Angry in the Great White North

Update: My musings have gotten some notice. But really...somewhat partisan? Maybe I need to be trying harder.

One the most important and most popular ways for the Ontario government to raise funds is through the sale of saving bonds:

Ontario Savings Bonds are a safe and secure investment which is backed 100 per cent by the Province of Ontario, including both principal and interest. They are available from financial institutions, credit unions, caisses populaires or investment dealers.

In 2007, $1.3 billion was raised through the sale of OSBs. Besides institutional investors, regular Ontarians purchase OSBs directly from bank tellers at their local bank branches.

The Ontario Financing Authority manages the sale of OSBs on behalf of the Ontario government.

Well, that's only half-true.

The Ontario Securities Commission has become involved as well, though by accident. The OSC is proposing a new regulation, 31-103, that would set new rules for Registration Requirements. Basically, 31-103 requires that people who sell securities be held to extensive training and strict licensing requirements.

Now here's the rub. There already exist requirements like this. These requirements include a special exemption for OSBs and other government bonds -- bank tellers, for example, were allowed to sell them because people understood what these bonds were, who backed them, and the amount of risk (that is, near zero) that the investment entailed. The problem is that, as a whole, the requirements covering the training and licensing required to sell securities are not consistent across the country, where provincial securities commissions have set different standards. Equivalent regulations to OSC Regulation 31-103 are being proposed in every other province and territory to bring all the rules in line with each other.

Again, not bad in of itself, but remember that without a national securities authority, these sorts of efforts require 13 different provincial and territorial authorities to get organized, making it harder for the people impacted by these changes to respond.

One of those changes in the OSC proposal 31-103 is to remove that exemption that covered tellers and others selling safe government bonds.

You would think the minister in charge, Gerry Phillips, and his staff might notice that.

But you see, Gerry Phillips isn't involved. These changes are made within the confines of the OSC, and are not changes to any actual legislation. A change to a law provides opportunities for opposition politicians and interested stakeholders to make their concerns known in committee where the legislation is reviewed and amended. But in the case of the OSC, the enabling legislation the defines the powers of the OSC allows the OSC to make regulation changes without oversight of either the minister in charge (in this case, Gerry Phillips) or of Queen's Park as a whole. The justification is that markets move so quickly that making these sorts of changes through legislation is too slow. The unintended consequence is that the OSC is a law unto itself, setting the rules for how Ontario stocks and securities trading works. The OSC does request comments on its proposals, but unlike a political party, the OSC is not forced to defend its record in front of the electorate.

The bottom line to all this, though is that the OSC changes in regularion 31-103 impacts the abilitiy of the OFA to raise funds using OSBs. The CIBC makes it clear in a letter to the OSC:

The Instrument also proposes to eliminate most exemptions currently found in sections 34 and 35 of the Ontario Securities Act. These exemptions permit bank employees to sell government debt products such as Canada Savings Bonds (“Government Savings Bonds”) without the need to be registered. We query whether bank employees selling Government Savings Bonds will need to be registered as a result of the proposed changes arising from the Instrument. If so, we ask the CSA to identify any benefit that will accrue from requiring bank employees to be registered to sell Government Savings Bonds that will justify the costs of either licensing thousands of bank employees, or exiting the business and making Government Savings Bonds unavailable to bank clients.

We hope that the potential result of requiring banks and bank employees to be registered to sell Bank Deposit Products and Government Savings Bonds is an unintended one. As the sale of such products is performed by employees in a bank, such activity falls within the federal jurisdiction over banking and ought not to be within the purview of provincial securities regulators.

Accordingly, we urge the CSA to carve out the sale of Bank Deposit Products and Government Savings Bonds by banks and bank employees from the Exempt Market Dealer registration category. We do not believe that banks and bank employees need to be registered to sell Bank Deposit Products and Government Savings Bonds. Banks operate under a robust regulatory framework which already addresses the key areas that are the subject of this Instrument.

The Canadian Bankers Association makes the same point, making special mention that the sale of provincial savings bonds would also be affected.

Basically, the banks are pointing out that they would be forced to extensively train their tellers in the esoteric science of securities trading in order for them to continue doing what tellers have been doing for years, and that is to sell Ontario and Canada Savings Bonds for a few weeks a year at the teller window to citizens who want to invest in their country and their province.

The banks have two choices. They can remove the sale of OSBs and CSBs from the tellers and concentrate it with the investment specialists. Government savings bonds are sold directly for only a few weeks a year, so that would put a severe bottleneck in the sales. Or they can train up their tellers at great expense so that they sell these perfectly safe bonds for all of three weeks a year. And you know that expense will be passed down to consumers like you and me in higher service charges.

How expensive? The legal firm of Gowling Lafleur Henderson LLP crunched the numbers:

We estimate that it cost approximately $200,000 to become set up as a limited market dealer in Ontario, which costs included incorporating and registration costs, legal fees, accounting fees, compliance personnel, staffing and training fees and costs to develop policies, procedures and systems. We ask that the securities regulators consider these very high costs and provide a serious analysis of the effects of these proposed changes.

Imagine small communities where the only financial service comes from banks. If the teller is not trained up, and there is no one else who meets the standards required by 31-103, bonds would simply be unavailble.

So either the sale of bonds takes a big hit, or we all pay more for banking.

Actually, when you think about it, a lot of people could lose their jobs if starting tomorrow they had to pay $200,000 to legally do what they were doing just yesterday.

But back to the bonds.

The banks are just the middlemen in the sales of bonds, and they seem to be pretty upset. Imagine then, how the people who are actually issuing the bonds must feel about all this.

It should come as no surprise, then, but I'm told that the OFA is furious with the OSC for proposing this change and moving so far along the process without including the OFA in the design of the regulation. And the OFA is not impressed with Minister Gerry Phillips for sleepwalking while the OSC prepared to choke off a major revenue generating mechanism for the government.

But then the OSC does not seem to involve the government in these sorts of decisions until it is fait accompli and the minister provides a final signature. Indeed, the legislation that defines the OSC's powers states that if the minister does not explicitly reject a rule change, it is as if the minister approved it.

In this provincial election the talk is about how much money to spend on health care and private schools and so on. But maybe we should take one step back and ask Dalton McGuinty about how the Liberals have been managing the OSC and how they've been safeguarding the ability of Ontarians to invest in their own province. If the OFA and the OSC were being managed by ministers paying attention to the details, we wouldn't have a situation in which a regulation that has been carefully constructed at great expense to be consistent with similar regulations across the country is now likely to cause havoc in the provincial bonds program. Instead, the government is on the verge of making its own saving bonds virtually inaccessible to regular citizens, unless the banks that serve these citizens pay out a huge expense that would then be passed on to these regular citizens, an expense that would ironically reduce their ability to invest in provincial bonds.

If revenues from OSBs goes down, Dalton McGuinty would be forced to reduce services or raise taxes:

This time, he means it.

Liberal Premier Dalton McGuinty, whose 2003 campaign promise not to raise taxes dogs his Oct. 10 re-election bid, said Ontarians should read his lips.

McGuinty told host Sean Mallen that his decision to break that cornerstone promise and introduce the annual health tax of up to $900 was agonizing.

"We will not have to raise taxes, because we're in charge. We know exactly where we are," he said yesterday on Global's Focus Ontario.

In charge? The situation seems to be the result of a lack of control and oversight. If Dalton McGuinty's Liberal government was really in charge, then why are the banks agonizing that the OSC is about to choke off their ability to sell OSBs on behalf of that government? Dalton McGuinty won't raise taxes, but the OSC is about to seriously hurt the sale of OSBs, or force Ontarians to pay more in order to buy them.

Increased bank charges might not be a tax in the literal sense, but if Dalton McGuinty's government creates a situation in which banks are forced to spend millions in order to continue to support a government program, a cost the banks pass down to me and that I pay even if I don't buy bonds, the literal definition of a tax might seem unimportant to me.

It is the theatre of the absurd. The situation is esoteric and under-the-radar, but has the potential of seriously impacting Ontario's financial health, as well as destroying the livelihoods of hundreds or even thousands of workers in the finance industry. The possibility that this government action will give banks justification to raise service charges flies in the face of the "I won't raise taxes" pledge made by Dalton McGuinty.

Hopefully it's not so esoteric that no one takes the time to ask a few questions.