Big banks take heat at Senate hearing

In terms of the retail investment business, the regulators expressed their dismay with the banks’ decisions to shrink their product shelves, citing the impact of tougher know-your-client (KYC) and know-your-product (KYP) requirements, which were introduced as part of the Client-Focused Reforms (CFRs), as justification for those decisions.

“We at CSA were disappointed to see this reaction of only going to proprietary products at the big banks,” Magidson told the committee.

Vingoe echoed that sentiment, saying he was also disappointed by the banks’ position that they can only ensure proficiency on their own products.

He stressed that the CFRs don’t impose such an onerous compliance challenge that the banks needed to retreat to a strictly-limited product shelf that cut out third-party investment funds — or to stop offering the securities of, and research coverage on, junior issuers.

“They’ve withdrawn to a large degree from offering junior companies’ securities — I would say not because of the Client-Focused Reforms, but because of their own pecuniary interests, and streamlining of their operations,” Vingoe said.

In the wake of their testimony, Committee chair Clément Gignac suggested that the issue of the banks’ practices could warrant a referral to the Competition Bureau.

Members of the committee also highlighted the banks’ dominant position within the Canadian investment industry, and the struggles of independent dealers.

While the regulators acknowledged the possible role of compliance burdens in contributing to this phenomenon, they also suggested that the makeup of the industry largely reflects commercial realities — including the advantages that banks have with issuers from their ability to provide commercial lending alongside investment banking services.

And, while many small dealers have chosen to focus on areas such as wealth management, rather than the business of financing junior issuers, Magidson stressed that there is still a segment of the independent dealer business that’s engaged in venture market activity.

“There is [independent dealer] activity, and I think that, if there are things that [regulators] can do to further enhance the attractiveness of the space, we will — but a lot of it is coming down to, the market is speaking, and the business models are reacting,” he said.

Supporting capital raising

In the meantime, on the issuer side, the regulators noted that they’ve recently taken a number of steps — including their new pilot project to allow semi-annual reporting by listed venture companies, and efforts to develop more useful prospectus exemptions — to support capital raising.

Notably, the listed issuer exemption, which allows public companies to raise up to $50 million per year without issuing a full prospectus has been particularly successful, they said.

Vingoe reported that, since that exemption was introduced, companies have collectively raised $3.8 billion…