The 2017 crisis of depositor and investor confidence near-panic that led to the near-failure of alternative lender Home Capital before its rescue by vulture fund investors (including Warren Buffett) coincided with rising concerns over tight housing markets, potentially overextended borrowers and regulatory systems, and conflicting tax policy signals. With interest rates rising and the federal government still reviewing its grab bag of often ill-considered housing-related election promises, these issues remain front-of-mind for many Canadian policy analysts. Osgoode Hall law professor Stephanie Ben-Ishai's edited collection Dangerous Opportunities provides an interesting cross section of insights into Home Capital's near-crisis and the wide range of policy and regulatory issues to be resolved in managing conflicting pressures on Canadian housing policies and related governance, regulatory and tax issues.
Ben-Ishai has given her contributors considerable latitude in delving into their diverse topics. Poonam Puri's assessment of the corporate governance and regulatory issues evoked in the Home Capital case provides useful fodder for a master class on these topics. Puri's chapter summarizes the basic events and context for these events, discussing regulatory issues relating to disclosure of material information affecting the value of publicly traded securities and their implications for broader questions of corporate governance. The company's failure to provide timely disclosure prompted regulatory sanctions by the Ontario Securities Commission, triggering a wave of withdrawals by frightened depositors. Puri's broader analysis addresses questions such as tensions between “short-term” and “long-term” decision making, board composition and diversity, and the role of independent directors as a necessary but insufficient condition of effective governance.
Simon Archer's chapter explores the role of major pension funds in corporate governance and stabilizing financial markets through major investments and interlocking directorates. Archer focuses on the intervention of the Healthcare of Ontario Pension Plan (HOOPP), which provided Home Capital with (very expensive) bridge financing at a critical stage. He concludes that HOOPP's actions were prudently designed, profitable and sufficiently transparent to address public concerns about a $2 billion investment in distressed debt by previously non-arms’ length parties. He notes that major public sector pension funds and investment managers have expanded “alternative lending” activities, some fairly high risk, in recent years. These realities underline the critical importance of maintaining the independence of such major institutional investors from political interference—and other forms of politicization—to satisfy fiduciary responsibilities and preserve confidence in the integrity of public markets.
Gail Henderson's chapter on securities regulators and investor education, while only tangentially related to the Home Capital case, notes regulators’ efforts to use education to promote investor empowerment but also potential incentives to shift responsibilities for responsible market behaviour from regulators to investors. This chapter might have been more effective if it had placed investor education by regulators in its broader context, which includes self-regulatory organizations (SROs) and investment firms themselves. The recent evolution of “know your client” rules and trends toward greater transparency in investment management fees illustrate the complexities of integrating regulatory and investor education functions.
Stephanie Ben-Ishai's chapter reviews the regulatory framework for mortgage markets in Canada and the United States and their respective evolution since the financial crisis of 2007–2009. She notes that Canada has placed a greater emphasis on regulatory measures to constrain mortgage lending in the interests of borrower solvency, while US legislators and regulators have placed a greater emphasis on disciplining abusive lending practices. Some provinces, notably Quebec, have applied federal guidance to provincially regulated financial institutions, but risks remain of borrowers migrating to more lightly regulated institutions in other provinces. Central banks’ recent decision to remove monetary stimulus and raise interest rates will test the effectiveness of these initiatives in protecting borrowers from market risks, as well as the willingness of politicians and regulators to stay the course.
Jinyan Li's chapter analyzes at length the role of tax policies in providing crosscutting incentives for home ownership and housing investment. Li notes federal and provincial tax penalties on foreign buyers of nonresident properties but argues for more extensive measures to discourage “harmful speculation.” Some of her suggestions for incremental policy changes, such as “tightening disqualifying conditions” for access to the personal residence exemption from capital gains taxes, might help limit the use of these to disguise investment properties as owner-occupied ones as part of a broader National Housing Strategy. However, more sweeping suggestions resurrected from the 1967 Carter Commission report—such as the elimination of capital gains exemptions for owner-occupied housing, making complex (but essentially arbitrary) distinctions between the “consumption” and “investment” components of home ownership for tax purposes, and the old chestnut of taxing “imputed rent” from home ownership—involve political and economic risks beyond the tolerance of most policy makers.
Overall, Dangerous Opportunities is a useful contribution to law and business scholarship, linking issues of corporate governance with perennial challenges of housing policy and warnings to policy makers tempted by supposedly easy, simple solutions to complex policy problems.
