From the Regulators

Declining operating costs and past surpluses will keep market regulation fees stable, says annual report

By James Langton |

The Investment Industry Regulatory Organization of Canada (IIROC) says that it expects fees to remain flat for the coming year, as its operating costs are set to decline and past surpluses are used to keep market regulation fees stable.

IIROC released its latest annual report today, which indicates that fees will likely not rise for fiscal 2015. According to the report, fees were expected to remain flat for dealer regulation activities in 2015, and to increase by 11% for market regulation, compared to fiscal 2014. However, after the approval of the budget, IIROC's board approved the use of $2.65 million of the market regulation division's surplus for fiscal 2014 to hold fees flat for market regulation for 2015 "on a post-application of surplus basis."

"During the upcoming year, market regulation will expand its capacity to conduct policy impact analysis and broader economic assessment of industry trends through the use of the equity data warehouse system and the expansion of the data analytics team," the report notes. IIROC also intends to complete development of a debt market surveillance system, according to the report, which will allow it to expand the scope of debt market surveillance and oversight in fiscal 2016.

"Dealer regulation will continue to evolve and refine its risk-based approach to compliance examinations. This will include more focus on an integrated approach to compliance examinations involving business conduct, financial operations and trading conduct compliance, and concentration on the effective implementation and phased roll out of the client relationship model (CRM2) framework," says the report.

IIROC also says that it intends to continue strengthening information security. The regulator reports that the total cost of the incident involving a lost laptop in 2013 is expected to be $5.7 million, and that most of that, $5 million, was incurred in fiscal 2014. As a result, it suffered a small operating deficiency in fiscal 2014 of $193,000; down from a $3.35 million surplus in the previous year. "The deficiency was driven mainly by costs relating to the accidental loss of a portable device partially offset by reduced compensation and discretionary expenses," it notes.

Revenues declined slightly in 2014, down 1% to just under $87 million, from $87.9 million in 2013. IIROC's total operating costs increased, by 3% to $87.1 million during the year; as dealer regulation costs increased by 4% ($2.2 million) to $58.5 million, and market regulation costs increased by 1% to $28.7 million.

"Other" costs increased to 13% of overall costs from 9% the previous year, as the accidental loss of a portable device resulted in expenses of $5 million; which included measures to notify potentially affected dealers and clients, and for the provision of ongoing support services to clients, including credit alerts, credit monitoring and a dedicated call center.

The report indicates that IIROC applied to the provincial regulators for permission to use $2.5 million of its restricted fund (which is primarily made up of enforcement penalties) to pay "the direct third party costs of the support services provided to potentially affected investors in connection with the lost portable device." It says those costs were paid out of operating funds in fiscal 2014 and were completely offset by cost saving measures, such as "reduced hearing costs due to the greater reliance on in-house counsel and lower discretionary costs such as the use of consultants." The request to use the restricted fund, however, was denied, the report says.

IIROC notes that it has not received any reports of identity theft, or fraud, resulting from the loss of the portable device. However, it remains a source of financial uncertainty for the regulator. "It is not possible to estimate the total amount of potential damages or range of possible loss, if any, resulting from settlements or other remedies in connection with this matter," it notes.

Also, back in 2013, the regulator was served with a class action notice in connection with the incident; and, the report says that a ruling on whether that suit will be allowed to proceed by the courts is expected this month. "Given the preliminary status of this proceeding, it is not possible to reasonably quantify the effect, if any, of this proceeding on the financial performance of IIROC," says the report; adding, "management believes the action is without merit and is defending the action vigorously."

The report also notes that IIROC is facing a lawsuit for wrongful dismissal. "The outcome of this lawsuit and amount of ultimate loss is not reasonably estimable at this time," says IIROC, adding that it "believes the action is without merit and is defending the action vigorously."

For the coming year, IIROC is budgeting for total operating expenses of $90.05 million, which is down by about 2%, from its 2014 budget. The report says this decrease is "driven primarily by reduced compensation costs. This is due to an increase in vacant positions and lowered pension expenses partially offset by increased staffing mainly in market regulation and technology and market salary increases."

The report marks the last one for outgoing IIROC president and CEO, Susan Wolburgh Jenah. Last week, it was announced that Andrew Kriegler, who is currently deputy superintendent at the Office of the Superintendent of Financial Institutions (OSFI), will become its new president and CEO on November 1.

In her message to the industry, Wolburgh Jenah stressed the importance of consultation and engagement. "In 2013-2014, we continued to constructively engage with the industry, investors and other stakeholders to ensure we achieve more effective regulation, enhanced compliance and increased confidence in our markets," she said, pointing to recent consultations on items, such as IIROC's current proficiency assurance model; its efforts to develop an online glossary of financial certifications; the publication of quarterly policy priorities updates; its ongoing study into the impact of high frequency trading (HFT); and, ongoing work to implement comprehensive the CRM2 reforms.