Cost–benefit analysis is a valuable tool for assessing major public policy decisions, projects and regulations—for example, evaluating prospective regulations in a number of fields, including health, safety and the environment. The nature of securities regulation, however, makes costs-benefit analysis more difficult. Rather than focusing on a particular action, like releasing a pollutant, financial regulation cost-benefit analysis focuses on behavioural and market reactions.
Canadian securities regulators have refrained from conducting formal (quantitative) cost-benefit analysis because it is so complex. However, this not an excuse to avoid it. A more disciplined and rigorous approach to the rule-making process—one that quantifies the costs and the benefits in commensurable terms—is needed.
Regulators do engage in extensive, informal discussions (qualitative analysis) with market participants at the formulation stage of the rule-making. A detailed “walk-through” of regulators’ thinking would greatly enhance the process. Regulators should be able to answer questions like:
- What gap is the proposed rule intended to fill?
- Have alternatives to the rule been considered and, if so, why has the particular rule be chosen over alternatives?
- What are the perceived shortcomings/unintended consequences of the rule?
The obligation to disclose the detailed background thinking on rule formulation and its impact on investors and the marketplace would foster a more disciplined approach to the rule-making process itself. It would encourage deeper and more systematic thinking on the market impact of proposed rules, and lead over time to more quantitative analysis. You can read more on this subject in my latest Letter from the President.