The increased regulatory burden in the financial services sector over the past few years certainly has had an impact, with more firms closing up shop or selling the business to a larger competitor because of the increased costs of compliance. Although the regulators recognize this is happening, there’s not much they’re doing to alleviate the regulatory burden that firms are facing, say the compliance officers (COs) and company executives surveyed for this year’s Regulators’ Report Card.
This frustration was evident in the ratings that registrants gave the regulatory bodies for “the regulator’s awareness of dealers’ regulatory burden and concern about keeping it to a minimum.” This category was among the lowest-rated in this year’s Report Card.
Closer inspection, though, reveals divergent trends among the regulatory bodies. The two Toronto-based self-regulatory organizations (SROs), the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), were rated much higher than their provincial counterparts.
Not only did the MFDA garner the highest rating in the category (5.5) this year, but that rating was significantly higher than last year’s rating of 4.7. Comments from MFDA-licensed firms were quite mixed for the category, but several survey participants pointed out that the SRO appears to be more attentive to the regulatory burden that its registrants face despite the fact that the regulator is being pulled in different directions.
“For the past couple of years, there seems to me to be greater openness by the MFDA to listen about the regulatory burdens,” says a chief compliance officer (CCO) with a mutual fund dealer in Atlantic Canada. “I know they’re listening, but there’s also lots of pressure to increase this burden from investor protection advocates.”
In turn, says Mark Gordon, the MFDA’s president and CEO, the SRO is focused on mitigating the regulatory burden on member firms through ongoing reviews of its rules and by making sure regulations are being enforced effectively, particularly regarding suitability.
“We also need to make sure we’re applying our rules in a way that make sense, given the nature of our member’s operations and their business,” says Gordon, “and not doing anything that is unnecessary to achieve the underlying objective of the rule.”
The rating in this category for the other SRO in the survey, IIROC, also rose this year, to 5.2 from 4.8 in 2013. Many survey participants made an effort to point out the SRO now shows greater awareness of the burden that dealers are facing, but doesn’t seem to be concerned about it. The problem, some said, is that this awareness is just lip service.
“It’s a lot of talk,” says a CCO with an investment dealer in Ontario. “They repeatedly say they are mindful [of the burden imposed on us], but they keep coming out with more rules.”
Susan Wolburgh Jenah, IIROC’s president and CEO, says the regulator is mindful that its registrants are dealing with increasing regulations across the board, and that this is placing greater pressure on them. Having said that, the SRO can focus only on its own responsibilities.
“Everybody understands the issue of regulatory burden,” says Wolburgh Jenah. “So, it’s something we need to be aware of, but we obviously don’t control the entire regulatory agenda. We’re doing what we can to be responsible and ensure that we’re approaching our regulatory responsibilities in a balanced way, based on what the key issues and risks are.”
Despite the concerns that registrant COs and executives shared about the SROs, those who have direct regulatory dealings with the provincial regulators were even less enthusiastic, giving these regulators paltry ratings in this category.
Case in point: the B.C. Securities Commission (BCSC) saw its rating in the category tumble to 3.2 this year from 5.1 in 2013. Survey participants cited many reasons for their displeasure – and the BCSC’s failure to address the regulatory burden it places on its registrants was front and centre.
“They have zero concern,” says an executive with a British Columbia-based dealer. “They have been asked to slow the rate of change, but they won’t. They blame the Canadian Securities Administrators.”
This same person complained that because of increased and changing regulations, financial advisors no longer can recommend venture-capital investments to their clients – which, this person feels, is destroying the Canadian vencap business.
The BCSC is aware of the frustration of its registrants, particularly regarding vencap. In response, the regulator is launching several initiatives, including a prospectus exemption that was expected to come into effect in mid-March.
“[The exemption] would allow shareholders who already own securities of a [TSX Venture Exchange] or any other listed issuer to be able to participate in private placements that previously were unavailable to them because they didn’t meet the threshold to be an accredited investor,” says Sandy Jakab, director of capital markets regulation with the BCSC. “This is something that our dealer community has responded to really well.”
In addition to these concerns, survey participants who rated the provincial regulators in the survey cited the overwhelming emphasis on the needs of investors vs the day-to-day operational issues facing registrants – particularly, the smaller firms.
“I understand [the regulators are] trying to protect investors, but it just takes far too much time for a small [dealer] to keep up with all of their regulations,” says an executive with an Ontario-based portfolio-management firm who commented on the Ontario Securities Commission (OSC), which garnered a 4.3 rating in the category.
To help to mitigate some of that burden, the OSC, like the MFDA, constantly reviews its rules and expectations to ensure they are clear and accurate for registrants, says Maureen Jensen, the OSC’s executive director and chief administrative officer. But, at the end of the day, she adds, the needs of the investor will always come first for the regulator: “We understand it’s a burden, but we also see the worst side of what happens out there to investors. We do believe that compliance is, if you will, a necessary evil.”
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