from consumers and isresponsible for disciplining representatives. However, its consumer protectioncomponent has been criticized.

While the Securities Act authorizes the IDA to continue regulating itsmembers in Québec,14 the CVMQ has not recognized it as a SRO. Inaddition, the rules it prescribes for its members appear compulsory andrestrictive. When a broker voluntarily joins the IDA, he must undertake, bycontract, to observe its rules and regulations and suffer the sanctions itlevies.

3.6 THE QUASI-JUDICIAL PROCESS15

In the field of financial sector regulation, the quasi-judicial process foundwithin organizations takes on a particular character that deserves analysis.

3.6.1 The concept of the quasi-judicial function

The quasi-judicial function (jurisdictional function) consists in decidingdisputes between parties, i.e. ruling, like a judge, on the existence of factsand impartially applying the rules of law to them. The dispute between partiesoccurs between a subject and an administrative authority where the latter haspreviously handed down, or is about to do so, a decision that deprives thesubject of a right.

14 Sec. 351, Securities Act.15 This section is based largely on chapter 6 of the book by Pierre Issalys and Denis Lemieux, L’action

gouvernementale: précis de droit des institutions administratives, Cowansville, Les Éditions YvonBlais inc., 1997, 1332 p.


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3.6.2 Exercise of the quasi-judicial function

There are two forms of quasi-judicial function in the governmentadministration.

The first is the administrative tribunal, i.e. an organization of theadministration specializing solely in the quasi-judicial function, such as theAdministrative Tribunal of Québec and the Labour Tribunal.

The second is a body that exercises both regulatory functions and quasi-judicial functions, such as the Commission des valeurs mobilières duQuébec, the Régie des alcools, des courses et des jeux and the CanadianRadio-television and Telecommunications Commission.

3.6.3 Advantages of the quasi-judicial function

The quasi-judicial function is entrusted to a body to avoid turning to the courtsin the first instance. In matters of economic regulation, short-term and specificinitiatives are required. Accordingly, to resolve disputes, in some casesbodies have been created to exercise the quasi-judicial function, and inothers, the quasi-judicial function has been introduced within regulatorybodies.

As a result, decisions are reached:

− with less formality, at lower cost and more efficiently;− in a way that is more accessible, faster and better perceived by subjects

and the administration;− with the benefit of more extensive, and eventually multi-disciplinary,

expertise;− with knowledge of the specific context and technical aspects specific to

the matter in dispute.

3.6.4 The quasi-judicial function and the regulatory function

In the financial sector, regulatory bodies are formed to regulate a field ofactivity. These bodies wield administrative, quasi-judicial and sometimesregulatory power. Accordingly, a regulatory body acts like a tribunal at times.The regulatory function and the quasi-judicial function go hand in hand andare closely linked.

Regulatory bodies are often confused with administrative tribunals. The twotypes of authority exercise the quasi-judicial function for technical, efficiencyand accessibility reasons, while maintaining the rules of impartiality andindependence that are essential to the judicial function.


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However, regulatory bodies that exercise the quasi-judicial function differfrom administrative tribunals mainly because regulatory bodies apply bothobjective and subjective standards, such as the public interest, whileadministrative tribunals apply purely objective legal standards to situations offact.

In addition, the regulatory body oversees a sector of economic activity on acontinuous basis. It has more extensive powers than an administrativetribunal. The body is called upon to rule on more “open” questions, taking intoaccount a broader factual context and on the basis of rules that are notalways legal by nature. Accordingly, it has extensive discretionary power.

In addition, the regulatory body differs from the traditional legal function.Unlike a judge who is called on to reach a decision only when a dispute isbrought before him, the regulatory body’s role is proactive: it can investigateand impose administrative or penal sanctions against a player who breachesthe rules.

Lastly, the decision-making process of a regulatory body is more complexthan that of an administrative tribunal because it applies to economicsituations affecting a myriad of interests: competitors, suppliers, customers,consumers, communities, professional associations, etc. Sometimes, adecision may concern a group of individuals and companies. At other times,the body may rule on a particular situation and the decision-making processthen becomes very formal.

3.6.5 Problems for a regulatory body in exercising the quasi-judicial function

We observe that the main problem of any administrative authority exercisingboth regulatory functions and quasi-judicial functions involves the guaranteeof independence and impartiality of the individuals charged with exercisingquasi-judicial functions compared to other regulatory tasks.

Under the Charter of Human Rights and Freedoms (R.S.Q., c. C-12), personsor organizations exercising quasi-judicial functions are considered astribunals for the purposes of the Charter and are thus subject to theobligations that must be taken into account in their structure and operation.

A number of situations immediately spring to mind. For instance, a regulatorybody, unlike an administrative tribunal, is not limited to the evidence laid outbefore it by the subjects. It can make use of its human and material resourcesto carry out its mission: which gives it an advantage that, however, createsobligations in terms of the decision-making process. This situation imposesconstraints with respect to observance of principles of natural justice or fairtreatment of subjects.


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In addition, the institutional independence and intellectual autonomy of theauthority exercising the quasi-judicial function must be preserved from theinfluence of the authority exercising other regulatory functions. Theseessential attributes of the judiciary may be compromised or appear to becompromised when, for instance, the quasi-judicial authority uses commonservices within the regulatory body (investigators, legal advisers, secretaries,communication services, staff, etc.). A barrier must therefore be raisedbetween certain activities.

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UNIVERSAL REGULATORY PRINCIPLES

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CHAPTER 4UNIVERSAL REGULATORY PRINCIPLES

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4.1 INTERNATIONAL ORGANIZATIONS ANDREGULATORY PRINCIPLES

It appeared useful to examine international organizations promotingcooperation among regulatory bodies and harmonization of rules in thefinancial sector. The exercise helped deepen the Task Force’s considerationof regulatory principles in the financial sector.

This chapter describes the core principles developed by major internationalorganizations.

4.1.1 The International Association of InsuranceSupervisors

The International Association of Insurance Supervisors (IAIS) was formed in1994. It represents insurance regulatory bodies from over 100 jurisdictionsincluding Québec. Its objectives are:

− promote cooperation among insurance regulatory authorities, bothdomestically and internationally, with a view to maintaining an efficient,fair and safe insurance market for the benefit and protection ofpolicyholders;

− unite the efforts of regulatory bodies to develop oversight standards thatmembers may choose to apply;

− encourage cooperation with other international bodies;− assist each other to maintain the integrity of markets;− encourage regulatory bodies to exchange information to promote the

development of domestic insurance markets.

According to the IAIS, a regulatory body should apply regulatory principles toall insurers under their jurisdiction. Application of these principles may, ifneed be, be completed with additional measures.

More specifically, the IAIS sets out core principles for the regulatory body.According to these principles, the regulatory body must be structured in sucha way as to fulfil its basic mission, i.e. maintain a fair, safe and stableinsurance market for the benefit of policyholders. It must be able to carry outits functions efficiently. Among other things, the regulatory body must:

− be operationally independent and accountable in the excersing of itsfunctions and powers;

− have adequate powers, legal protection and financial resources toperform its functions and exercise its powers;


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− adopt a clear, transparent and consistent regulatory and supervisoryprocess;

− clearly define the responsibility for decision making;− hire, train and maintain sufficient staff with high professional standards

who follow the appropriate standards of confidentiality.

The IAIS16 has also adopted various other core principles for insuranceregulation. These principles range from the need to hold a license to operatein the insurance field to the quality of management and managers, rules forchange of control, rules for corporate governance, solvency rules, rules fordiversification of investment risks, acceptable liability standards, sanctions,etc.

4.1.2 The Basel Committee

The Basel Committee (Basel Committee on Banking Supervision) wasformed in 1974 by the central banks of the G10 countries, including Canada.It has no official supranational authority, but formulates broad regulatoryprinciples in the expectation that national regulatory bodies will implementthem.

In 1977, the Basel Committee released a document on the core principles forsupervision of deposit-taking institutions. These core principles are seen asminimum requirements. Their objective is national and international financialstability. These principles have been approved by the governors of the centralbanks of the G10 countries. It should be noted that the Basel Committee wasassisted in its work by a large number of organizations other than the centralbanks of G10 countries.

Seven basic precepts

The basic task of supervision is to ensure that deposit-taking institutionsoperate in a safe and sound manner and that they hold capital and reservessufficient to support the risks that arise in their business.

Here are the seven basic precepts on which the core principles mentionedbelow depend.

1. The key objective of supervision is to maintain stability and confidence inthe financial system, thereby reducing the risk of loss to depositors andother creditors.

2. Regulatory bodies should encourage and pursue market discipline byencouraging good corporate governance (through an appropriatestructure and set of responsibilities for a bank’s board of directors and

16 See the IAIS website: www.iaisweb.org .

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senior management) and enhancing market transparency andsurveillance.

3. In order to carry out its tasks effectively, a regulatory body must haveoperational independence, the means and powers to gather informationboth on and off site, and the authority to enforce its decisions.

4. The regulatory authority must understand the nature of the business it isoverseeing and ensure, to the extent possible, that the risks incurred bydeposit-taking institutions are being adequately managed.

5. Effective supervision of deposit-taking institutions requires that the riskprofile of individual institutions be assessed and supervisory resourcesallocated accordingly.

6. The regulatory body must ensure that deposit-taking institutions haveresources appropriate to undertake risks, including adequate capital,sound management, and effective control systems and accountingrecords.

7. Close cooperation with other regulatory bodies is essential, particularlywhere operations cross national boundaries.

Regulatory core principles

We have identified, from among the core principles,17 a number of items thatdeal with the regulatory body.

- A regulatory body must have clear responsibilities and objectives. It mustpossess operational independence and adequate resources. There mustbe a suitable legal framework for its powers of intervention. It must havelegal protection in performing its functions. Arrangements for sharinginformation between regulatory authorities and protecting theconfidentiality of such information should be in place.

- The regulatory body must have regular contact with the management ofdeposit-taking institutions and a thorough understanding of theinstitution's operations. In addition, the regulatory authority must have ameans of collecting and analyzing reports and statistical returns fromfinancial institutions on a solo and consolidated basis. It must have ameans of independent validation of supervisory information.

- Lastly, the regulatory body must have the ability to supervise a financialconglomerate on a consolidated basis and have at its disposal adequatesupervisory measures to bring about timely corrective action wheninstitutions fail to meet solvency requirements (such as minimum capital

17 See “Core Principles for Effective Banking Supervision”, Basel Committee, September 1997, 46 p.,

available at: www.bis.org/publ/bcbs.htm .


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adequacy ratios) or other rules. In extreme circumstances, this shouldinclude the ability to revoke the institution’s license.

4.1.3 The International Organization of SecuritiesCommissions

The International Organization of Securities Commissions (IOSCO) seeks tohelp its members:

− to cooperate to promote high regulatory standards with a view tomaintaining a fair and efficient market;

− to exchange information;− to unite their efforts to establish standards and an effective surveillance of

international securities transactions;− to provide mutual assistance to ensure the integrity of the markets by a

vigorous application of the standards and by effective enforcementagainst offences.

IOSCO membership comprises regulatory bodies from 91 jurisdictions,including Québec.

IOSCO has formulated a number of core principles of which the followingrelate to regulatory bodies.

− The responsibilities of the regulator should be clear and objectivelystated.

− The regulator should be operationally independent and accountable in theexercise of its functions and powers.

− The regulator should have adequate powers, proper resources and thecapacity to perform its functions and exercise its powers.

− The regulator should adopt clear and consistent regulatory processes.

− The staff of the regulator should observe the highest professionalstandards, including appropriate standards of confidentiality.

− The regulator should have comprehensive inspection, investigation andsurveillance powers.

− The regulator should have comprehensive enforcement powers.

− The regulatory system should ensure an effective and credible use ofinspection, investigation, surveillance and enforcement powers andimplementation of an effective compliance program.


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− The regulator should have authority to share both public and non-publicinformation with domestic and foreign counterparts.

In addition, IOSCO has adopted the following core principles in relation toself-regulatory organizations.

− The regulatory system should make appropriate use of professionalauthorities that exercise some direct oversight responsibility for theirrespective areas of competence and to the extent appropriate to the sizeand complexity of the markets.

− Professional authorities should be subject to the oversight of the regulatorand should observe standards of fairness and confidentiality whenexercising powers and delegated responsibilities.

In addition, according to IOSCO, the three core objectives of securitiesregulation are: the protection of investors; ensuring that markets are fair,efficient and transparent; and the reduction of systemic risk.18

4.1.4 The North American Securities AdministratorAssociation

The North American Securities Administrator Association (NASAA)represents all the securities authorities of the American states, the District ofColumbia, Puerto Rico, Mexico, Québec and the other provinces of Canada,a total of 66 securities regulatory bodies.

NASAA was formed in 1919 and is the oldest international organizationdevoted to investor protection. It is headed by a ten-member board ofdirectors. It has no regulatory power, but makes recommendations to itsmembers and to market players.

Its areas of activity are:

− protecting investors and educating the public;− standardizing regulation, forms, review and registration processes, etc.;− making recommendations to authorities to adopt or amend regulations.

NASAA19 has five sections: broker-dealers, corporate finance andadministration, enforcement, investment advisers, and investor education.

18 See “Objectives and Principles of Securities Regulation”, IOSCO, September 1998, 74 p., available

at: www.iosco.org/iosco.html .

19 See the following website: www.nasaa.org .


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CHAPTER 5REFORMS UNDERTAKEN BY OTHER GOVERNMENTS

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In recent years, many jurisdictions throughout the world have carried out athorough examination of their financial sector regulation in response to itsdecompartmentalization. In most cases, these examinations have led toreforms that have been announced or initiated.

The Task Force studied some of these reforms, namely those in the UnitedKingdom, France, Australia and Ontario, to determine to what extent thesituations elsewhere are comparable with the one in Québec and to examinethe solutions developed in these jurisdictions.

The situation in the United States was also studied, in view of the importanceof the American market. The United States has recently taken a step todecompatmentalize its financial sector and integrate, to some degree, theregulation of financial institutions with the passing of the Gramm-Leach-BlileyAct in 1999. Accordingly, this model has little relevance, sincedecompartmentalization was initiated in Québec over 15 years ago.

5.1 THE UNITED KINGDOM

In 1997, the British Parliament concluded that the financial regulatory systemwas in need of reform. It observed that the regulation of the financial sector,based on fields of activity, no longer corresponded to the dynamic demandsof financial markets. At the time, there were over ten regulatory bodies andSORs in the United Kingdom, each responsible for a field of activity such asbanking, securities, insurance, etc. This plethora of organizations was verycostly for companies and subjected them to different regulatory regimesdepending on the product or service provided. Similarly, the consumer had todeal with many organizations to obtain information or to complain, and with alarge number of dispute settlement mechanisms. This left him confused bythe financial system’s morass of regulations and oversight structures.

To reduce the regulatory and administrative burden by eliminating duplicationof actions by organizations, and to modernize and simplify the financialmarkets regulatory structure, the British Parliament decided to pass a singlestatute to control the entire financial sector, and entrust all regulatory andoversight responsibilities for financial markets to a single organization, theFinancial Services Authority (FSA). In addition, the government decided notto use SROs to regulate the financial sector.

In 1997, the reform began with the transfer to the FSA of supervision ofbanking and securities, performed by the Bank of England and the Securitiesand Investments Board respectively. The other regulatory authoritiesgradually combined their operations and staff with the FSA and concludedagreements with it to carry out their responsibilities stipulated in variousstatutes. These other authorities are: the Building Societies Commission, theFriendly Societies Commission, the Investment Management Regulatory


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Organisation, the Personal Investment Authority, the Registry of FriendlySocieties, the Securities and Futures Authority and the HM Treasury.20

In 2000, after consultation, the British Parliament passed the FinancialServices and Markets Act. This legislation, all of whose provisions are tobecome effective by the end of 2001, stipulates that the regulation andoversight of the entire British financial industry is to be integrated under theFSA, thus officializing the passage from a structure consisting of manyregulatory bodies and SROs to a structure based on a single strongregulatory body answerable to the British Parliament.

The British legislation is based on four core objectives that guide and framethe entire financial sector integration process:

− confidence in the market: maintain confidence in the financial system;− public education and knowledge: promote a better understanding of the

financial system;− consumer protection: ensure an appropriate degree of protection for

consumers (not the same thing as the traditional objective of eliminatingall risk);

− curb financial crime: elimnate fraud, money laundering, etc.

The legislation stipulates that consultation mechanisms, chiefly committees ofinterested parties, will head the entire consultation procedure undertaken bythe FSA. In particular, a Consumer Panel and a Practitioner Panel arestipulated.

The FSA publishes discussion papers to inform, but also collect commentsfrom, the public, professionals and specialists concerning the policies,strategies and mechanisms it sets up to achieve its objectives. In addition, itholds public hearings in many regions of the country, works with professionalassociations and makes the documents it produces publicly available.

When members of the Task Force met with their British guest, William Blair,21

he maintained that the single organization scenario results in a regulatorystructure that is more appropriate to today’s increasingly integrated financialmarkets. Mr. Blair, a consultant to the British government, stated that theconsultation mechanisms put in place, among other things, help maintainclose contact with industry representatives, whereas previously such contacthad been maintained through the involvement of SROs, in various fields ofactivity, in the regulatory structure.

20 To oversee insurers.21 See the biographical note in Appendix 3.

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5.2 FRANCE

In February 2001, the French Minister of the Economy, Finance and Industrytabled draft legislation in the National Assembly to reform the regulatorystructure of the financial sector. The bill followed an examination of thesituation that identified the new issues of market integration, the restructuringof stock markets (creation of Euronext resulting from the consolidation of theParis, Brussels and Amsterdam stock exchanges), growing competitionamong financial centres, the emergence of financial conglomerates, the inter-penetration of banking and insurance activities and the arrival of new players,particularly on the Internet.

French government authorities concluded that it was necessary to review theregulation of financial activities after observing that:

− the trades and techniques of banks and insurers are growing moresimilar: accordingly, it is appropriate that banking and insurance solvencyregulatory authorites coordinate their oversight and resources;

− in the context in which European bourses are forming alliances, Frenchregulatory authorities appear too numerous and too segmented and areincapable of optimal action regarding foreign institutions: the structureneeds to be rationalized;

− customers of banks and insurers are demanding more attention andconcerted action: the reform must broaden their representation;

− the draft legislation seeks to give more legal security to the actions ofregulatory authorities to better protect savers.

Key components of the reform

The reform has two main focal points, namely financial markets andprudential management. Once the legislation is passed, the three existingsecurities organizations (the Commission des opérations de Bourse or COB,the Conseil des marchés financiers or CMF and Conseil de discipline de lagestion financière) will be merged to form the Autorité des marchés financiersor AMF. The existence of a single organization will help France to participatein the regulation process in Europe of an integrated capital market. Inaddition, the French government is currently promoting greater similarityamong, rather than a merger of, prudential authorities in the banking andinsurance fields.

Securities

According to the project that has been announced, the new French regulatorybody is an independent and financially self-sufficient administrative authority.In addition, the AMF performs the missions currently devolved to the threemerged organizations. Accordingly, it has authority in three segments,namely the organization and operation of markets, public bids and the rulesof professional practice applicable to players (issuers, intermediaries andmanagers).


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According to the reform, the AMF consists of a plenary college (a board ofdirectors) and, for certain attributions, two specialized commissions (for publicbids and for sanctions). The plenary college of fifteen members consists of amajority of members of senior jurisdictions and qualified persons appointedby the state. Market players are represented, as are financial sectoremployees. Members of the plenary college are appointed for a term of fouryears, which is renewable once. A government commissioner, appointed bythe responsible minister, has a seat on the plenary college and the twocommissions without a vote in deliberations.

The chairman of the AMF is selected from the plenary college and isappointed by the French government. A vice chairman is appointed by thecollege from among its members. The AMF is headed by secretary generalappointed by the plenary college, upon being nominated by its chairman, andapproved by the minister.

The regulations made by the AMF must be approved by the responsibleminister. This measure, together with the presence of the governmentcommissioner, ensures that the rules of the AMF are consistent. There is alsoprovision for the government to stand in for the AMF if it proves ineffective,meaning that ultimate responsibility lies with the government.

The commission on public bids consists of representatives of market players,half of whom are members of the plenary college and whose chairman is thechairman of the plenary college. The commission on sanctions consists ofmembers of the plenary college and exercises the AMF’s powers ofdisciplinary and administrative sanction.

When the Task Force met with the French guest, Jacques Mistral,22 hementioned that the securities regulatory bodies were consolidated inparticular to improve the effectiveness of represention in international forumsand in cases of cooperation with other jurisdictions, such as the supervisionof Euronext.

Solvency regulatory authorities

Another purpose of the French reform is to create conditions for greater andmore effective cooperation between the two existing oversight bodiesregarding solvency regulation, namely the Commission bancaire and theCommission de contrôle des assurances. It includes the following threecomponents.

− An “organizational” link has been formed: on the boards of directors, fiveof the members are common to the two commissions. The chairmen ofthe two bodies are ex officio members of the other body. The governmentalso has a representative on each body.

22 Idem.


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− Besides the interlocking links, the commissions hold joint meetings atleast twice a year to deal with matters of common interest (for instance, acomprehensive examination of the situation of a mixed banking –insurance group).

− Membership of the Commission bancaire and of the Commission decontrôle des assurances is harmonized: the member of the Conseil d’Étatand that of the Cour de cassation are appointed members of the twobodies.

According to Mr. Mistral, organization of the regulatory structure of thefinancial sector must make allowance for the potential risk of conflict ofinterests between consumer protection activities and solvency regulationactivities. He added that it is necessary to strengthen the links betweenregulatory bodies because many financial institutions are active in a variety offields, such as banking and insurance (“bankinsurance”). One of the waysFrance has advocated to work towards this objective is to appoint commondirectors to the boards of these bodies. In addition, he insisted that regulatorybodies must be attentive to changes that occur in their industry, whichencourages appropriate intervention that takes the specific features of theirfield of acitivity into account. Lastly, he concluded that the French reform iseminently pragmatic, that it must not be viewed as a rejection of a singleorganization but as the best scenario under the circumstances. He did notdeny that a single organization might wield more authority and enjoy greaterindependence.

5.3 AUSTRALIA

Australia recently reformed the entire regulatory regime of its financial sectoras well as its oversight structure. In 1996, the government instructed a taskforce, the Financial System Inquiry or Wallis Commission, to identify thedriving forces of change in the financial system and recommend ways toimprove the regulatory model in effect. The Wallis report was submitted to theAustralian government in March 1997. The government acted on it bypassing legislation setting up the new regulatory structure in 1998.

The reform led to the revision of all Australia’s legislation affecting thefinancial sector and to the development of a new regulatory structure. Thisstructure is based on two bodies, the Australian Securities and InvestmentsCommission (ASIC), responsible for regulating markets, i.e. the sales, adviceand information disclosure activities relating to the financial products andservices of brokerage houses, banks, insurers and pension plans, and theAustralian Prudential Regulation Authority (APRA), responsible for theprudential regulation of financial institutions.

In addition to these two organizations, the Central Bank of Australia isresponsible for controlling systemic risk, monetary policy and the paymentssystem, and the Australian Competition and Consumer Commission is


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responsible for competition legislation and consumer protection in general,but not financial products and services that are now the responsibility ofASIC. ASIC and APRA are so-called “functional” agencies that replace“institutional” regulatory bodies.

Prior to the reform, Australia’s financial sector was regulated by four federalorganizations as well as state organizations. The Central Bank of Australiawas responsible for monetary policy, the payments system and for regulatingbanks. The Insurance & Superannuation Commission was responsible forsolvency and information disclosure rules applicable to insurers and topension plans. The Australian Securities Commission was responsible for therules applicable to stock exchanges and brokers, the integrity of securitiesmarkets, disclosure rules applicable to investment products and forregulations applicable to all Australian corporations. Lastly, the AustralianCompetition and Consumer Commission had the same responsibilities as itdoes now, namely promotion of healthy competition and consumer protection.The states were responsible for administering laws on Building Societies andcredit unions. This made for a farily segmented regulatory structure.

Justification of the reform

To justify the reform, the Australian government pointed to the need toimprove the performance and efficiency of its financial system, its concernregarding the disparate regulation of similar products and activities, as well asits concern regarding the efficiency of regulation by the states.

Other factors were also taken into consideration: the changing needs andprofile of consumers, greater attention paid by companies to efficiency andcompetition, market globalization, the growing presence of conglomeratesand disintermediation.

The Task Force’s guest from Australia, representing ASIC, Ms. DeliaRickard,23 mentioned that the scenario adopted by Australia gives preferenceto regulation by function but does not completely eliminate dual coverage byregulatory bodies. In addition, she noted that this reform was also consistentwith the government’s intention to deregulate, which had been put forward inthe early 1980s. Lastly, she maintained that there is no need to wait for afinancial crisis to reform the financial sector. She maintains that recentchanges in the financial sector justify a review of the oversight structure andregulatory framework.

5.4 ONTARIO

In the 2000-2001 Budget Speech, the Ontario government announced itsintention to combine the regulation of its financial sector within a single body,namely the Ontario Financial Services Commission. This responsibility is

23 Idem.


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currently split between two bodies: the Ontario Securities Commission andthe Financial Services Commission of Ontario. The latter is itself the result ofthe consolidation, in July 1998, of the Ontario Insurance Commission, thePension Commission of Ontario and the Deposit Institutions Division of theMinistry of Finance.

In September 2000, the Ontario government published a discussion paperentitled “Improving Ontario’s Financial Service Regulation: Establishing aSingle Financial Service Regulator; a Discussion Paper”. In April 2001, draftlegislation was released for discussion, showing the legislative amendmentsneeded to combine these two bodies.

Publication of the draft legislation enabled a detailed examination of thereform Ontario has undertaken. Under the draft legislation, the OntarioFinancial Services Commission is headed by a board of directors with amaximum of 18 directors, including a chairman and three vice chairmen. Asuperintendent of pension plans and a superintendent of insurance assumethe regulatory duties for these sectors. A separate Pension Plans Tribunalhas also been set up to hold hearings under the pension plan legislation. Thenew commission may recognize self-regulatory organizations. It would nothand its revenue over to the Ontario Treasury, except for amounts received insettlement of lawsuits.

The Ontario government justifies its reform by the changes in Canada’sfinancial sector that reflect the new needs of consumers and business, thedemand for new products and services, the arrival of new technology andglobal competition of specialized financial establishments and financialmarkets. In addition, the supporters of the new regulatory body argue that thechanges to the regulatory system in Canada have led to the disappearance ofthe rules that distinguished the traditional four pillars of finance, namelybanking, trust companies, insurance and securities. It is now virtuallyimpossible to distinguish between many financial products offered byinsurers, deposit-taking institutions and brokerage houses. With respect tothe distribution of financial products and services in Ontario, about 70% of lifeand health insurance agents are also registered as investment dealers.

Lastly, the Ontario government believes that the consumer finds it difficult totell the difference between products and that he is entitled to comparableinformation and protection when he purchases similar products. To do so, itseemed necessary to combine the two commissions.

Other reforms

Besides these reforms, governments in many jurisdictions are entrusting orare in the process of entrusting responsibility for regulating the financialsector to a single body. Examples of such jurisdictions include Ireland,Denmark, Norway, Sweden, Japan, Singapore, South Korea andSaskatchewan.


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CHAPTER 6KEY OBSERVATIONS OF THE BRIEFS SUBMITTED TOTHE TASK FORCE

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After meeting with representatives of Québec regulatory bodies, the TaskForce issued a public notice to invite individuals or organizations wishing toexpress an opinion to submit a brief. The same invitation was extended totargeted bodies and 24 briefs24 were submitted. While the consultation wasgeneral in scope, it was mainly regulated entities and regulated entities’groups that responded to the invitation.

The briefs propose two types of analyses, i.e. comprehensive analyses thatexamine all fields in the financial sector, and sectoral analyses, focusing ononly one specific field. Thirteen interveners prepared a comprehensiveanalysis, although it should be noted that the real estate brokerage andretirement plans fields are not always considered in these analyses. The 11remaining analyses are sectoral.

Most of the interveners expressed support for the Minister of State for theEconomy and Finance’s initiative to establish the Task Force. The CanadianLife and Health Insurance Association clearly expressed this support in theintroduction to its brief:

In light of these changes, Québec has innovated by quickly and often in anoriginal manner adapting the regulatory structure applicable to the sector.Québec was the first province in Canada to group together in 1978 bodiesthat oversee and regulate financial institutions under the aegis of theInspector General of Financial Institutions, to allow the deregulation offinancial institutions, in 1984, and implement the multidisciplinary distributionof products in 1989 and 1998. The establishment of the Task Force onFinancial Sector Regulation reflects this tradition, especially, on thisoccasion, from the standpoint of consumer protection and the streamlining ofthe regulatory burden. [OUR TRANSLATION]

6.1 PINPOINTING THE PROBLEMS RAISED

Whether the analysis presented was comprehensive or sectoral, the mainmessage was almost always the same, i.e. the high number of regulatorybodies in Québec is causing several problems.

The problems pinpointed can be divided into the following categories:

- the needlessly cumbersome administrative burden;- confusion among consumers;- problems stemming from the representation of the industry in regulatory

bodies and self-regulatory organizations;- problems pertaining to regulatory power;- excessively high direct costs;

24 The briefs can be consulted on the Task Force’s Web site (www.gesef.gouv.qc.ca).


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- impediments to participation in the harmonization process;- regulation-related problems;- problems stemming from the consolidation of regulatory functions.

6.1.1 The needlessly cumbersome administrative burden

The key factors pinpointed that make the administrative burden cumbersomeare:

- overlapping responsibilities between various regulatory bodies;- costs engendered by interaction between a regulated entity and several

of these regulatory bodies;- the lack of coordination of the bodies’ initiatives or administrative

demands.

Overlapping responsibilities

The sharing of regulatory responsibility by several bodies causes overlappingthat makes more cumbersome the administrative burden borne by regulatedentities. The Insurance Bureau of Canada, which represents most damageinsurers, made the following comment:

The regulation of insurers’ operations by two different bodies, whosemandates and powers occasionally overlap, is a significant administrativeand regulatory burden for this industry. The regulatory structure governingthe operations of Québec damage insurers is the most cumbersome andcomplex of all of the Canadian provinces (page 1 of the brief). [OUR TRANSLATION]

The Association québécoise de la planification financière, which is made upof Québec financial planners, commented as follows in its brief:

It is often difficult for practitioners to know where and to whom they shouldturn when problems arise or when they simply wish to obtain information.

The regulatory bodies are frequently confused about their respectivemandates (page 11). [OUR TRANSLATION]

Costs engendered by interaction between a regulated entity and severalregulatory bodies

Regulated entities must devote time and energy to their dealings with aregulatory body and the proliferation of such bodies increases the time andenergy required accordingly.

The Conseil des fonds d’investissement du Québec, which represents mostmanufacturers and pooled investment fund firms, noted that:

The red tape generated by the need to take into account the numerousregulatory bodies is obvious. The firms in question must allocate significant

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resources to understanding, implementing and following the rules andprocedures proposed by each of the bodies. It goes without saying that thisred tape engenders costs that are inevitably passed on to the consumer.(page 4 of the brief) [OUR TRANSLATION]

The Canadian Bankers Association, made up of the Canadian banks, madethe following comment:

As we noted earlier, we must now deal with three regulatory bodies insteadof a single one, which only serves to needlessly complicate oversight andregulation in this sector and unduly increase the costs of all interveners.(page 35 of the brief) [OUR TRANSLATION]

The lack of coordination of the bodies’ initiatives or administrativedemands

The multiplicity of bodies makes it very hard to coordinate initiatives andadministrative demands.

The Mouvement des caisses Desjardins noted in this regard that:

whether from the standpoint of the protection of personal information, creditcontracts, unclaimed deposits or information technology, the interveners arenumerous and the user has trouble understanding the system. The sameproblem is apparent in financial institutions since the multiplicity of accesspoints represents as many sources of requests for information, research orinvestigations as of the handling of complaints. (page 11 of the brief) [OURTRANSLATION]

6.1.2 Confusion among consumers

Unfortunately, no voluntary consumer defence group submitted a brief.However, several interveners mentioned that the large number of bodiescreated a great deal of confusion among consumers.

The Conseil des fonds d’investissement du Québec made the followingobservation:

Various regulatory bodies are multiplying their initiatives aimed at the public,on their Web sites, in their brochures and even on television, some morevigorously than others, thus confusing the public. (page 5 of the brief) [OURTRANSLATION]

The Réseau des notaires planificateurs financiers du Québec, comprisingnotaries who devote themselves, by and large, to financial planning, notedthat:

In addition, this situation creates entirely absurd confusion for the consumer.(page 6 of the brief) [OUR TRANSLATION]


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The Investment Dealers Association of Canada, which acts as a professionalassociation and self-regulatory organization in respect of the Canadiansecurities industry, indicated that:

From the standpoint of consumer protection, we believe that it is desirable tosubmit these complaints, regardless of the financial product or service inquestion, to a central body, which, for the purpose of this letter, we will callthe “new body.” We acknowledge that it is sometimes hard for consumers toidentify among various regulatory and self-regulatory bodies that havejurisdiction over financial services the one to which they must submitcomplaints. (page 1 of the brief) [OUR TRANSLATION]

The Canadian Bankers Association made the following observation:

At present, the public is undoubtedly very confused when it is a question oflodging a complaint with a regulatory body, given the large number of self-regulatory and regulatory bodies. (page 16 of the brief) [OUR TRANSLATION]

There is no choice but to conclude that it is very hard for Québec consumersto ascertain where they must turn for assistance.

6.1.3 Problems stemming from the representation of theindustry in regulatory bodies and self-regulatoryorganizations

Some briefs allude to problems stemming from the representation of theindustry in regulatory bodies and self-regulatory organizations. They mentionthat the regulations adopted by certain bodies are unfair to regulated entities,which are poorly represented in such bodies. Other briefs note that industryrepresentatives tend to favour the industry’s interests to the detriment ofconsumer protection.

For example, the Regroupement des consultants en avantages sociaux duQuébec, comprising roughly 240 members that distribute fringe benefits,insurance and group annuities, commented as follows:

What do property insurance and life and health insurance have in commonaside from the principles of insurance? To put representatives of each ofthese classes at the same table does not automatically raise the level ofdebate. Do the representatives of these two classes share any interestswhatsoever and knowledge of the other class and does this not lead to therisk of voting alliances that are out of place in a regulatory body? (page 8 ofthe brief) [OUR TRANSLATION]

Partenaires Cartier, which groups together six brokerage firms, made thisobservation:

However, all too often, their associations are, basically, dedicated todefending their members’ economic interests, before fulfilling their self-


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regulatory functions. The system should not allow conflicts of interest inwhich the rules are established more often than not in light of economicconsiderations, competition between those who control these associationsand those who belong to them simply because they have no other choice.(page 6 of the brief) [OUR TRANSLATION]

We note that it is very hard to ensure representation of the “industry” inregulatory bodies without conflicts of interest arising.

6.1.4 Problems pertaining to regulatory power

Several briefs mentioned that the multiplicity of regulatory bodies authorizedto adopt regulations leads to considerable regulatory incoherence.

For example, the Canadian Bankers Association stated that:

In the same vein, we believe that the bodies responsible for administering theAct are needlessly numerous and that there is good reason to extensivelyreview the regulatory structure pertaining to the intermediaries in question.Indeed, the multiplicity of oversight and regulatory bodies makes it very hardif not practically impossible to fully harmonize the rules between thedisciplines regulated and to achieve cooperation among intermediariesbecause of often antagonistic interests. (page 8 of the brief) [OUR TRANSLATION]

6.1.5 Excessively high direct costs

Certain briefs pointed out that the large number of regulatory bodiesengenders high costs for regulated entities, as the examples below suggest.

The Canadian Bankers Association observed that:

In this respect, there is no choice but to accept that the fee structure ofvarious oversight bodies is cumbersome, costly and growing steadily.Moreover, it is directly proportional to the number of entities that intervene inthe administration of the Act. (page 10 of the brief) [OUR TRANSLATION]

Le Groupe Promutuel, a federation that groups together 35 mutual insurancecompanies, noted that:

However, one drawback of this method of financing in some instances is thatpublic agencies are compelled to strive increasingly to balance their budgets,which tends to significantly increase management fees and costs demandedof users. The number and size of the bodies that oversee the financial sectorhave, of course, exacerbated the problem. In recent years and in the courseof various reforms of the legislation governing the financial sector, the cost oflicences, accreditations and various fees have, in some cases, more thandoubled, a reflection of the complexification of the regulatory system. (point 1of the brief) [OUR TRANSLATION]


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The Mouvement des caisses Desjardins made the following remark:

The multiplicity of regulatory bodies imposes heavy fees on institutions andlicence holders. (page 5 of the brief) [OUR TRANSLATION]

6.1.6 Impediments to participation in the harmonizationprocess

A number of interveners maintained that the division of responsibilities,resources and powers among several bodies is reducing their ability topromote Québec’s viewpoint in Canadian or international forums.

The Corporation des assureurs directs de dommages du Québec, anassociation comprising 12 direct property insurers, noted that:

We believe that the division of Québec’s regulatory powers among a largenumber of bodies weakens the bodies and Québec’s image abroad. (page 5of the brief) [OUR TRANSLATION]

The Regroupement des cabinets de courtage d’assurance du Québec, whichrepresents 613 property insurance brokerage firms, issued the followingwarning:

Regulatory and institutional mimicry has its limits. A society should notrelinquish the ideal that it has set for itself with respect to behaviour in asector solely with a view to harmonization. (page 12 of the brief) [OURTRANSLATION]

6.1.7 Regulation-related problems

Several interveners took advantage of the opportunity afforded them by theTask Force to criticize the regulations, regardless of the regulatory structure.

Essentially, they noted that the regulations:

- are overly cumbersome;- too complex;- inadequate in some instances;- engender substantial costs.


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6.1.8 Problems stemming from the consolidation ofregulatory functions

Several briefs emphasized problems stemming from the consolidation ofregulatory functions. A number of sectoral interveners pointed out that theirfields are specific and that it is important for them to have access tocompetent individuals in their fields.

For example, the Investment Dealers Association of Canada commented:

In our view, the centralization of regulations must not be undertaken to thedetriment of the maintenance of the in-depth expertise that it demands andmust give priority to greater administrative efficiency. These two conditionsare essential for the attainment of the two objectives set by the minister.(page 2 of the brief) [OUR TRANSLATION]

6.2 PINPOINTING THE SOLUTIONS PROPOSED

Most of the briefs suggest that change is necessary. The solutions proposedconsist, by and large, in the consolidation of regulatory bodies.

6.2.1 A single body

Among the interveners who submitted a comprehensive analysis, six favourthe establishment of a single body. However, it should be noted that thedegree of elaboration of the proposals varies considerably. Some briefsdescribed the body’s operation in detail, while other briefs provided very fewdetails.

Five of the six briefs proposed the establishment of branches in the singlebody that would oversee specific fields or activities or would assume specificresponsibilities in respect of consumers, e.g. the handling of complaints.Some interveners suggested that assistants to the head officer manage theseunits.

Three interveners said that one person should head the body.

Four interveners suggested relying on advisory committees, representing theindustry and the public, which would help the body elaborate regulations andthus replace the boards of directors of the existing bodies.

6.2.2 Two bodies

Three interveners proposed that two regulatory bodies be established, whichwould share responsibility for regulation. However, the division of


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responsibilities differs depending on the model proposed. In two proposals,one of the bodies would oversee the solvency of financial institutions and theother body, the distribution of financial products and services. In the otherproposal, one of the bodies would be responsible solely for consumerprotection (information and complaints) and the other body, for regulatingfinancial markets.

6.2.3 Reorganization of responsibilities

Ten interveners suggested a different division of responsibilities from what isnow the case, either through the divisions of a single body or through existingbodies. For example, some suggested that the BSF be responsible foreverything pertaining to distribution, including distribution by unrestrictedpractice brokers, and that the CVMQ be responsible solely for regulating thesecurities market. Other interveners proposed that the BSF be responsibleonly for regulating the distribution of insurance and that the CVMQ beresponsible for all facets of securities.

6.2.4 Self-regulatory organizations

The viewpoints expressed on self-regulatory organizations vary. Someinterveners called specifically for the possibility of resorting to self-regulatoryorganizations, while others completely eliminated recourse to suchorganizations and even participation by industry representatives in themanagement of regulatory organizations. Several interveners acknowledgedthe usefulness of self-regulatory organizations but emphasized that theregulatory body should exercise stringent control over their operations andthe exercising of duties or functions attributed or delegated to them.

6.2.5 Sectoral consolidation

Some interveners operating in a single field confined their analysis to theirown situation. They recommended sectoral consolidation, i.e. the merging ofbodies that concern them or a change in the division of responsibilitiesamong regulatory bodies in such a way that henceforth they are onlyregulated by a single body.


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THE TASK FORCE’S OBSERVATIONS

CHAPTER 7


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CHAPTER 7THE TASK FORCE’S OBSERVATIONS

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7.1 OBSERVATIONS

The Task Force was given the mandate to review the regulatory structure ofthe Québec financial sector and to formulate recommendations in order toenhance the structure’s efficiency both from the standpoint of consumerprotection and streamlining for the industry of the administrative andregulatory burden within Québec’s fields of jurisdiction. Consequently,the Task Force examined the capacity of the existing regulatory structure tolimit the administrative burden borne by the financial sector and effectivelyprotect consumers while allowing Québec to fully exercise its regulatoryjurisdiction over the sector. This examination has led the Task Force to makethe following observations.

7.1.1 Source of the problems

Prior to deregulation and intersectoral convergence, various fields of thefinancial sector were separate and regulation was effected on an institutionalbasis. A single body was responsible for regulating each segment. Atpresent, different fields of the financial sector are no longer clearly separateand several bodies are responsible for the regulation of most participants,which produce and also distribute a wide array of financial products andservices.

Deregulation and intersectoral convergence are worldwide phenomenawhose pace of development has hinged on changes in legislation in variouscountries. Those jurisdictions in which deregulation and intersectoralconvergence occurred early on were confronted earlier on than otherjurisdictions with the problems that they engender from the standpoint of theregulatory structure.

Québec is facing the same problems. It has constantly updated its sectorallegislation in order to reflect deregulation and intersectoral convergence.However, it has not yet updated the regulatory structure governing thefinancial sector overall. Today, Québec is facing the problems arising fromthe lag in its regulatory system in respect of deregulation and intersectoralconvergence in the industry.


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7.1.2 Problems

The problems arising from the failure to bring into line the existing regulatorystructure with changes in the financial products and services industry can bedivided into three categories drawn from the Task Force’s mandate:

- the administrative burden;- consumer protection;- Québec’s jurisdiction.

7.1.2.1 The administrative burden

The array of regulatory bodies operating in Québec imposes an unduly heavyadministrative burden on regulated entities. Moreover, we cannot overlookthe constitutional overlapping that exacerbates this burden.

Indirect costs

We can pinpoint at least three sources of increases in the indirect costs borneby regulated entities that are regulated by more than one body:

- To deal with several regulatory bodies implies recourse to extensivehuman and physical resources, not to mention the considerable timedevoted to dealings with such bodies.

- The division of jurisdiction between various bodies is not always clear,which leads to overlapping in their dealings with regulated entities andconfusion among the latter.

- No procedure ensures the coordination of the regulatory bodies’ dealingswith a given regulated entity, which again leads to overlapping andobliges the regulated entities to devote more time and resources to suchdealings.

All of the foregoing factors necessarily lead to higher indirect costs thatcannot be measured but are nonetheless confirmed by the briefs submitted tothe Task Force.

Direct costs

The operation of each regulatory body engenders fixed costs and theproliferation of such bodies normally increases these fixed costs. Sinceadministrative costs pursuant to legislation are passed on to regulatedentities in the form of various fees, the regulated entities must assume higherindirect costs.

THE TASK FORCE’S OBSERVATIONS CHAPTER 7

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The administrative burden and its attendant direct and indirect costs canmake less competitive the financial products and services sold in Québec,which means that the cost is ultimately passed along to the consumer.

7.1.2.2 Consumer protection

Confusion among consumers

Given the growing complexity of the financial products and services industry,it is becoming increasingly hard for even informed consumers to ascertainwhich body is responsible for regulating the financial institutions with whichthey do business or the financial services they purchase. Consequently, it ishard to know to whom they should turn. Furthermore, it is hard for consumersto obtain assistance or information since they must contact several bodies.Since several bodies often regulate a regulated entity, consumers are at aloss.

Inconsistency in the regulations

Deregulation of the financial products and services industry and intersectoralconvergence are engendering competition between different fields of thefinancial sector that used to compete solely with similar enterprises. Toensure that intersectoral competition is fair and that consumers are properlyprotected regardless of the origin of the products they purchase, regulationsmust be coherent and less fragmented. However, the proliferation of thebodies responsible for adopting regulations does not promote the adoption ofcoherent regulations. Bodies whose missions and interests are usuallydifferent can adopt different regulations, even in the case of analogous orrelated financial products or services.

For example, we have noted that the exemption enjoyed by certain membersof the professional orders from the application of provisions in the Actrespecting the distribution of financial products and services pertaining tofinancial planners causes unwarranted regulatory disparities.

Inadequate regulations

The current operating method of certain bodies responsible for elaboratingregulations gives some interest groups regulatory power over other groups,which can lead to unfairness between these groups of regulated entities andbetween their clienteles.


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Effectiveness of regulations

Adequate consumer protection demands a regulatory structure that ensureseffective oversight. The current division of regulatory responsibility makes itvery hard to achieve comprehensive, integrated oversight of the financialsector applicable to an increasingly global, integrated industry. Intervention,when required, must no longer be partial in order to be effective.

Moreover, each field of the financial sector has its own traits and interests.Effective regulation means that experts must be found in regulatory bodieswho fully comprehend the specific nature of each field and take account of itwhen performing their duties.

7.1.2.3 Québec’s jurisdiction

Respect for Québec’s fields of jurisdiction

Strong, credible regulatory bodies are one of the best ways for Québec toensure respect for its fields of jurisdiction. The scope of any regulatorystructure and the resources allocated to it obviously depend on the extent ofthe operations to be regulated. Given the relatively small size of Québec’sfinancial sector from an international perspective, the maintenance ofnumerous large regulatory bodies is unwarranted and it is essential toconsolidate resources to adequately promote Québec’s constitutional fields ofjurisdiction.

Participation in harmonization processes

Regulatory bodies elsewhere in Canada have engaged in consolidation inorder to achieve broader harmonization between jurisdictions. SinceQuébec’s representatives are dispersed among several bodies, it is notcertain that they can coherently exert significant influence through thesebodies, which is essential against a backdrop of globalization.

The globalization of financial markets demands that Québec participateactively in various harmonization processes to ensure that its regulations areat least compatible with Canadian, North American and internationalregulations. While it is important for regulations applicable to Québec to fullysatisfy Quebecers’ expectations and needs, such regulations must not lead tothe isolation of its market.

To the contrary, Québec’s openness to the world compels the key players toparticipate in a concerted, orderly manner in order to better promote theinterests of stakeholders in the Québec financial sector in all harmonizationprocesses to which Québec must adhere.

It is important for Québec to participate diligently in various groups ofregulatory bodies. However, the Québec body that takes part in such


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discussions must be able to influence deliberations and decision-making.Excessive dispersal of resources among various bodies reduces Québec’sability to influence the outcome of harmonization processes.

This dispersal of resources is especially detrimental to Québec’s interests inthe securities field, where it is becoming increasingly difficult for a jurisdictionto distinguish itself in terms of regulations, which continue to be a powerfultool for economic development.

7.1.3 Other observations

7.1.3.1 The administration of the Supplemental Pension Plans Act

The Régie des rentes du Québec fulfils a twofold mandate in respect ofpension plans. The RRQ regulates pension plans and plays a promotionaland advisory role in respect of such plans. Its regulatory responsibilitiesresemble those of other regulatory bodies in the financial sector. Elsewhere,regulatory bodies in the financial sector usually exercise such responsibilities,e.g. the Financial Services Commission of Ontario and the Office of theSuperintendent of Financial Institutions Canada. As for promotional andadvisory initiatives pertaining to pension plans, such initiatives are moreclosely related to the RRQ’s other functions since the RRQ is also the bodyresponsible for managing the Québec Pension Plan pursuant to the Actrespecting the Québec Pension Plan.

7.1.3.2 Administration of the Real Estate Brokerage Act

The Real Estate Brokerage Act has been included in the list of statutesgoverning the Québec financial sector because of brokerage operations inrespect of loans secured by immovable hypothec, reserved for real estatebrokers and agents, and because of the role that the IGFI plays insupervising the ACAIQ. However, some observers believe that the real estatebrokerage industry must not be considered part of the Québec financialsector since, in the vast majority of cases, real estate agents or brokers areinvolved only accessorily in the brokering of loans secured by immovablehypothec.

In addition, the bulk of real estate brokerage regulations concern neitherfinancial products nor services. Consequently, the regulation for which theACAIQ is responsible differs entirely from financial sector regulation, ingeneral, and the regulation of the distribution of financial products andservices, in particular.


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7.1.3.3 Administration of other legislation

The existing regulatory bodies are responsible for the administration ofseveral statutes governing sectors other than the financial sector. We note,however, that some of these statutes are of a predominantly financial nature,e.g. the Act respecting the Mouvement Desjardins (S.Q. 2000, c. 77), the Actto establish the Fonds de solidarité des travailleurs du Québec (F.T.Q.)(R.S.Q., c. F-3.2.1), the Act to establish Fondaction, le Fonds dedéveloppement de la Confédération des syndicats nationaux pour lacoopération et l'emploi (R.S.Q., c. F-3.1.2), while other statutes, e.g. the Actrespecting the legal publicity of sole proprietorships, partnerships and legalpersons (R.S.Q., c. P-45), have an incidental financial nature.

7.1.3.4 The Consumer Protection Act

The Consumer Protection Act (R.S.Q., c. P-40.1) applies to all contractsconcluded between consumers and merchants. It does not apply to:

- contracts concerning operations governed by the Securities Act;- insurance contracts.

This statute applies to all credit contracts,25 even those concluded by aninsurance company to finance a client’s insurance contract. It also applies toany contract pertaining to a loan concluded between a consumer and afinancial services cooperative.

The Office de la protection du consommateur (OPC) is authorized to receivecomplaints concerning contracts, including contracts in respect of loans.However, it is not authorized to accept and handle complaints lodged againstan insurance representative, broker or agent, a stockbroker or a financialplanner. The OPC must refer the complaint to the appropriate body.

From the standpoint of its jurisdiction over the handling of complaints, theOPC deals only marginally with current regulation of the financial sector.Complaints concerning financial institutions, insurance, securities and thedistribution of financial products and services are submitted to a regulatorybody in the Québec financial sector.

7.1.3.5 Adoption of regulations

Some regulatory bodies exercise regulatory powers while others do not.

The elaboration of regulations governing financial products and servicesoccasionally demands expertise usually found in regulatory bodies.Moreover, regulations are often established in conjunction with the Canada-

25 Specific rules apply to a credit contract (s. 66 et seq. of the Consumer Protection Act ).


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wide or international harmonization processes in which the regulatory bodiesparticipate.

However, the regulatory body responsible for administering a given statuteoften tends to over-regulate in order to broaden its control. Furthermore,when regulations are elaborated, factors outside the ambit of a regulatorybody must be considered in order to better serve the financial sector overall.

We believe that it is necessary for the government to control regulationsoverall in the financial sector in its fields of jurisdiction.

7.1.3.6 Canadian regulatory bodies

While the Task Force’s mandate does not include an examination ofregulation imposed by the federal government, we cannot pass over insilence that several of the latter’s initiatives lead to overlapping and dubiousencroachment into Québec’s fields of jurisdiction. Such overlapping andencroachment add to the regulatory and administrative burden borne byregulated entities and confuse consumers.

7.1.3.7 Quasi-judicial and judicial administrative processes

We briefly examined the decision-making, review and appeal processesstipulated in certain statutes administered by regulatory bodies in the Québecfinancial sector.

All regulatory bodies are responsible for accepting registrations or issuingauthorizations, usually in the form of licences or certificates, in respect of theexercising of a specific activity. Such authorizations assume anadministrative, quasi-judicial or judicial process governing their delivery orwithdrawal. These processes are also used to ensure control over theexercising of the activity and impose remedial measures when needed, togrant exemptions from the applications of certain provisions in theregulations, and to review decisions.

In some instances, the legislation explicitly makes provision for the delegationof decision-making power. In other cases, no provision is made in thisrespect. Provision is made in one statute for a review process governing thedecisions of certain regulatory bodies, although no such provision is made inanother statute. Furthermore, in some instances, all decisions handed downby a body pursuant to a given statute are subject to review or appeal, while inother statutes, review or appeal is allowed only in specific cases.

Appeals of decisions are sometimes lodged with the Court of Québec andsometimes with the Tribunal administratif du Québec.


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Our review reveals that quasi-judicial and judicial administrative processesare disparate and considerably lacking in consistency.

7.2 GUIDELINES

Before we propose modifications to the existing regulatory structure, the TaskForce established guidelines respecting the organization of such a structure.These guidelines obviously stem from the Task Force’s observations andcomments drawn from the briefs discussed earlier in this report.

Once we established these guidelines, we used them to evaluate variousscenarios and to elaborate the recommendations presented in Chapter 8.

The guidelines fall into the following categories:

- consumer protection;- streamlining the administrative burden;- respect for Québec’s fields of jurisdiction;- effectiveness and efficiency;- the limitations of self-regulation.

7.2.1 Consumer protection

§ The regulatory structure must enable consumers to ascertain fromwhom they can obtain information or with whom they must lodgecomplaints in a simple, efficient manner.

Consumers contact regulatory bodies when they encounter problemsconcerning financial products and services or to obtain information onproducts or producers. Consumers must know whom to contactregardless of the product or producer concerned. The procedure must besimple and efficient.

§ Consumers of financial products and services must have readyaccess to the regulatory structure.

The procedures for handling complaints and providing informationadopted by the regulatory structure must be readily accessible.

§ The regulatory structure must ensure the consistency ofregulations.

Regardless of the level at which regulations are established, i.e.government, regulatory body or self-regulatory organization, theregulatory structure must facilitate the adoption of consistent rules inrespect of analogous products, e.g. segregated funds and pooled


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investment funds, and with regard to different types of regulated entities,e.g. insurers as opposed to deposit institutions.

7.2.2 Streamlining the administrative burden

§ The regulatory structure must minimize the number of intervenersthat deal with a given regulated entity.

A regulated entity must have dealings with as few people as possiblewhen performing administrative tasks pertaining to regulation. The timerequired to perform such tasks will be limited and requirements can thusbe better coordinated.

§ Jurisdiction must be clearly divided in the regulatory structure.

A regulated entity must know whom to contact concerning theadministration of legislation, e.g. registration, authorization, informationdocuments, and so on. Moreover, only one authorized body should havejurisdiction over a single facet of a regulated entity’s activities.

§ The regulatory structure must ensure the coordination of theinitiatives of interveners dealing with a given regulated entity.

A regulated entity must not waste resources because different intervenersdo not coordinate their initiatives or administrative requirements, e.g. afinancial institution that must submit three times the same information onthree different forms to three different bodies.

§ The regulatory structure must minimize the administrative burdenborne by the industry.

The regulatory structure must foster a reduction in the costs assumed bythe industry in order to comply with regulations, primarily from thestandpoint of human, physical and technological resources.

§ The regulatory structure must minimize operating costs (directcosts).

The administration by a regulatory body of legislation governing thefinancial sector must be achieved at the lowest possible cost to regulatedentities.

7.2.3 Respect for Québec’s fields of jurisdiction

§ The regulatory structure must guarantee respect for Québec’s fieldsof jurisdiction.


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The regulatory structure must ensure that Québec fully, efficientlyexercises all of its constitutional fields of jurisdiction.

§ The regulatory structure must enable Québec to play a significantrole in cooperation and harmonization initiatives in Canada and atthe international level.

The regulatory structure must ensure that Québec interveners are able toplay a significant role in light of their competence and credibility in respectof North American and international cooperation and harmonizationinitiatives.

7.2.4 Effectiveness and efficiency

§ The regulatory body must follow the rules of effectiveness andefficiency and be fully accountable.

The regulatory structure must adopt appropriate management rules. Thepublic must be aware of the manner in which the regulatory structure isadministered. The executives must be responsible for their management.

§ The regulatory structure’s organization must enable it to respondpromptly and appropriately to change in the financial sector.

All bodies within the regulatory structure must be able to adapt to changein the financial sector, deregulation, intersectoral convergence, and todisintermediation, e.g. hybrid products, the emergence of conglomeratesand the gradual disappearance of distinctions between the fields.

§ All bodies within the regulatory structure must have a clear mission.

Each body must have clearly delineated objectives and responsibilities.

§ The regulatory structure must include an ongoing consultationprocess through which the interests of various stakeholders in thefinancial sector and consumers can be heard.

The regulatory structure must provide for procedures that allowconsumers and the industry to present their viewpoints concerningregulations and other questions in order to have a clear notion of ongoingchange.

§ The regulatory structure must administer in a disinterested mannerstatutes governing the financial sector.

The administration of legislation must be free of pressure from corporate,political or other interests.


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§ The regulatory structure must ensure the maintenance of thefinancial sector’s integrity.

The regulatory structure must allow for effective oversight of the financialsector to ensure the prompt detection of systemic financial problems.

§ The regulatory structure must adapt to the integration model ofstakeholders in the financial sector.

The regulatory structure must be adapted to deregulation andintersectoral convergence.

§ The industry must assume the direct and indirect costs ofadministering legislation governing the financial sector.

All regulatory bodies must be financed through the fees collected fromregulated entities and must not rely on government appropriations.

7.2.5 The limitations of self-regulation

§ A self-regulatory organization, when recognized, must bringtogether members with similar fields of competence and expertiseand encompass a given operating activity.

When a responsibility is assigned to a self-regulatory organization, thelatter must bring together members with similar fields of competence andexpertise and encompass a given operating activity to ensure thatconflicts between groups of members do not affect the self-regulatoryorganization’s regulatory activities. For example, an organizationrepresenting both the interests of stockbrokers (legal entities) andinsurance representatives (individuals) could not be recognized since theinterests of the various members are not convergent.

Obviously, when a self-regulatory organization is recognized, the entirerange of guidelines must be taken into account from the outset.


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THE PROPOSED REGULATORY STRUCTURE

RECOMMENDATIONS

CHAPTER 8


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CHAPTER 8THE PROPOSED REGULATORY STRUCTURERECOMMENDATIONS

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After hearing concerned parties, examining briefs, focusing on changes in thefinancial sector in Québec and elsewhere in the world and taking into accountthe existing regulatory structure, we are making the followingrecommendations to the Minister of State for the Economy and Finance.

8.1 ESTABLISHMENT OF THE AGENCED’ENCADREMENT DU SECTEUR FINANCIERDU QUÉBEC

RECOMMENDATION 1

We recommend the establishment through legislation of the Agenced’encadrement du secteur financier du Québec, a single body to regulatethe Québec financial sector.

This body would regulate the entire financial sector including, in particular,the fields of insurance, securities, deposit institutions, the distribution offinancial products and services, brokerage of loans secured by immovablehypothec, and pension plans. The new body, called the Agenced’encadrement du secteur financier du Québec (Agence26), would have itshead office in Québec’s national capital, Québec City, and would report to theMinister of Finance.

26 The organization chart of the Agence appears at the end of this chapter.


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8.2 FUNCTIONAL DIVISION OF THE AGENCE’SRESPONSIBILITIES

RECOMMENDATION 2

We recommend that the Agence’s regulatory responsibilities bedetermined by means of a functional approach and divided into fiveregulatory categories:

− consumer assistance;− solvency;− distribution;− securities markets;− compensation.

Five separate administrative divisions would assume theseresponsibilities, which should provide coordination services, especially inrespect of relations with regulated entities, inspection, investigations anddisclosure.

The regulatory structure should assume full responsibility for regulation of theQuébec financial sector and could do so by function, e.g. regulation ofsolvency and regulation of distribution, or by field, e.g. regulation of depositinstitutions, regulation of insurers, regulation of securities, and so on.

In light of the guidelines adopted by the Task Force, the division ofresponsibilities by function seems more appropriate than division by sector.Let us reiterate the following guidelines:

- The regulatory structure’s organization must enable it to respond promptlyand appropriately to change in the financial sector.

- The regulatory structure must ensure the consistency of regulations.

- The regulatory structure must adapt to the integration model ofstakeholders in the financial sector.

In the financial products and services industry, the institutional approach isgradually giving way to the functional approach. Various sectors are meldingwithin the same organization just as products in these fields are doing. Thistrend warrants inclusion in the regulatory structure.

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The Agence would include the following divisions, in keeping with its mainregulatory functions:

- the Direction de l’encadrement de l’assistance aux consommateurs;- the Direction de l’encadrement de la solvabilité;- the Direction de l’encadrement de la distribution;- the Direction de l’encadrement des marchés de valeurs;- the Direction de l’encadrement de l’indemnisation.

The Agence should also coordinate:

- relations with the industry;- its own disclosure requirements;- inspection and investigations.

The Bureau des examens et decisions,27 a quasi-judicial authority, would beset up within the Agence.

The establishment of separate divisions to oversee the regulation ofsolvency, distribution and securities markets would ensure the developmentof specialized skills in respect of each of the activities regulated, a measuregreatly desired by many interveners.

The Direction de l’encadrement de l’assistance aux consommateurs wouldoffer a one-stop service outlet for consumers and coordination of relationswith the industry would make it possible to establish a one-stop serviceoutlet for all regulated entities.

8.2.1 The Direction de l’encadrement de l’assistance auxconsommateurs, a one-stop service outlet forconsumers

Pursuant to the legislation, the Direction de l’encadrement de l’assistance auxconsommateurs would be responsible for consumer assistance andsimultaneously play a preventive and remedial role. The division would act asa veritable one-stop service outlet for consumers with regard to all facets offinancial services. It would receive complaints and ensure follow-up, offerdispute settlement and mediation services, and promote consumer educationin the realm of financial products and services. The Direction could rely onservices provided by sectoral associations such as the IBC or the CLHIAwere the Agence to eventually recognize them as self-regulatoryorganizations28 responsible for handing complaints.

We have adopted the expression “consumer assistance” to highlight thedivision’s proactive nature.

27 See section 8.11 devoted to the Bureau des examens et décisions.28 See section 8.10 devoted to self-regulatory organizations.


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The Direction de l’encadrement de l’assistance aux consommateurs wouldreport to a superintendent.

8.2.2 The Direction de l’encadrement de la solvabilité

The Direction de l’encadrement de la solvabilité would exercise oversight inrespect of solvency and compliance, i.e. essentially the administration ofprovisions in the Act respecting insurance, the Act respecting financialservices cooperatives, the Act respecting trust companies and savingscompanies (R.S.Q., c. S-29.01) and the Supplemental Pension Plans Act. Itwould also regulate the solvency of stockbrokers. The RRQ would continue toadminister provisions in the Supplemental Pension Plans Act pertaining topromotion and counselling.

In particular, the Direction de l’encadrement de la solvabilité would beresponsible for examining reports, inspection, the publication of guidelines,the issuing of orders (instructions, recovery plans) and the imposition ofmodifications to the right to practice.

The Direction de l’encadrement de la solvabilité would report to asuperintendent.

8.2.3 The Direction de l’encadrement de la distribution

The Direction de l’encadrement de la distribution would regulate thedistribution operations of insurers, insurance firms, securities brokers andadvisors, and representatives. In particular, it would administer provisionsgoverning the distribution operations of brokers, advisors and representativesstipulated in the Act respecting the distribution of financial products andservices and the Securities Act.

In particular, the Direction would be responsible for:

− the management of eligibility for practice;− the examination of disclosure reports;− the issuing of orders (instructions and recovery plans);− the imposition of modifications to the right to practice;− inspection and investigations.

The Direction de l’encadrement de la distribution would report to asuperintendent.


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8.2.4 The Direction de l’encadrement des marchés de valeurs

This division would regulate securities markets, i.e. share issues (receiptsand continuous disclosure by issuers), public issues, takeover bids, issuerbids, exchange offers, waivers, stock markets and clearing agencies.

The Direction de l’encadrement des marchés de valeurs would report to asuperintendent.

8.2.5 The Direction de l’encadrement de l’indemnisation

The Agence would manage the Fonds d’indemnisation des servicesfinanciers and the Régie de l’assurance-dépôts du Québec fund. Existingprivate compensation funds (the Canadian Life and Health InsuranceCompensation Corporation, the Property and Casualty InsuranceCompensation Corporation, and Canadian Investor Protection Fund) couldeventually be recognized as self-regulatory organizations responsible forcompensation. However, their operating structure should enable them tomeet Québec’s specific requirements.

A regulatory division devoted to compensation should allow for bettercoordination of the numerous existing compensation mechanisms.

This division would report to a superintendent.

8.2.6 A one-step industry service outlet to coordinaterelations with regulated entities

The Agence would undoubtedly be able to ensure the coordination keenlysought by regulated entities.

The Agence would coordinate all recurring administrative tasks such asregistrations, the issuing of licences, the collection of fees, the issuing ofstatutes, and the publication of a bulletin or other information documents inorder to provide regulated entities with a one-step service outlet.

The divisions responsible for regulation would oversee measures pertainingto failure to comply with standards.

The Agence should coordinate inspections and investigations in the realm ofdistribution and solvency aimed at financial institutions (insurers, trustcompanies, savings companies and financial services cooperatives),stockbrokers, pension plans and firms (occasionally financial institutions).

All disclosure obligations imposed by the Agence on a given regulated entityshould be coordinated.


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8.3 FUNDING AND ADMINISTRATIVE SUPPORT

RECOMMENDATION 3

We recommend that financial sector stakeholders fund the Agence andthat the government approve its budgets.

8.3.1 Funding

Regulated entities should assume the cost of funding the Agence’soperations, thus ensuring that the Agence is financially independent ofgovernmental budgets. Several regulatory bodies, including the CVMQ, theBSF, the ChAD and the CSF, enjoy financial autonomy. It is hard to backtrackwith respect to funding and the funds to administer such an agency shouldnot be used for other purposes by the government. For this reason, theAgence’s funding should be non-budgetary.

Moreover, the Civil Service Act would not apply to the Agence, which wouldallow greater flexibility in hiring and in establishing employment conditions.However, according to a recent study conducted by the Fraser Institute,29 theoperating costs of regulatory agencies have soared elsewhere in Canada.Since such an escalation is undesirable, the government would approve theannual budget, fees, rates, rates of remuneration and staffing plans submittedby the Agence following consultation of the industry and the Conseil de larégie administrative.30

8.3.2 Administrative support

The consolidation within a single agency of the regulation of the financialsector should reduce the administrative burden borne by regulated entities,including the Agence’s operating costs and the internal costs incurred byregulated entities.

Through the establishment of the Agence, it would normally be possible tostreamline certain expenses related to regulatory support services, such asadministrative, legal, computer, communications and other services nowfound in each existing regulatory body but which would now be confinedsolely to the Agence.

29 John F. Chant and Neil Mohindra, “Commissions Unbound: The Changed Status of Securities

Regulators in Canada”, The Fraser Institute, Critical Issues Bulletin, November 2001, 50 pages.30 See section 8.6 devoted to the Conseil de la régie administrative.


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8.4 SENIOR MANAGEMENT OF THE AGENCE

RECOMMENDATION 4

We recommend that a president and chief executive officer head theAgence and that the government appoint him for a five-year term, subjectto one renewal of term.

8.4.1 The president and chief executive officer

There are three management models in regulatory bodies in the Québecfinancial sector.

− The Inspector General of Financial Institutions is a body headed by agovernment appointee to exercise the powers and assume theresponsibilities stipulated in legislation that he administers. He alone isresponsible for the body.

− The Commission des valeurs mobilières du Québec is a body headed bycommissioners, including a chairperson, appointed by the minister toconstitute a commission responsible for administering the Securities Act.It exercises powers and assumes responsibilities attributed to it by otherstatutes.

− The Bureau des services financiers is a body headed by a board ofdirectors, 10 of whose members are appointed by the minister and ofwhom five are the presidents and vice-presidents of the Chambre del’assurance de dommages and the Chambre de la sécurité financière,who are elected by the industry. The board of directors exercises thepowers and assumes the responsibilities attributed to the BSF by the Actrespecting the distribution of financial products and services. A board ofdirectors also heads the chambers.

The guidelines stipulate that the regulatory structure must “must follow therules of effectiveness and efficiency and be fully accountable,” that it “mustadminister in a disinterested manner statutes governing the financial sector,”and that “the regulatory structure’s organization must enable it to respondpromptly and appropriately to change in the financial sector.”

We believe that management by a single senior executive would best respectthese principles. Clear, accountable management would be desirable.


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8.4.2 The appointment, dismissal, term of appointment andremuneration of the president and chief executiveofficer

8.4.2.1 Appointment

We have considered three methods of appointing the president and chiefexecutive officer, i.e. appointment by the National Assembly, by thegovernment, and by the minister responsible.

Appointments by the National Assembly are normally reserved for personswho report to the National Assembly and must be completely independent ofthe government, e.g. the Ombudsman and the Auditor General. This methodof appointment is not suitable for the head of the Agence, which is agovernment body reporting to a minister.

The usual method of appointing the director of a body reporting to a ministeris appointment by the government, e.g. the Inspector General of FinancialInstitutions, the chairperson of the Commission des valeurs mobilières duQuébec, the president of the Société de l’assurance automobile du Québecand the president of the Régie des rentes du Québec.

This situation prevails in other jurisdictions. For example, the federalgovernment appoints the Superintendent of Financial Institutions. In Ontario,the government will appoint the president of the future Financial ServicesCommission of Ontario.

Appointments made by the minister are unusual in the financial sector. Thechairperson of the board of directors of the Bureau des services financiers isthe only appointment made by the minister, although it should be noted thatthe BSF is not a government body.

While government appointments are less rapid and more complex thanappointments by ministers, they allow the minister, who usually proposes acandidate to the government, to more readily avoid pressure from interestgroups or potential candidates. Moreover, appointment by the governmentgives the appointee greater credibility.

Provision could be made for guidelines respecting the appointment of thechief executive. For example, legislation could stipulate requirementsconcerning the candidates’ professional experience or require that thepresident and chief executive officer be chosen from a list of candidatesdrawn up by certain bodies. However, in the case at hand, interests are sodiverse and divergent in the financial services industry that it would be veryhard to reach a consensus regarding the professional experience required ora list of candidates. It therefore seems preferable to give the government asmuch leeway as possible to appoint the president and chief executive officer.


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8.4.2.2 Dismissal

Legislation usually stipulates that the executive appointed may be dismissedfor valid reasons. Moreover, the person who appoints the executive is usuallythe person who may dismiss him. The Ombudsman is appointed by theNational Assembly with the approval of two-thirds of its members and may bedismissed with the approval of two-thirds of MNAs.

However, to ensure that the executive enjoys greater independence from thegovernment, one necessary—indeed, essential—condition is the executive’sability to act impartially and certain specific measures could be adopted inrespect of his dismissal.

For example, the Securities Act stipulates that the government may dismiss acommissioner only if the Court of Appeal recommends doing so once it hasconducted an investigation at the minister’s behest. This requirementensures, among other things, that the executive has an opportunity to beheard and that the hearing is public.

The Act respecting the Québec Pension Plan stipulates that the president ofthe RRQ, who is appointed by the government, may only be removed uponan address of the National Assembly.

To ensure that the president and chief executive officer of the Agence enjoysgreater autonomy, without granting him unconditional security of tenure, itwould be advisable for the government to be able to dismiss him for validreasons, subject to a public procedure during which the executive could beheard. We therefore suggest that the president and chief executive officeronly be dismissed upon the recommendation of a parliamentary committee.

8.4.2.3 Term of appointment

Québec legislation contains an array of provisions governing the terms ofappointment of executives:

− a term of appointment of stipulated duration, e.g. five years in the case ofthe Ombudsman;

− a term of appointment of minimum duration, e.g. at least five years in thecase of the Inspector General of Financial Institutions;

− a term of appointment of maximum duration, e.g. not more than five yearsin the case of the chairperson of the Commission des valeurs mobilièresdu Québec or not more than 10 years in the case of the presidents of theOffice des professions, the Régie des rentes du Québec and the Sociétéde l’assurance automobile du Québec.

To ensure that the body enjoys some degree of stability, it would bepreferable to grant a sufficiently long term of appointment to the presidentand chief executive officer. A five-year term of appointment renewable for one


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additional term would be appropriate. Renewal for one additional term strikesus as sound and desirable in an organization to ensure its steadydevelopment and the renewal of its staff.

8.4.2.4 Remuneration

The president and chief executive officer’s remuneration should take intoaccount the remuneration of individuals occupying comparable positions andaccorded executives exercising similar responsibilities.

8.5 MANAGEMENT OF THE AGENCE’SREGULATORY DIVISIONS

RECOMMENDATION 5

We recommend that the president and chief executive officer appointsuperintendents responsible for assisting him in the execution of hisduties and ensuring the management of the Agence’s regulatorydivisions.

The superintendents would be appointed to assist the president and chiefexecutive officer in managing the Agence and would head the body’s fivedivisions.

We examined two options with respect to the appointment of thesuperintendents:

− the chief executive would choose the superintendents;− the superintendents would be appointed in the same way as the chief

executive.

The relevance of each appointment method depends on the superintendents’role. Since their role would be to act as managers in the Agence, it would bepreferable for the president and chief executive officer to appoint them.Moreover, the president and chief executive officer could delegate powers tothem.

When the regulatory structure is reorganized, use should be made of theskills of the executives of existing regulatory bodies who administerlegislation governing the financial sector.


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8.6 THE CONSEIL DE LA RÉGIEADMINISTRATIVE

RECOMMENDATION 6

We recommend the establishment through legislation of a Conseil de larégie administrative in the Agence, comprising seven members, includinga chairperson, appointed by the Minister of Finance, for a term ofappointment of three years, renewable for one additional term.

The Conseil de la régie administrative, a permanent advisory board, would beset up to advise the Agence on questions concerning the conformity of theAgence’s initiatives with its mission and any question concerning its corporategovernance, such as the budget, the annual activity plan, the staffing plan,the appointment of superintendents, and so on. The Conseil de la régieadministrative would comprise seven members, including a chairperson, withexperience in the financial sector and, in particular, management expertise.The members would be subject to rules governing confidentiality and conflictsof interest.

Without playing the role of a board of directors, the Conseil de la régieadministrative would advise the president and chief executive officer on allquestions pertaining to the Agence’s internal operation and administration. Itwould not have any decision-making power but could offer occasional adviceto the minister responsible. It would report each year on its operations in theAgence’s annual report.

8.7 ADVISORY COMMITTEES

RECOMMENDATION 7

We recommend that the Agence establish ad hoc or permanent advisorycommittees to maintain close relations with consumers and regulatedentities.

The Agence should, as part of its mission, maintain close relations with theconsumers of financial products and services and with regulated entities.Depending on needs, the Agence could set up one or more ad hoc orpermanent advisory committees within each of its operating divisions.


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The Agence could set up an advisory committee in the Direction del’encadrement de la solvabilité, which would offer advice on the division’sproposed guidelines governing regulated financial institutions. The Agencecould also decide that an advisory committee is called for with respect to amore limited category of regulated entities, e.g. life and health insurers. TheAgence’s needs would dictate the number and mandate of the advisorycommittees.

Since the Agence’s needs would change over time, to avoid an unwieldyadministrative structure, it would be preferable to establish advisorycommittees through organizational initiatives, with the obvious exception ofthe Conseil de la régie administrative described in the previous section. Theestablishment of advisory committees through legislation causes majorproblems: when the legislation establishing the Agence is drafted, theAgence’s advisory needs, which are far from static, must be ascertained. Itseems more opportune to allow the Agence to decide upon the establishmentof the advisory committees, their composition and mandate.

To ensure the committees’ public accountability, the Agence should indicatein its annual report the composition of its advisory committees, their mandate,the number of meetings held and the topics discussed.

8.8 ACCOUNTABILITY OF THE BODY AND ITSPRESIDENT AND CHIEF EXECUTIVEOFFICER

RECOMMENDATION 8

We recommend that the Agence be publicly accountable.

Given the significant responsibility vested in a single body headed by a singlesenior executive, Quebecers should be assured that the Agence and thepresident and chief executive officer exercise judiciously and reasonably thepowers attributed to them. It is imperative that the Agence be publiclyaccountable. One of the guidelines adopted by the Task Force stipulates thatthe regulatory structure must follow the rules of effectiveness and efficiencyand be fully accountable. Such accountability should include the followingcomponents:

− The Agence would make public a three-year plan, comprising its policydirections, priorities and financial outlook.


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− Each year, the Agence would submit for approval by the ministerresponsible an activity plan, which would first be vetted by the Conseil dela régie administrative.

− The government should approve the Agence’s financial outlook, staffingplans and rates of remuneration. The budget estimates would first besubject to public consultation as is now the case with the CVMQ.

− Each year, before the end of June, the Agence would submit to theminister responsible a report on its activities focusing, in particular, on theresults achieved in relation to the plan submitted. The minister would thentable this report in the National Assembly.

− Each year, and when the government so decrees, the Québec AuditorGeneral would audit the Agence’s books and accounts.

− Pursuant to the Standing Orders of the National Assembly, theCommission des finances publiques could ask the Agence to appearbefore the committee to discuss its policy directions, activities andmanagement.

Some facets of the proposed system are drawn from the new managementframework proposed by the Québec government in the wake of theimplementation of the Public Administration Act (S.Q. 2000, c. 8).

8.9 STRATEGIC POLICY DIRECTIONS

RECOMMENDATION 9

We recommend that the legislation governing the Québec financial sectorand establishing the Agence stipulate the objectives to be achieved andthat the Agence obtain the powers necessary to help it attain theobjectives set by the legislation.

Given the key role played by the Agence in the financial sector, it is essentialto guide its initiatives by means of strategic policy directions stemming fromthe objectives stipulated in the legislation.


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8.9.1 Objectives of the legislation

− Legislation governing the financial sector would ultimately seek to fosterthe smooth operation and orderly development of the Québec financialsector.

− The legislation should ensure that consumers and businesses areconfident that each financial institution is solvent, that each advisor iscompetent, and that the information they receive is relevant, true andcomplete.

− The legislation should facilitate the delivery of quality, competitively pricedfinancial products and services to all consumers and businesses, whichassumes a high level of competition and the possibility for the financialsector to develop steadily and rapidly.

− The legislation should provide consumers with adequate assistancethrough access to simple, effective, inexpensive information sources andrecourse.

The attainment of these objectives would enable the financial sector togenuinely support economic development.

8.9.2 The Agence’s strategic policy directions

− The Agence should, through the manner in which it administers thelegislation and exercises its powers, contribute to the achievement of theobjectives stipulated in the legislation.

− The Agence should enable consumers:

to be served diligently; to be properly informed; to ascertain how to obtain assistance; to be able to lodge complaints and receive the necessary attention; to be compensated when they are wronged by a regulated entity

engaged in its authorized activities.

− The Agence should act in a way that minimizes the administrative burdenborne by regulated entities. To this end, the body should:

operate efficiently, i.e. make optimum use of resources; coordinate all administrative requirements (registration, contributions,

disclosure, and so on) in respect of a given regulated entity; act openly and diligently; facilitate communication with regulated entities.


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− The Agence should exercise its powers efficiently and should, therefore,obtain the resources needed to do so, i.e. competent employees andadequate physical resources.

− The Agence should adapt to changes in the sector and keep in closecontact with it. In particular, it should establish consultative mechanismsthat allow it to monitor new trends, the latest developments and theconcerns of consumers, regulated entities and the general public.

8.9.3 Elaboration of regulations

The Agence would be responsible for the elaboration of regulations. Itsexpertise and knowledge of the financial sector would make it the body bestqualified to adequately respond to changes in different fields in the financialsector by means of effective regulations geared to the entire industry’s needs.

When elaborating regulations and its guidelines and instructions, the Agenceshould bear in mind that:

− consumers ultimately assume the cost of regulation and that the benefitsthey derive therefrom must clearly outweigh this cost;

− consumers can make enlightened choices when they obtain the relevantassistance and information, combined with adequate protection;

− competition among businesses operating in Québec must be encouragedand conditions conducive to the development of such businessesoperating inside and outside Québec must be created;

− businesses are mainly responsible for their own management; thus, it ispreferable to establish objectives instead of imposing means to beadopted and rules to be followed;

− regulation must allow for changes in management and businesspractices;

− the government has adopted a regulatory streamlining policy.

While the Agence would be responsible for drawing up regulations, thegovernment would maintain regulatory power by approving the Agence’sregulations, rejecting them, or imposing new rules. The government wouldcontrol the body of regulations governing the financial industry, thus ensuringthat the regulations are appropriate, coherent and geared to the financialsector overall and that they do not duplicate existing regulations or legislation.


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8.10 SELF-REGULATORY ORGANIZATIONS

RECOMMENDATION 10

Insofar as self-regulatory organizations are contemplated in the regulatorystructure, we recommend that the mechanism for recognizing suchorganizations be governed by the principles stipulated in the legislationand that it be applied in the same manner to all fields of the financialsector.

In the United Kingdom, the reform of financial sector regulation eliminatedself-regulatory organizations engaged in regulatory operations on behalf ofauthorized regulatory bodies in the financial sector. In Canada and Québec,several self-regulatory organizations continue to engage in regulatoryoperations on behalf of regulatory bodies.

A self-regulatory organization, as defined by a number of regulatory bodies,31

is an organization to which has been delegated responsibilities stipulated inlegislation or which has been empowered to oversee the good conduct ofbusiness in a given field. Mention should be made of stock markets andclearing corporations recognized by the CVMQ, the only Québec agencyauthorized to recognize self-regulatory organizations according to aframework clearly defined in the legislation.32 Several other organizationsoperating in the various fields of the financial sector assume roles andfunctions similar to those of a self-regulatory organization, but are notrecognized as such.

8.10.1 Principles of recognition

Consumer assistance demands that the Agence assume most functions,duties and responsibilities pertaining to market regulation, although it could,in some instances, delegate regulatory duties to self-regulatory organizations.Before it delegates duties, the Agence should ensure compliance with thefollowing principles of recognition, to be included in the legislation, in order torespect the objectives of the new regulatory structure and Québec’sjurisdiction over the regulation of its financial sector.

− The inclusion of self-regulatory organizations in the regulatory structureshould not override the benefits stemming from the revision of regulationof the financial sector, especially by once again subjecting financial sectorinterveners to a multitude of bodies.

31 See the definitions in Appendix 5.32 Ss. 169-170, Securities Act (R.S.Q., c. V-1.1).


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− The inclusion of self-regulatory organizations should comply with theprinciples inherent in the regulatory structure. Since the governmentshould approve the regulations drawn up by the Agence, it should alsoapprove the regulations elaborated by a self-regulatory organization.

− Self-regulatory organizations should undertake to comply with requestsfrom the Agence to amend their regulations when the Agence deemssuch regulations to be unsuited to the Québec financial sector even if thisleads to the adoption of rules applicable solely to Québec.

− Self-regulatory organizations should make provision for a mechanismgeared to taking into account conditions in the Québec financial sector.For example, a Canada-wide self-regulatory organization could establisha specific committee for Québec reporting to its board of directors or setup a Québec territorial body to which powers would be delegated. Thiscommittee or body would exercise genuine decision-making power inrespect of questions that directly affect the Québec financial sector fromthe standpoint of Québec regulation of the financial sector.

− The Agence or the government could at any time suspend, revoke ormodify the status of a self-regulatory organization should the latter fail tocomply with the commitments that led to its recognition.

− As a corollary, if the Investment Dealers Association of Canada wishes topursue its activities in Québec, it must obtain the status of a self-regulatory organization from the Agence, which must apply the principlesof recognition stipulated in the legislation.

8.10.2 Recognition procedure

The recognition procedure in respect of self-regulatory organizations couldapply to all organizations that assume regulatory duties in the Québecfinancial industry in the fields of insurance, financial planning, compensationand securities. For example, the Agence could delegate the regulation ofproperty insurance sales representatives to organizations representing thelatter. Such organizations would make provision for rules governing theirrepresentatives, which the government would approve, in order to ensure thatthe public receives quality services. The rules would be compulsory andrestrictive since the government would ultimately approve them.

Moreover, the recognition procedure would be discretionary in that it wouldbe incumbent upon the Agence to consider the advisability of delegatingregulatory duties to an organization. An organization would be recognized asa self-regulatory organization solely in respect of the duty delegated to it andits other activities would not be deemed part of the regulatory functionspertaining to the Québec financial sector. Furthermore, such recognitionshould be established in light of the self-regulatory organization’s ability toobjectively, fairly and effectively perform the duty or duties delegated to it by


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the Agence, which should assess the relevance of delegating regulatoryduties to an organization and the organization’s ability to perform such dutieswithout creating internal conflicts of interest.

8.11 THE BUREAU DES EXAMENS ET DÉCISIONS

RECOMMENDATION 11

We recommend the establishment within the Agence of the Bureau desexamens et décisions as a separate authority to hand down quasi-judicialdecisions.

The regulatory bodies studied issue, modify, suspend or withdrawauthorizations that control the exercising of various activities and enjoyextensive discretionary leeway, depending on the legislation that governsthem. Each regulatory body that the Task Force studied maintains its owndecision-making process and a separate administrative procedure in respectof these acts. Moreover, each body maintains separate review and appealprocesses. Appeals of decisions handed down by the CVMQ and the BSFare lodged with the Court of Québec, while appeals of decisions of the IGFIand the RRQ are lodged with the Tribunal administratif du Québec.

The establishment of the Agence should encourage the government toharmonize decision-making, administrative, review and appeal processes.Faced with the market, the Agence could neither support nor justify disparateprocesses. However, this would not prevent it from establishing differentconditions, if need be, to grant or withdraw authorizations or licencesdepending on the activity regulated and the degree of discretion granted. Inaddition, rights of review or appeal could vary depending on the type ofdecision handed down but should follow a single process to ensureconsistency.

These harmonization rules, from the standpoint of the processes mentionedearlier, should apply to the entire regulatory structure. The establishment ofthe Bureau des examens et décisions is in keeping with such harmonization.

The Bureau des examens et décisions would make decisions, review andoverride decisions made by the Agence and take disciplinary action againstmarket stakeholders following investigations conducted by the Agence. Suchdisciplinary action could range from the suspension of licences orauthorizations to fines or legal proceedings. The Bureau des examens etdécisions should make decisions that would more significantly affect therights of stakeholders to ensure their independence in relation to decisionsmade by the Agence’s general administration. The relevant legislation shouldspecify the Bureau des examens et décisions’ jurisdictional responsibilities.


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The Agence must enjoy solid recognition and credibility on domestic andinternational markets and, to this end, the Bureau des examens et décisionsshould be competent, multidisciplinary, responsive and efficient.

Certain conditions must be met to ensure that the Bureau des examens etdécisions is able to hand down quasi-judicial decisions and review thedecisions handed down by the Agence’s divisions and that it is thusrecognized by all subjects and stakeholders in the financial sector.Specifically, the Bureau must:

− ensure unfailing compliance with the audi alteram partem rule whereby asubject is entitled to be heard before a decision on his case is handeddown;

− be impartial;− act fairly;− be independent.

This reflects the principles of natural justice.

The Bureau des examens et décisions must satisfy these conditions inappearance and in fact and, to this end, it would be isolated from theAgence’s other operations. A separate group of people should staff theBureau des examens et decisions and its activities should be kept separatefrom those of the Agence.

Appeals of decisions handed down by the Bureau des examens et décisionswould be lodged directly with a court of law. Given the significant financialimpact that the decisions may have in Québec and elsewhere, appealsshould be lodged with the Court of Québec, an ordinary law court.

8.12 OTHER RECOMMENDATIONS

8.12.1 The Real Estate Brokerage Act

RECOMMENDATION 12

We recommend that only the regulatory duties now performed by theACAIQ with respect to the brokerage of loans secured by immovablehypothec be assigned to the Agence.

As for the regulatory duties that the IGFI now assumes in respect of theACAIQ, it is incumbent upon the government to decide to whom it wishes toassign them.


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8.12.2 The Supplemental Pension Plans Act

RECOMMENDATION 13

We recommend that only the administration of regulatory provisionsgoverning the solvency of pension plans be assigned to the Agence.

The RRQ would continue to administer provisions respecting the promotion ofpension plans and counselling.

8.12.3 The Consumer Protection Act

RECOMMENDATION 14

We recommend maintaining the status quo with respect to the OPC.

8.12.4 The administration of other statutes

RECOMMENDATION 15

We recommend that the Agence be responsible for administering otherfinancial legislation.

Regulatory bodies in the financial sector now administer several statutesother than those governing the financial sector. Some of these statutes arepredominantly financial in nature, e.g. the Act respecting the MouvementDesjardins, the Act to establish the Fonds de solidarité des travailleurs duQuébec (F.T.Q.) and the Act to establish Fondaction, le Fonds dedéveloppement de la Confédération des syndicats nationaux pour lacoopération et l'emploi, while other statutes, e.g. the Companies Act and theAct respecting the legal publicity of sole proprietorships, partnerships andlegal persons have an incidental financial nature.

It is incumbent upon the government to decide to which body it assigns theadministration of legislation that is not predominantly of a financial nature.


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8.12.5 Regulation of financial planning

RECOMMENDATION 16

We recommend that the Agence regulate all financial planners, includingthe members of professional orders.


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THE IMPLEMENTATION OF THE NEW STRUCTURE

CHAPTER 9


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CHAPTER 9THE IMPLEMENTATION OF THE NEW STRUCTURE

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9.1 LEGISLATION

If our recommendations are adopted, the Agence will be established throughlegislation and the assumption by the Agence of the functions of existingbodies will require amendments to current legislation and regulations. Oncethe transition has been made, the Agence will administer all legislationgoverning the financial sector.

The establishment of the Agence will require the government to coherentlyorganize the decision-making (including the delegation of regulatoryresponsibilities), administrative and quasi-judicial powers attributed to thisfinancial sector regulatory body.

9.2 THE BUREAU DE TRANSITION ANDTRANSITIONAL MEASURES

To ensure a smooth transition, we recommend the establishment of a Bureaude transition, vested with a juridical personality and responsible for carryingout the transition according to a precise timetable. The president and chiefexecutive officer of the Agence would be appointed in a timely manner duringthe mandate of the Bureau de transition, which would exercise powersstipulated by the legislation. In particular, it would be responsible forpinpointing the human and physical resources that would be transferred andprocedures governing the transfer.

The following guidelines should be applied to the establishment andoperation of the Bureau de transition:

− The Bureau de transition should be made up of between five and sevenmembers whose credibility is recognized in the financial sector and by thegeneral public who are independent of existing bodies and are appointedby the government to perform their duties full time.

− The Bureau should have attributed or delegated to it the powersnecessary to consolidate regulatory functions within a single body.

− The Bureau should have its own budget established according to itsresponsibilities and the timetable adopted.

− The Bureau should adopt a detailed action plan covering theresponsibilities attributed by the government action plan.


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− The Bureau should seek to complete the transition within not more than12 months.

− The Bureau should clearly indicate that the body to be established wouldrely, first and foremost, on expertise found in existing bodies.


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APPENDICES

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APPENDIX 1

Biographical notes on members of the Task Force

Yvon Martineau, Chairman

Yvon Martineau is senior partner with Fasken Martineau, a law firm. Heobtained a law degree from Université Laval and was admitted to the Barreaudu Québec in 1970. He is a member of the Canadian Bar Association and theBarreau du Québec and has served on the latter’s administrative committeeand general council.

Mr. Martineau specializes in corporate and commercial law, mainly in therealms of mergers and acquisitions and securities. He has contributed inQuébec and abroad to the development of several big Québec companies.Moreover, he has directed major transactions that have had a significantimpact on the restructuring of Québec financial institutions.

He also holds an MBA in finance. He has served as chairman of the board ofHydro-Québec and sits on the boards of directors of a number of private andpublic companies, in particular those in Groupe Canam Manac inc. andGroupe Jean Coutu (PJC) inc.

From 1982 to 1985, while he was senior partner with another big law firm, hepractised in London, England. Prior to that, he taught company law at theUniversité de Montréal and the École de formation professionnelle duBarreau du Québec. He is the author of the Manuel des corporations duQuébec, published in 1983.

Dominique Vachon

Dominique Vachon holds a master’s degree in economics and a bachelor’sdegree in industrial relations from the Université de Montréal.

She is Vice-President and Chief Economist at the National Bank of Canada,where she previously served for over five years as principal economist. Shehas also taught macroeconomics and labour economics at the École desHautes Études Commerciales and has written numerous financial columns inLes Affaires and Finance et Investissement.

Ms. Vachon became a member of the board of directors of the Université duQuébec à Montréal in 2000 and a member of the board of directors of theExport Development Corporation 2001. In 1997, she received theBusinesswoman of the Year award granted by the Board of Trade ofMetropolitan Montreal.


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Claude Béland

Claude Béland is a visiting professor at the Université du Québec à Montréal,where he holds the chair in economics and humanism. He is also thePresident and CEO of the Société d'implantation du Centre hospitalier del'Université de Montréal and Deputy Chairman of the board of directors of theRégie des rentes du Québec. Mr. Béland holds a Licentiate in Laws, with aspecialization in commercial law and cooperative law.

Between 1959 and 1985, Mr. Béland taught law in several institutions. In1971, he gave up private practice to serve as legal advisor to the Fédérationdes caisses d'économie du Québec. He became director general of theFédération in 1979 and oversaw its affiliation with the Mouvement descaisses Desjardins the same year. In 1986, he was elected president of theMouvement des caisses Desjardins; he was reelected in 1994 for a new termof appointment, which was renewed in 1997 and ended in 2000.

Mr. Béland has carried out numerous strategic initiatives that havecontributed to the institution’s expansion and development. Mention shouldbe made of the sweeping restructuring of the Mouvement, through which thecredit unions have become co-owners of all of the agencies and corporationsthat make up the Mouvement Desjardins. The subsequent addition of newsubsidiaries rounded out the range of services offered to individuals andbusinesses. In 1989 and 1990, he oversaw the affiliation of credit unionfederations in Ontario, Manitoba and Acadia. He is also responsible for theestablishment in 1994 of the Société financière Desjardins-Laurentienne

Mr. Béland continues to participate actively in Québec society. He is amember of the boards of directors of a number of Québec businesses andhas been appointed by the Conseil général du Barreau du Québec to theposition of President of the Fonds d'assurances professionnelles du Barreaudu Québec.

Pierre Carrier

Pierre Carrier obtained the title of certified management accountant in 1966and that of a fellow (FCMA) in 1987. Since 1992, he has studied ancientcivilizations, history and archaeology. He is also studying philosophy.

Throughout his career, Mr. Carrier has occupied various positions with anumber of organizations. He served as director of administrative services andcommunications with the Conseil de la langue française until 1992. Between1977 and 1981, he was the secretary of the Office de la protection duconsommateur. He worked for the Commission des accidents de travail(CAT) from 1957 to 1977, where he occupied the positions of director generalof compensation and director of the review board.


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Mr. Carrier continues to be active in several professional corporations. Since1999, he has been a member of the administrative committee of the Bureaude l'Ordre des infirmières et des infirmiers du Québec. He also sits on theboard of directors of the Institut de réadaptation en déficience physique deQuébec. He has also served as a member of the administrative committeeand the Bureau de l'Ordre des traducteurs, interprètes et terminologues.

Yvon Charest

Yvon Charest holds a bachelor’s degree in actuarial science and is a fellow ofthe Society of Actuaries (FSA) and a fellow of the Canadian Institute ofActuaries (FCIA).

Mr. Charest has been with Industrial Alliance since 1979; he was appointedPresident and Chief Executive Officer of the company in May 2000.Previously, he occupied various positions with the company, including chiefoperating officer and actuary in charge of actuarial valuation responsible forensuring budget monitoring in life insurance subsidiaries, specifically inrespect of product pricing.

Throughout his career, he has been a member of numerous CanadianInstitute of Actuaries (CIA) committees, commissions and task forces. Inparticular, he was a member of the CIA board from 1989 and 1992 anddeputy chairman of the board from 1992 to 1994. Since 1989, he has been amember of various committees of the Canadian Life and Health InsuranceAssociation.

Mr. Charest is member of the board of directors of Industrial Alliance,National Life of Canada, Industrial Alliance Pacific and, since January 2001,the board of directors of MD Life.

Pierre Comtois

Pierre Comtois holds a bachelor’s degree in commerce with an option inadministration, and a diploma from the Institute of Canadian Bankers,obtained at the École des Hautes Études Commerciales. He is a financialplanner and certified administrator. He has also taken a course at theCanadian Securities Institute.

Mr. Comtois is Deputy Chairman of the board of Optimum gestion deplacements inc. From 1992 to 1996, he served as executive vice-president,finance and treasury, with Groupe Optimum inc. From 1982 to 1992, heoccupied the position of vice-president and director general, finance, withGeneral Trust of Canada.

Mr. Comtois is a member of the investment committee and the marketingcommittee of the Fonds des professionnels du Québec inc. He is also a


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member of the board of directors of the Opéra de Montréal and the board ofdirectors of the Banque Martin-Maurel (France), and is a member of theboard of directors and of the investment committee of Fondation Centraide.

Pierre Laurin

Pierre Laurin holds a doctorate in administration from Harvard University anda doctorate honoris causa from Concordia University. He also holds abusiness degree from the École des Hautes Études Commerciales and a BAfrom the Séminaire de philosophie de Montréal.

Since January 1999, Mr. Laurin has been executive in residence at the Écoledes Hautes Études Commerciales. Previously, he served for 12 years asvice-chairman and president for Québec of Merill Lynch Canada. From 1982to 1987, he was vice-president and director of planning and administrationwith Alcan. He was also founding president and CEO of Soccrent, a venturecapital company dedicated to establishing new companies in the Saguenay—Lac-Saint-Jean region.

He is Chairman of the Board of Procréa Biosciences and AtriumBiotechnologies. In addition, he sits on the boards of directors of LaboratoiresAeterna, Quebecor, Boomerang and various non-profit organizations.

In recognition of his extensive professional and social commitment, he wasnamed an officer of the Order of Canada in 1982 and Chevalier de l'Ordrenational du Mérite de la République française in 1997. Mr. Laurin is also theauthor of several publications and the founder of Revue Gestion, aninternational management journal.


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APPENDIX 2

Interveners who submitted briefs to the Task Force

The Task Force received 24 briefs, the complete contents of which can beconsulted on the Task Force’s Web site (www.gesef.gouv.qc.ca).

- Association des cabinets gestionnaires de courtage en assurance depersonnes du Québec

- Association des experts en sinistre indépendants du Québec inc.- Association québécoise de la planification financière- Bourse de Montréal Inc.- Canadian Bankers Association- Canadian Federation of Independent Business- Canadian Life and Health Insurance Association Inc.- Cartier Partners Financial Group Inc.- Comité Consultatif Juridique en valeurs mobilières- Conseil des fonds d'investissement du Québec- Corporation des assureurs directs de dommages du Québec- Fédération des Chambres immobilières du Québec- Fiscal and Financial Planning Association- Gilles Thouin.- Groupe Promutuel- Insurance Bureau of Canada- Investment Dealers Association of Canada- Mouvement des caisses Desjardins- Office de la protection du consommateur- Ordre des administrateurs agréés du Québec- Regroupement des assureurs de personnes à charte du Québec- Regroupement des cabinets de courtage d'assurance du Québec- Regroupement des consultants en avantages sociaux du Québec- Réseau des notaires planificateurs financiers du Québec


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APPENDIX 3

Biographical notes on experts invited by the Task Force

Delia Rickard

Delia Rickard is a graduate in law and is studying for an MBA degree. She isDeputy Executive Director, Consumer Protection, with the AustralianSecurities and Investments Commission. For the past two and a half yearsshe has, among other things, chaired the task force responsible for revisingand expanding the Electronic Funds Transfer Code. Previously she workedfor five years in the consumer protection division of the AustralianCompetition and Consumer Commission (ACCC). During this time, she alsocollaborated for one year in the deliberations of the Wallis Commission, whichexamined the Australian regulatory system.

Prior to joining the ACCC, she served as advisor and senior advisor with twoCommonwealth Ministers of Consumer Affairs. Ms. Rickard has considerableexperience in the realm of consumer protection and is thoroughly familiar withissues in the financial services sector, especially codes of conduct andconflict-resolution methods. From 1996 to 1998, she was a member of theAustralian Payments System Council.

William Blair

William Blair is a graduate of Balliol College, Oxford and is now practising inthe financial sector. He has defended a number of cases before the courtsand has an extensive consulting practice. He was appointed Queen’s counselin 1994 and is the author of several publications, in particular, TheEncyclopedia of Banking Law and Banking and Financial ServicesRegulations. He is also a visiting professor at the London School ofEconomics and at the Centre for Commercial Law Studies in London. Sincethe beginning of 2001, he has sat part-time on the Financial Services andMarkets Tribunal recently established in the United Kingdom.

Jacques Mistral

Jacques Mistral holds a PhD in economics. He has taught at the Universitédes Antilles, the Université de Paris Nord, the École Normale Supérieure andthe Institut d’Études Politiques de Paris. From 1988 to 1991, he served as atechnical advisor responsible for economic affairs in the office of PrimeMinister Michel Rocard. From 1992 to 2000, he held several key positionswith the French group Axa, including central director. He subsequently servedas a special advisor for economic policy and international relations with the


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minister of the economy, finance and industry. He is currently the ministerfinancial counselor at the French Embassy in Washington and financialadvisor at the French Embassy in Canada.

Jean Roy

Jean Roy obtained a PhD in finance from the Wharton School of theUniversity of Pennsylvania in 1985. He taught finance at Université Lavalfrom 1983 to 1990 and served as director of the department of finance andinsurance from 1985 to 1988. Since 1990, he has been a full professor offinance at the École des Hautes Études Commerciales, where he specializesin the management of financial institutions. He has served as a consultantwith the Mouvement Desjardins, the ministère des Finances du Québec, theCommission des valeurs mobilières du Québec, the Office de la protection duconsommateur, the federal Department of Finance, and the Canada DepositInsurance Corporation.


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APPENDIX 4

Working groups of Canada-wide forums

The Canadian Council of Insurance Regulators

Over the past two years, the CCIR has examined through sub-committeesvarious issues, including:

− consumer protection from the standpoint of insurance;− the market conduct of personal insurance companies;− the different categories of insurance policies;− E-commerce in the insurance sector;− the capital test for property insurers.

The Canadian Association of Pension Supervisory Authorities

Over the past two years, CAPSA has examine through sub-committeesvarious issues, including:

− a study of Canadian and foreign pension plan regulation;− the development, in consultation with the industry, of the principles

underlying a pension plan legislative model;− the development and communication of policies, guidelines and

recommendations pertaining to pension plan investments;− the development of guidelines concerning electronic information

exchange between the members and administrators of pension plans;− a review of pension plan funding requirements;− the development of common guidelines for corporate governance.

Canadian Securities Administrators

Over the past two years, Canadian Securities Administrators have examinedthrough sub-committees various issues, including:

− the modification of the System for Electronic Document Analysis andRetrieval (SEDAR) for prospectuses and annual information forms;

− the proposed norm concerning parallel negotiating systems and operatingrules;

− the Mutual Reliance Review System in respect of the registration of themember advisors and brokers of a self-regulatory organization;

− the reformulation of the policy concerning the sales or purchase programfor the owners of small blocks of shares;

− the relationship between the member and his clients;


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− the directive for engineers and geologists concerning the presentation ofreports on oil and gas;

− the modification of the standard concerning rights offerings;− the review of the standard governing scholarship plans;− the proposal for a national escrow regime applicable to initial public

distributions;− the standardization of disclosure timing and content;− the standard concerning financial forecasts;− the standard concerning the use of the monetary unit with regulatory

authorities;− the standard concerning the replacement of external auditors;− the standard concerning the change of date of the fiscal year end;− the standard concerning communication with the true holders of the

securities of a reporting issuer;− the change in the definition of “material fact” and “material change;”− the norm concerning communication to shareholders of quarterly financial

statements;− the exemption from certain insider report obligations;− the standard concerning the System for Electronic Data on Insiders

(SEDI);− the standard concerning the distribution of controlling interests;− the standard concerning information on outstanding stock;− the standard concerning the warning system and related questions

affecting public offerings and insider reports;− the standard concerning the distribution of securities outside the main

jurisdiction;− the standard concerning mutual fund prospectuses;− the standard concerning mutual funds;− the standard concerning term market funds;− the standard concerning mutual fund business practices.

Joint Forum of Financial Market Regulators

Over the past two years, the Joint Forum has set up sub-committees toexamine various issues, including:

- consumer complaint management and dispute resolution;- regulatory principles governing investment disclosure in capital

accumulation plans;- harmonization of regulations governing segregated funds and pooled

investment funds;- the proficiency of intermediaries and the granting of licences;- the structure of the Joint Forum.


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APPENDIX 5

Definitions of self-regulatory organizations (SROs)

Neither the Securities Act nor any other statute governing the financial sectorin Québec precisely defines the concept of the self-regulatory organization(SRO). However, the Derivatives Institute of the Bourse de Montréal,33 theInvestment Dealers Association of Canada (IDA),34 the National Associationof Securities Dealers Inc. (NASD),35 and the Commodity Futures TradingCommission (CFTC)36 provide explicit definitions.

Derivatives Institute

An organization that has been delegated certain regulatory and compliancefunctions by the regulatory authorities.

IDA

A self-regulatory organization is an organization that has been given theauthority and the responsibility to regulate its members.

National Association of Securities Dealers Inc.

An entity, such as the NASD, responsible for regulating its members throughthe adoption and enforcement of rules and regulations governing thebusiness conduct of its members.

33 Established in March 2001 by the Bourse de Montréal, the Derivatives Institute is responsible for

training and informing the public in the use of derivatives for effective portfolio management.34 As a Canadian self-regulatory organization in the securities industry, IDA regulates the activities of

stockbrokers from the standpoint of the capital required and the conduct of business. To become amember, a company must comply with rigorous requirements governing capital, demonstrate that it iswilling and able to conduct its operations according to the Association’s by-laws, regulations andguidelines, and agree to submit to constant oversight.

35 The NASD is the American self-regulatory organization that oversees the registration and regulationof stockbrokers and investment salesmen throughout the United States. It is mainly responsible forelaborating regulations and rules of conduct in respect of the securities market, auditing its members’operations, imposing penalties on offenders, and operating and regulating the securities market.

36 The CFTC is an independent agency established by the US government to regulate and protectinvestors on American derivatives markets.


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Commodity Futures Trading Commission

Self regulatory organizations (i.e., the commodity exchanges and the NationalFutures Association) must enforce minimum financial and reportingrequirements for their members, among other responsibilities outlined in theCFTC's regulations. When a futures commission merchant (FCM) is amember of more than one SRO, the SROs may decide among themselveswhich of them will be responsible for assuming these regulatory duties and,upon approval of the plan by the Commission, be appointed the “designatedself regulatory organization” for that FCM.

ANNEXES

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RECOMMENDATION 1

We recommend the establishment through legislation of the Agenced’encadrement du secteur financier du Québec, a single body to regulatethe Québec financial sector.

RECOMMENDATION 2

We recommend that the Agence’s regulatory responsibilities bedetermined by means of a functional approach and divided into fiveregulatory categories:

− consumer assistance;− solvency;− distribution;− securities markets;− compensation.

Five separate administrative divisions would assume theseresponsibilities, which should provide coordination services, especially inrespect of relations with regulated entities, inspection, investigations anddisclosure.

RECOMMENDATION 3

We recommend that financial sector stakeholders fund the Agence andthat the government approve its budgets.

RECOMMENDATION 4

We recommend that a president and chief executive officer head theAgence and that the government appoint him for a five-year term, subject toone renewal of term.


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RECOMMENDATION 5

We recommend that the president and chief executive officer appointsuperintendents responsible for assisting him in the execution of his dutiesand ensuring the management of the Agence’s regulatory divisions.

RECOMMENDATION 6

We recommend the establishment through legislation of a Conseil de larégie administrative in the Agence, comprising seven members, includinga chairperson, appointed by the Minister of Finance, for a term ofappointment of three years, renewable for one additional term.

RECOMMENDATION 7

We recommend that the Agence establish ad hoc or permanent advisorycommittees to maintain close relations with consumers and regulatedentities.

RECOMMENDATION 8

We recommend that the Agence be publicly accountable.

RECOMMENDATION 9

We recommend that the legislation governing the Québec financial sectorand establishing the Agence stipulate the objectives to be achieved andthat the Agence obtain the powers necessary to help it attain theobjectives set by the legislation.


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RECOMMENDATION 10

Insofar as self-regulatory organizations are contemplated in the regulatorystructure, we recommend that the mechanism for recognizing suchorganizations be governed by the principles stipulated in the legislationand that it be applied in the same manner to all fields of the financialsector.

RECOMMENDATION 11

We recommend the establishment within the Agence of the Bureau desexamens et décisions as a separate authority to hand down quasi-judicialdecisions.

RECOMMENDATION 12

We recommend that only the regulatory duties now performed by theACAIQ with respect to the brokerage of loans secured by immovablehypothec be assigned to the Agence.

RECOMMENDATION 13

We recommend that only the administration of regulatory provisionsgoverning the solvency of pension plans be assigned to the Agence.

RECOMMENDATION 14

We recommend maintaining the status quo with respect to the OPC.


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RECOMMENDATION 15

We recommend that the Agence be responsible for administering otherfinancial legislation.

RECOMMENDATION 16

We recommend that the Agence regulate all financial planners, includingthe members of professional orders.

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