Investment Industry Association of Canada (IIAC) president and CEO Ian Russell is calling on regulators to provide a rigorous cost-benefit analysis alongside their rule-making efforts; failing that, regulators should provide more insight into the philosophical justification for new rule proposals.
In particular, Russell says in his latest letter to the investment industry that regulators need to be more open about the thinking that goes into their reform plans, such as the series of fundamental changes to the client/investment advisor regulation that the Canadian Securities Administrators (CSA) proposed earlier this year. In an ideal world, the CSA would produce a quantitative cost-benefit analysis with its proposals.
"Extensive consultations with key stakeholders, without accompanying rigorous analysis of the rule-making process, is not a sufficient condition to ensure sound feedback and vigorous debate — or the right rules," Russell says in the letter. "Fundamental analysis behind proposed rules is the best assurance that they will be as cost-efficient as possible and that unintended consequences are limited to the extent possible."
Without this analysis, the risk of adopting inefficient rules is heightened, Russell says, arguing that this needlessly hampers the industry: "A higher regulatory burden is acceptable if improvements to investor protection and market efficiency outweigh higher costs to investors and intermediaries. However, it is likely that recent reforms have resulted in unnecessary and duplicative rules and an unfair cost burden."
At the same time, Russell argues that such reforms have also produced unintended consequences and that they may have inadvertently benefited less-regulated segments of the market, such as exempt-market dealers (EMDs).
However, Russell acknowledges that the rigorous quantitative analysis that the investment industry would like to see from regulators is not likely. For one, it's hard to produce a credible analysis of the impact of many rule proposals. And second, there's a fear that reform will stall in the face of such work.
Absent a strict quantitative analysis, then, the IIAC would like to see the regulators provide more insight into their thinking that leads to their rule proposals.
"Regulators should make this dialogue more transparent, in effect providing a detailed ‘walk-through' of the thinking behind rule formulation. A comprehensive outline of the qualitative factors considered by regulators in making rules would contribute to more constructive debate with market participants and lead to better rules," he says, adding that it would make the rule-making process more disciplined as well.
"The regulators have an obligation to ensure consultations with stakeholders are as constructive as possible," Russell adds, "and promoting a more transparent process would go a long way to contributing to vigorous and constructive debate on the merits of proposed rules, benefiting investors and the capital markets."
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