CSE Chairman Thomas Caldwell went One-on-One with Andrew McCreath on his weekly BNN program to discuss regulation and the markets and most pressingly addressed the question: Is too much regulation hurting the securities industry?
Tom, a vocal advocate of improving securities regulation in Canada, lent his thoughts on the current state of “over regulation” in the Canadian securities industry, exemplified by his early comments in the interview :
“I think we’ve reached a tipping point where the volume, the mass of regulation is so great – and a lot of it is not substantive in protecting investors – but the volume is representing a massive cost, not only to independent brokerage firms, but also to companies raising money – ergo it’s impacting the economy.”
Tom then touches on the spiralling growth of regulation as illustrated by this point:
“Take a look at the Ontario Securities Act – a year ago it was 2800 pages, this year it’s 3500 pages. it’s been expanding at 20% a year.”
One issue he is particularly concerned about is the upcoming Client Relationship Model, which could have dire consequences on transactional brokers that invest in junior companies:
“Brokers will no longer recommend junior or new companies to investors. The risk is too high for the broker – it’s going to hurt that industry big time.”
From a securities firm perspective, the increasing growth of regulation is making the business model of running a brokerage unsustainable:
“The costs of regulation are now the killer… typically one third to one half of all your administrative costs relate to regulation, that is an unsustainable business model.”
Ultimately, Tom offers his thesis on where the industry needs to look to improve, for the betterment of the economy:
“I think we should take a look at securities regulation and see how we can make it better – better being simpler… because in securities regulation less is more, simpler is better. Because it is easier to police and it is easier to focus on from the broker to comply.”
Not dismissing the importance of regulation (it is very important), Tom makes the telling statement about how growth in regulation can be misinterpreted as a positive by saying:
“Sarbanes-Oxley never saved one investor one dollar!”
The second portion of Tom’s interview focuses on his market outlook.
Some quick insights from the second portion of his interview with Andrew:
- A self-identified “incurable optimist”, Tom is still positive on the markets – both in Canada and the US.
- He still sees value in some stocks that others might not including Barrick Gold, bought as a turnaround last year (he’s a self-professed “garbage man”), and US Banks including Citibank, Morgan Stanley, and Bank of America – who have tremendous earning power when the economy improves. He believes they will become substantial dividend payers again as they gradually reacquire stock.
- Likes Canadian banks as an investor but not as competitor.
- Inflation will be back and it makes sense to own stuff rather then be a lender in this type of environment.
- Tom discusses Urbana Corporation (CSE:URB) and thinks there is a great model with closed-end funds as they are cheaper to run than a mutual fund. He attests that a lot of fortunes were made in these vehicles 60 years ago.