It may have taken over a decade to finalize phase two of the Client Relationship Model (CRM 2) rules, but now comes the hard part — actually implementing them.
While the CRM 2 reforms may have a relatively simple objective — ensuring that investors understand the ultimate costs they incur, and the performance of their portfolios — from an operational perspective, that’s no easy task. To the client, the reforms should simply mean that there’s more, and better, information about their finances coming from dealers. But getting that information to them requires much work that involves not only the dealers themselves, but also firms that create the funds as well as those involved in clearing and settlement functions and various other vendors.
“It really is the biggest project I could imagine — because you’ve got compliance, technology, market valuation, a whole bunch of things,” says Barb Amsden, managing director of the Investment Industry Association of Canada (IIAC).
The effort also requires competitors to work together, while separate parts of large organizations that may not otherwise come in contact must co-operate, she notes.
In the end, Amsden says that the CRM 2 reforms will bring about a “much better system,” but it’s going to require a lot of time, people, and money to get there.
Just how much money is not clear. The Canadian Securities Administrators (CSA) did not attempt to estimate the cost of implementation when they published the final CRM 2 rules in March 2013.
At the time, they acknowledged that there would be “one-time system building costs associated with the new reporting requirements.” The CSA attempted to mitigate these costs by providing “unusually long transition periods” for certain requirements. They also noted that other initiatives — such as allowing electronic delivery and replacing the mutual fund prospectus with Fund Facts documents — are allowing firms to save on expenses in other areas.
The IIAC has asked for information about costs from firms as part of its member surveys. Amsden notes that, because these are new regulatory requirements, firms don’t track the costs as they would with a voluntary project.
What is clear is that the industry is devoting a lot of time and resources to it. The IIAC has six industry committees devoted to various aspects of CRM 2, and the main committee has 115 people on it, Amsden notes. In dealing with all of these committees, she’s already blown through her teleconferencing budget for the year in the first three months of 2014.
Next: The challenge of applying the rules
The challenge of applying the rules
Of course, any new rule initiative brings complaints from the industry about the cost of compliance. Yet, the CRM 2 rules are a particular challenge because they apply to all firms, which means they must be implemented by a diverse array of firms with widely varying business models, compliance cultures, and oversight arrangements.
At the end February, the CSA published a list of 35 “frequently asked questions,” which they have received from the firms under their direct oversight (such as exempt market dealers, portfolio managers and fund managers). Their answers, and the additional guidance they provide, highlights the range of issues that have arisen with these firms over the past year.
These sorts of technical issues are magnified for the investment dealers, Amsden suggests, because they serve the widest range of clients and have the most diverse collection of possible products to accommodate within the new requirements. These firms also have the most complex operational considerations and yet don’t have a final set of rules, because the self-regulatory organizations’ versions of the CRM 2 rules remain a work in progress.
Nevertheless, Amsden suggests that the industry could have done a better job of communicating its operational concerns about CRM 2. Such concerns can come across like stalling or resistance to the regulators’ efforts. In reality, Amsden says, the industry really just wants to get the new requirements adopted as efficiently as possible, and it would like the regulators to help facilitate that implementation.
“We know everybody is working with the best possible intentions, it’s just that delays have bigger implications when you’re talking about costs of implementation and trying to deliver something in a consistent way,” she says.
Next: The role of self-regulatory organizations and CRM 2.