Overdue modernization of Ontario’s capital markets is 'now or never'

One industry expert believes that Canada’s capital markets are holding back the country’s true potential

Overdue modernization of Ontario’s capital markets is 'now or never'

Jos Schmitt is co-Founder, President & CEO of NEO, a senior stock exchange operator in Canada. Throughout his career, Schmitt has held numerous leadership roles in capital markets and been instrumental in the development and creation of exchanges around the world.

When I first came to Canada 20 years ago, I quickly realized that the country was full of incredible potential.  What I saw was a wealth of natural resources and a well-above-average educational system. Both critical components for a thriving economy, where innovators can design the products and services of tomorrow and where easy access to resources enables size and scale. The benefit?  Successful domestic companies, job creation, wealth generation and, ultimately, ongoing economic growth.

Canada is not living up to this potential.  And there is one main reason for this: the lack of truly vibrant capital markets. Capital markets where - through competition, innovation and investor confidence - companies raising capital are matched with investors in the most efficient way possible. In a perfect world, this should happen naturally, but we do not live in a perfect world. Therefore, proper securities legislation is critical.

Over the last 20 years, economies across the globe have undergone unprecedented change driven by globalization, financial crises, new technologies, shifting consumer behaviours, re-emerging protectionism and, last but not least, a global pandemic.

During this same timeframe, many countries modernized their securities legislation, including jurisdictions with whom we fiercely compete for risk capital. While here at home, Ontario’s securities legislation has not been modernized since 2003.

This is why the mission entrusted by the Ontario Government to the Capital Markets Modernization Taskforce is essential. The CCMT delivered a number of bold, thoughtful and, above all, refreshingly business-informed recommendations. These recommendations are driven by a set of driving principles for change that warrant the fullest support from the Ontario government and the people of Ontario.

To foster competition, innovation and investor confidence in the Canadian capital markets, the Ontario Securities Commission needs to be set up for success, both in mindset and structure.  Enhancing its mandate, reforming its governance structure and separating its regulatory and adjudicative functions are vital.  And a single, efficient and properly guided Canadian Self-Regulatory Organization is just as important.

We need to create new and multiple ways for capital raisers to access capital.  Today, as many high-quality companies emerge in Ontario, access to domestic risk capital is challenging.  We need to make the capital-raising process more efficient, address predatory short-selling activities and harmonize, where possible, with the United States. Not only is this necessary, but indispensable if want to stop the brain drain and prevent more companies and professionals from leaving for the south.

Competition and diversity have never been more relevant.  They are key to the success of any industry and guarantee the best possible outcome for the customer. This is similar when it comes to capital markets and its core customers of investors and capital-raisers. Addressing some of the real and perceived competition issues in our capital markets is of utmost importance. Without it, innovation will be further stifled, and yet again we will see an accelerating trend of investors and companies leaving for other jurisdictions.

We also need to give companies the ability to properly execute as public entities. Going public is met with significant obligations that are necessary for the transparency and integrity of the markets. Public companies need access to critical shareholder information, the ability to handle shareholder matters in a fair and square way, and the ability to avoid unwarranted shareholder battles. Leaving these issues outstanding will drive more and more promising companies to reject the Canadian capital markets, instead deciding to remain private or seek capital abroad.

The success of an economy is translated in its ability to enable new and innovative companies to become the blue chips of tomorrow. Regulatory constraints, anti-competitive behaviours, and access to seed and growth capital are sizable hurdles that often prevent next-generation companies from delivering on their promise. Ontario can be a leader in this space but has failed because of the “one-size-fits-all” nature of its regulatory framework. Regulatory nimbleness is crucial to unlocking the potential of these new entrants. 

And finally, we need proper enforcement, sanctions and dispute resolution. Developing new means to access capital, reducing the regulatory burden, fostering competition, and enabling innovation all have the potential to embolden bad actors to expand existing and develop new fraudulent schemes.  To foster investor confidence, we need to equip our regulators with the right tools and capabilities..

Economies globally are facing unprecedented and ever-accelerating change. To be successful in embracing that change, economies must rely on vibrant capital markets. In Ontario, the private sector is ready for the challenge but our regulatory framework is outdated. We stand at a crucial moment in time. Either we act on the CMMT recommendations, or we continue to discuss our options while the future passes us by and capital flows out of Canada. It’s now or never and it is in our hands.