These are tough times for Canada’s small investment dealers, a fact that was pointed out in the last issue of The Analyst by Ian Russell, head of the Investment Industry Association of Canada (IIAC). As Canada’s small brokerage firms struggle for survival following a third consecutive year of falling earnings, it’s worth noting that regulators can and should have a role in creating and supporting a financial services marketplace that can sustain firms, both big and small. I’d like to reinforce the idea that small brokerages play an important role in the Canadian economy and to suggest a few ways regulators could respond to their decline.

Although operating profits in the Canadian investment industry rose significantly in 2013, most of the gains were made by the big eight integrated firms, according to the IIAC. The country’s approximately 180 boutique firms made minimal gains. IIAC estimates that about 30 small- and mid-sized dealers have disappeared over the last four years. Some might argue that the decline in the number of brokers is just the free market at work. Demand for the services provided by brokers is down, so it’s only natural that the number of brokers would also decrease. However, this line of reasoning ignores the fact that the Canadian financial services market is not completely free. If we want to create a robust Canadian financial services sector that benefits both Canadian businesses and investors, then we need an environment that encourages both competition and transparency.

One of the main reasons for the decline in profits in Canada’s smaller investment dealers is the recent general weakness in the Canadian equities market. Canadian equities, which are heavily weighted towards the resources sector, have fared poorly over the last several years. Most Canadian investment dealers are relatively small and deal primarily in equities. So when domestic equity markets are weak, these dealers don’t do well. If it takes too long for equity markets to recover, many of these dealers will wind up their businesses.

Fewer investment dealers isn’t just bad for the Canadian financial services community and job market; it’s bad for the whole Canadian economy. Small Canadian businesses and start-ups don’t tend to get their funding from large, risk-averse institutions. For their early-stage capital, they depend on smaller innovative firms that might have a very different risk appetite than many of the larger incumbents. If there are fewer investment dealers willing to play this role, it’s going to be harder for start-ups to thrive. This ultimately makes it more difficult to create large, home-grown success stories such as Bombardier and BlackBerry that generate jobs and tax revenue.

It’s important that both Canadian policy-makers and regulators take steps to ensure the country has a rule set and market structure in place that encourage competition in the financial services industry. Obviously, there’s nothing regulators can do to prevent equities or resources cycles, but they can take other steps to build a more competitive marketplace.

One of these steps is to ensure that the regulatory burden for small investment dealers is not too onerous. Regulation has increased significantly since the 2008 financial crisis, particularly in the areas of equities markets technology and compliance. The big eight integrated firms have the scale and systems in place to be able to cope with the additional regulations, but for smaller dealers, the expense of complying with new rules can be crippling. Canadian regulators have carefully considered these issues, but they should do everything in their power to create an even more balanced environment that would allow small- and medium-sized investment dealers to thrive.

More importantly, regulators need to create a more open, transparent financial services marketplace in Canada. Currently, only the equities markets are truly transparent. If someone wants to know where an equity trades, what volume is traded, or what its valuation is, they can simply look it up online and get up-to-date information immediately.

Transparency is lacking in other areas, however, including the bond and foreign exchange markets. It’s impossible to find up-to-date online information on valuation or volume for these instruments. Even if a client went to their broker or investment advisor and asked where their bonds were trading or what their high and low prices were over the last year, they’d be unable to get a definitive answer. Bond and foreign exchange markets are controlled by a few large institutions, and there’s limited competition in these instruments, which isn’t good for clients or the industry as a whole.

Including bid and ask prices and trade reporting for bonds, for example, would increase transparency and likely lead to more competition and lower costs for financial services clients, who would now be able to make more educated investment decisions. This would also make it easier for smaller investment firms to take a more active role in that market, thereby having the added benefit of diversifying their businesses away from the swings of the equity cycle.

Ultimately, Canadian politicians and regulators need to ask themselves whether it’s better for the country to have an opaque financial services market run by a few large firms, or whether there should be transparency across as many markets as possible, thereby encouraging competition and lower prices for the investing public. The answer should be clear.