The advocates for financial reform slog on, despite a blowback against the campaign to re-regulate Wall Street. President Obama has shoved Paul Volcker in front of Congressional committees and TV cameras to push the Volcker Rule limiting the size and trading activities of major banks. Meanwhile, the House Financial Services Committee, under the chairmanship of Barney Frank (D-MA), passed a bill to establish a new Consumer Financial Protection Agency (CFPA), to create a council of regulators to oversee systemic risk, and install stricter standards for alternative funds and credit-rating agencies (and other protections). Given that the market crash (and longer market cave-in) has been blamed for trillions of dollars in retirement and household asset losses, the cry for reform still burns. Has the Frank proposal worked anywhere else? Yes: In Canada.
The World Economic Forum declared Canadas banking system was soundest last year. One of the reasons its so sound is because its better regulated. A key regulatory agency is the Consumer Agency of Canada (FCAC), which was founded in 2001 to strengthen oversight of financial services and consumer issues.
I asked Bill Knight, the first Commissioner of the FCAC (serving from its inception until 2006), whether or not the proposed CFPA (modeled after the FCAC) and other reforms might help. He believes the House bill would aid in protecting American investors and consumers. One of the other parallel protections in the bill is the council of regulators. Knight noted that the U.S. has seen what happens when the intelligence agencies dont talk to one another. Its the same with the regulators. Your financial regulatory system is like a bunch of amusement park bumper cars, he joked. Your regulators want to showboat, and every cowboy is competing for headlines. Then, when they fall on their face, the other regulators let them hang.
Knight explained Canada's four common sense approaches to financial regulation:
One: The Financial Institutions Supervisory Committee (FISC)
This council of regulators meets and works together regularly in a team effort. The FISC Team includes the Governor of the Bank of Canada, Superintendent of Financial Institutions (OSFI), Canada Deposit Insurance Corporation (CDIC), the Deputy Minister of Finance and Knights former position, the Commissioner of FCAC.
If anything were happening that might create systemic risk, this team would provide informal pressure. For example, Scotia Bank and a couple of other banks announced they would get into the sub-prime mortgage space. The FISC Team leaned on the banks, and the banks folded. At other times the action would be formal.
Two: Stronger Public Sector Housing Role
When financial markets tightened in Canada, the government used Crown Corporations (public entities) to ease lending, and did so with the support of regulators. Unlike its U.S. counterparts, Fannie Mae and Freddie Mac, the Canada Mortgage and Housing Corporation (CMHC) was never privatized, so government finance leaders and regulators could better monitor CMHC. However, the FISC Team could act against the Crown if it moved too far in terms of risk and exposure.
Third: Regulatory Protections Still Intact after Mergers
Canadas regulatory bodies still regulate banks and investment houses even after mergers, despite complex corporate and subsidiary dividing lines. For instance, while a deposit bank in Canada can buy a securities company, that subsidiary continues to be regulated by a securities commission (post-merger).
Four: The FCAC
FCAC's creation was one in a series of initiatives resulting from an extensive period of study and public consultation on financial sector reform that began in the 1990s. The consultation found that the current framework for consumer protection is not as effective as it should be in reducing the information and power imbalance between institutions and consumers.
While some consumer protection activities existed previously in Canada, those activities were dispersed among various federal entities. FCACs bailiwick includes all banks and federally incorporated or registered insurance, trust and loan companies and retail associations.
Overall, Canadian citizens have done a better job of protecting their nest eggs and the countrys assets. The American people will never again fully trust the market if the American government doesnt re-regulate the market. Canada shows it can be done.
Tom Croft, an international expert on innovative capital strategies and director of Pennsylvanias Steel Valley Authority, is the author of Up From Wall Street: The Responsible Investment Alternative (Cosimo Books, 2009).