Regulatory reforms often amount to changing the paperwork that firms and advisors fill out — not the culture in which they operate. However, there may be more at stake with the client relationship model (CRM) reforms, as regulators are currently considering whether even more fundamental changes are needed to protect investors.

It has been so long since the CRM project began that it may be hard to remember why regulators began this initiative in the first place. And yet, many of the same regulatory concerns that motivated the CRM — and, its predecessor, the Ontario Securities Commission’s Fair Dealing Model (FDM) — are at the core of the Canadian Securities Administrators’ (CSA) recent efforts to examine whether it’s necessary to impose a best interests standard on financial advisors, or to intervene with the way that mutual fund fees are currently structured.

In 2009, when the regulators adopted the CRM as their way of introducing some of the reforms contemplated in the FDM, they effectively decided that deeper changes weren’t necessary. By deciding to continue relying on disclosure — albeit beefed up disclosure under the CRM reforms — the regulators didn’t have to entertain more intrusive reforms, such as imposing a fiduciary duty on advisors, or banning embedded compensation.

However, those issues are back on the regulators’ radar once again, suggesting that there’s much more riding on these CRM reforms compared to a typical regulatory change.

Indeed, many of the investor protection concerns underlying the regulators’ decision to consider imposing a statutory fiduciary duty are the same issues that motivated the creation of the FDM. For example, the CSA says in its paper on the fiduciary duty issue that it’s concerned that the current standard of conduct may not be high enough given the wide gulf between the investment knowledge of the average investor, and the information that dealers and advisors have.

In many cases, the basic financial literacy of clients is in question, which means that no matter how stringent the disclosure standards, investors are often in no position to second guess the quality of advice they receive. So, the fact that this advice isn’t mandated to be in their best interest may not be good enough.

Similar regulatory concerns underpin the CSA’s examination of mutual fund fees. The idea that regulators may move to limit, or even completely ban, embedded commissions stems from the fact that most investors either don’t know that trailer fees exist; or, if they do, they don’t understand them.

One of the central aims of the CRM reforms is to narrow that gap between client and advisor knowledge with beefed up disclosure of the initial terms of their relationship, along with more information about the costs of investing, dealer compensation, and the performance of those investments. Thus, the extent to which the CSA achieves this objective with the CRM reforms may well weigh heavily on whether it decides that more fundamental changes are necessary.

Indeed, in its paper on fund fees, the CSA indicates that it plans to monitor the impact of the CRM reforms, “to determine whether these initiatives appreciably improve investors’ awareness and understanding of mutual fund costs, make them more informed consumers of investment fund products and advice services, and promote effective competition among financial industry participants.”

At this point, it’s too early to say whether the CRM reforms will have a meaningful impact on these regulatory concerns. Indeed, given that the latest aspects of those reforms have only just been finalized by the CSA, and that firms still have another three years to fully implement these changes, it seems unlikely that the regulators will rush to impose statutory fiduciary duties, or to ban trailer commissions, in the near future.

That said, if these long-awaited measures don’t do the trick, regulators may be left with little choice than to take more drastic steps.

This is the final article in a three-part series on the Client Relationship Model.