Canada: A rare commodity, ripe for global investment

Transcription

1 Canada: A rare commodity, ripe for global investment SEPTEMBER 2014 By Alistair Almeida Vice President, Business Development and Relationship Management, Global Financial Institutions, CIBC Mellon Canadian allure: Open for business and international investment Canada offers much to recommend it to global investors, including a favourable business environment and strong incentives in support of research, development and international investment. Bloomberg has rated Canada as the best sovereign nation in the world in which to do business 1, the Economist Intelligence Unit has projected that Canada will remain the best place in the G-7 to do business through at least , and KPMG studies found Canada had a 7.2 per cent business cost advantage over the United States 4 as well as 46.4 per cent lower total tax costs 5. Trade agreements further bolster Canada s prospects, with the North American Free Trade Agreement (NAFTA) granting Canadian market participants tariff-free access to the United States and Mexico, and bright prospects for further increases in European trade as the Comprehensive Economic and Trade Agreement (CETA) free trade agreement, signed in principle between Canada and the European Union, is finalized. According to the Honourable Ed Fast, Minister of International Trade, Canada, 3 Canada remains one of the best places in the world for international business and foreign direct investment, with a robust economy and strong business fundamentals we are improving Canada s public infrastructure, deepening our trade and investment relationships in large and fast-growing markets around the world and improving our country s fiscal framework by returning to a balanced budget in Our government continues to create the conditions needed to attract the global investors who create jobs and new sources of economic growth and prosperity in communities across Canada.

2 Points of consideration for global investors and investment managers considering entering or expanding Canadian holdings: 1. What role can Canada s balance of resources, financial sector and growth trajectory play in a global portfolio? 2. What regulatory requirements apply to the businesses, sectors and geographic regions into which you are seeking to invest? 3. How do cross-border regulatory requirements play out in Canada as they relate to your investment activities? 4. What scale of local expertise, support and advice do you need to achieve your investment goals? Canada is rightly known for its vibrant and attractive natural resources segment: some sixty minerals and metals are produced in a growing sector 6, and Canada s reserves of petroleum and timber are among the world s largest. Canada s value proposition extends across a number of other sectors, including aerospace, automotive, chemicals/plastics, sustainable energy technologies and life sciences. Canada also has a highly sophisticated services sector, as our skilled workforce (the most highly educated in the Organisation for Economic Co-operation and Development) helps make Canada a preferred destination for complex and highvalue-added information-technology and business-process outsourcing. 7 Canada s financial sector: A global leader The Canadian financial system remains robust. Canadian banks are well capitalized, financial markets are functioning well and financial market infrastructures are supporting core financial market activities. The nonfinancial sector continues to benefit from the low interest rate environment. - Bank of Canada Financial System Review, June Canada s financial sector has earned particularly strong global acclaim. For the sixth year in a row, the World Economic Forum in 2013 ranked Canada s banking system as the soundest in the world, and Canada maintains one of the few triple-a credit ratings for sovereign debt meaning lower borrowing costs as well as strong demand for Canada s bonds for use as collateral. Canada s banks are well-managed, well-regulated and among the best capitalized in the world exceeding the Bank for International Settlements norms by significant margins. 9 Canada also benefits from a strong track record in the mortgage market: less than half of one per cent of all mortgage holders in Canada s largest banks have gone more than three months without making a payment a figure which has remained stable for more than 20 years, through highs and lows of unemployment, interest rates and Canadian dollar exchange rates. 10

3 Canada s regulatory climate: We play by the rules OSFI generally prefers to take a principles-based approach in setting our regulatory and supervisory expectations principles help to underscore the point that regulated institutions are expected to use judgment and apply the guidelines to the situations they face on the ground within their own organizations. 11 Mark Zelmer, Deputy Superintendent, Regulation Sector, Office of the Superintendent of Financial Institutions Canada s financial sector regulators and participants can share well-justified praise for fostering a strong and stable market environment. Canada s market participants recognize the value of reinforcing strong risk management, governance and best practices across the industry. Canada s regulators take a collaborative approach that the top banking regulator once characterized as a no surprises approach 12. Regulators release draft regulation to foster discussion and planning, and market participants provide comments back to regulators to help all involved move forward to overcome potential areas of challenge and reinforce the strong environment. Canada nonetheless has a relatively complex regulatory environment, with the federal Office of the Superintendent of Financial Institutions (OSFI) serving as the primary banking regulator and a network of 13 provincial and territorial securities regulators overseeing securities trading matters across the nation in each provincial or territorial jurisdiction. There are efforts to simplify this structure, as Canada s federal government has come to agreement with four of provinces Ontario, British Columbia, New Brunswick and Saskatchewan to work towards the formation of a national securities regulator. Canada s Department of Finance says that this Cooperative Capital Markets Regulatory System will strengthen Canada s capital markets by providing better protection to investors, enhancing Canada s financial services sector, and managing systemic risk. A common regulator will administer a single set of regulations, reducing red tape for businesses Canada s current securities regulatory environment includes a passport system governing interjurisdictional matters, and the regulators do work to harmonize the rules via industry organizations, but there remain differences in approach (for example, varying collateralization requirements for securities lending activities). Proponents of the new cooperative system expect it will further reduce barriers and simplify requirements for both domestic and global investors looking to participate across provincial jurisdictions. Additional resources for global investors considering a new or expanded presence in Canada: Canadian Trade Commissioner: Foreign Affairs, Trade and Development Canada Invest in Canada annual publication. investors-investisseurs/assets/ pdfs/download/flagship_ Publication_2014.pdf Natural Resources Canada: Mineral Capital Investment Environment: nrcan.gc.ca/mining-materials/ publications/8782 Bank of Canada Monetary Policy Report July ca/2014/07/mpr / Other market stakeholders are also taking steps to strengthen our markets: the Bank of Canada in 2014 introduced an enhanced risk assessment framework to explicitly highlight prospective global and domestic risks (for example, a sharp correction in housing prices, stress emanating from emerging markets or geopolitical/financial stress in the Eurozone) in order to better position market participants to put appropriate risk mitigation plans and measures in place.

4 Global regulatory impacts Regulatory requirements continue to evolve in Canada and around the world, and Canadian market participants are working to adapt to and reconcile global and domestic demands. On some fronts, market stakeholders and rule-makers have close alignment for example, an inter-governmental agreement is now in place between Canada and the United States related to the U.S. Foreign Account Tax Compliance Act (FATCA), and institutions active in Canada are therefore required to report on U.S. citizens holdings within Canada or face a 30 per cent withholding tax. While regulatory aims are often aligned to shared principles such as strengthening systemic stability and enhancing transparency the particular requirements and approaches employed by regulators in Europe or the United States may mean there are differences to navigate across jurisdictions. Reconciling Canadian activities with the requirements of global cross-border regulations is a key consideration, which means local expertise and insights are invaluable to global investors looking to navigate the Canadian market. Canadian regulators tend to focus on the financial health of an institution or segment, rather than outlining specific requirements for what a given contract between two participants must say. European regulators on the other hand have in some cases asked for specific language or terms within a given contract. There have been some points of navigation as entrants to the Canadian market work with their domestic suppliers to find a solution that satisfies the requirements of cross-border regulations and Canadian requirements as well as the business and risk needs of both suppliers and clients.

5 Footnotes: New faces at key Canadian institutions New leadership continues to chart a strong course forward at key Canadian institutions. The Alternative Investment Fund Managers Directive (AIFMD) is one of the major global regulatory challenges for market participants currently, including for participants in Canada. Global players are often looking to move their suppliers to deliver a standardized offering within the terms set out under AIFMD. At the same time, Canadian regulators have proscribed certain activities and behaviours with which market participants must comply. All participants of course aim to satisfy the requirements of the relevant regulatory bodies. In some cases, global market players have taken a very conservative approach to the regulatory guidance, in turn putting them into a space where their expectations in areas like liability, indemnity and information disclosure may run beyond what Canadian market participants are required, willing or even able to deliver for example, protections from domestic insolvency are not an expectation in Canada. Navigating these challenges is a matter of mutual education and an area where CIBC Mellon s intense focus on client service and relationship building, combined with deep knowledge of the Canadian market, has proven to be highly effective in helping its clients find the right balance to meet the needs of both Canadian and global stakeholders. Governor Stephen Poloz took over as the top official at the Bank of Canada in June He has worked to strengthen the Bank of Canada s efforts to promote a stable and efficient financial system in Canada. His biography and recent remarks are available at the Bank of Canada website: profile/stephen-s-poloz/ At Canada s top banking regulator, Jeremy Rudin took over in June 2014 from Julie Dickson following the completion of her seven-year term as Superintendent of Financial Institutions. His biography is available at the OSFI website: osfi-bsif/pages/bio-jr.aspx How can CIBC Mellon help? Emerging regulatory requirements can be grouped into three broad categories. First, tasks we as an asset servicing provider are already delivering or can reasonably facilitate within our service offerings: we are pleased to take these on as a value-add for clients. Second, responsibilities that present a substantial additional burden: we can help when clients share some of the additional costs. Lastly, there are some responsibilities that we simply cannot take on from a business or Canadian regulatory perspective. Certain filings under FATCA are an example of this last category: while Canadian custodians were able in the past to make certain U.S. tax filings on behalf of clients, FATCA requires specific internal client information that providers cannot access, as well as the provision of certifications that domestic custodians are not able to give on behalf of clients.

6 Why invest in Canada? The Canadian Trade Commissioner Service offers this summary of Canada s outstanding investment climate for international investors: A welcoming business environment Canada is the best country in the G-20 to do business, according to both Forbes and Bloomberg. Source: Forbes and Bloomberg A strong growth record Canada led all G-7 countries in economic growth over the past decade ( ). Source: The World Bank Unparalleled market access Once CETA comes into force, foreign investors in Canada will have assured preferential access to both NAFTA and the EU - a vibrant market with a combined GDP of US$35 trillion, or nearly one-half of the world s output of goods and services. Source: The World Bank A highly educated workforce Canada s workforce is the most highly educated among members of the OECD, with half of its working-age population having a tertiary level education. Competitive R&D environment Canada offers the lowest business costs in the G-7 for R&Dintensive sectors, with a 15.8 per cent cost advantage over the United States. Source: KPMG Financial stability For the sixth consecutive year, the World Economic Forum has declared Canada s banking system to be the soundest in the world. Source: World Economic Forum A great place to invest, work, and live Canada is one of the world s most multicultural countries with world-class universities, a universal health care system and clean and friendly cities in addition to having the second highest standard of living in the G-20, as measured by GDP per capita. Source: The World Bank Source: Organisation for Economic Co-operation and Development Low tax rates Canada s overall marginal effective tax rate is by far the lowest in the G-7 - about 17 percentage points lower than that of the United States. Source: Finance Canada

7 In closing: Tap CIBC Mellon as your Canadian asset servicing provider Global investors into Canada know they can rely on CIBC Mellon to provide strong service, critical market information and diligent execution to support their efforts in this marketplace. The prudential Canadian regulatory environment and conservative business culture have proven very effective in helping Canada sustain stability and growth over many years in a challenging environment, but some of the practices can prove unexpectedly foreign to international participants. Local insights and expertise can be very valuable in bridging the gap, and at CIBC Mellon, we have a long track record of helping clients navigate the Canadian market and regulatory environment. CIBC Mellon s experienced team of more than 1,000 are exclusively focused on serving the needs of Canadian institutional investors and global institutional investors into Canada. With the sophisticated technology and capabilities of BNY Mellon, a global leader in investment services, combined with the local insights and support of its team and that of CIBC, one of Canada s leading financial institutions, CIBC Mellon can deliver on-the-ground execution, expertise and insights to global investors. Canada has a well-deserved global reputation for friendliness, prudence and stability: come and experience it for yourself. Endnotes aspx?sf = sp-ds/pages/mz aspx 12 jd pdf

8 Canada s market participants recognize the value of reinforcing strong risk management, governance and best practices across the industry. - Alistair Almeida, Vice President, Business Development and Relationship Management, Global Financial Institutions, CIBC Mellon For more information, please contact us at or relationship_management@cibcmellon.com. About CIBC Mellon CIBC Mellon is a Canadian company exclusively focused on the investment servicing needs of Canadian institutional investors and international institutional investors into Canada. Founded in 1996, CIBC Mellon is jointly owned by The Bank of New York Mellon (BNY Mellon) and Canadian Imperial Bank of Commerce (CIBC). CIBC Mellon s investment servicing solutions for institutions and corporations are provided in close collaboration with our parent companies, and include custody, multicurrency accounting, fund administration, unitholder recordkeeping, pension services, securities lending services, foreign exchange settlement and treasury services. As at June 30, 2014, CIBC Mellon had more than CAD$1.4 trillion of assets under administration on behalf of pension funds, investment funds, corporations, governments, insurance companies, foreign insurance trusts, foundations and global financial institutions whose clients invest in Canada. CIBC Mellon is part of the BNY Mellon network, which as at June 30, 2014 had USD$28.5 trillion in assets under custody and/or administration and USD$1.6 trillion in assets under management. CIBC Mellon is the corporate brand of CIBC Mellon Trust Company and CIBC Mellon Global Securities Services Company and may be used as a generic term to reference either company or both companies collectively. For more information including CIBC Mellon s latest knowledge leadership on issues relevant to institutional investors active in Canada visit or follow us on CIBC Mellon is a licensed user of the CIBC trade-mark and certain BNY Mellon trade-marks KL This article is provided for general information purposes only and CIBC Mellon and its affiliates make no representations or warranties as to its accuracy or completeness, nor do any of them take any responsibility for third parties to which reference may be made. This article should not be regarded as legal, accounting, investment, financial or other professional advice nor is it intended for such use.