Although the retail investment business has evolved dramatically over the past 25 years, the regulators that oversee it have struggled mightily to keep up.

The firms that cater to retail investors – and the products and services those firms pitch – have changed radically since 1989. And although the regulatory landscape also has shifted plenty, it’s not clear that investors are better protected today.

“The same issues that existed in 1989 exist today,” says Glorianne Stromberg, a retired securities lawyer and former commissioner with the Ontario Securities Commission (OSC). “Some of the symptoms have been addressed, but not the root causes that impact investors negatively.”

In the mid-1990s, Stromberg produced a groundbreaking report that highlighted many of the weaknesses in the regulatory system for the retail investment business in general and in the mutual funds business specifically.

However, the regulators did not adopt most of Stromberg’s recommendations. And, over the years, various other policy initiatives – including efforts to regulate financial planning, pledges to improve access to investor restitution and plans to remake regulation to focus on advice rather than transactions – have floundered for one reason or another. Yet, when you recall the regulatory landscape of 1989, there seemingly has been plenty of reform over the years – at the structural level, at least.

In the late 1980s, a wave of deregulation in the financial services sector toppled its so-called “four pillars” that had restricted firms’ activities to a specific industry and helped to draw lines between federal and provincial regulatory responsibilities. This deregulation led to the creation of the Office of the Superintendent of Financial Institutions (OSFI) as the regulator for banks, insurers and other federally chartered financial services firms.

In 1989, the country’s most powerful securities regulator, the OSC, didn’t have rule-making authority, let alone control over its own purse strings. In addition, the securities industry’s contingency fund was just getting over what is still the biggest dealer insolvency it has ever faced – the collapse of A.E. Osler & Co. in 1987 – and in the process of formalizing coverage and establishing itself as the Canadian Investor Protection Fund (CIPF).

Much has changed since then. The OSC has been making its own rules for the past 20 years and no longer is run as a profit centre for the provincial government (although that’s still the case for securities commissions in some other provinces); and both OSFI and CIPF have proven to be effective in their roles.

Moreover, the growth of the retail investment business has prompted other reforms. The flourishing of the mutual fund business necessitated the creation of the Mutual Fund Dealers Association of Canada (MFDA) as a self-regulatory organization (SRO) in 1998, along with the MFDA Investor Protection Corp.

As well, the financial services sector’s rapid growth also helped to spur the creation of the Ombudsman for Banking Services and Investments (OBSI) as a dispute-resolution service in 2002 in a bid to improve the business’s performance in resolving client complaints, enhance investor protection and bolster client confidence.

Furthermore, the inherent conflict within the Investment Dealers Association of Canada as both the SRO and lobbyist for the brokerage business eventually became untenable, and the two functions were split in 2006.

Yet, despite all of this, many of the underlying issues that Stromberg raised 20 years ago remain unresolved. “Conflicts of interest still permeate the industry,” she notes, “and are tolerated by the regulators.” In addition, she adds, the “informational asymmetry” between the industry and investors “is as wide as ever.”

To be fair, regulators are adopting rules that aim to reduce conflicts of interest, ratchet up the standard of care and enhance transparency in certain areas as part of the client relationship model reforms.

However, those requirements won’t be fully implemented until mid-2016. Even then, it’s not clear that they will ensure adequate investor protection.

Questions about advisor proficiency, investor restitution and industry conduct standards are likely to persist. Regulators, it seems, are destined to lag the lucrative, innovative retail investment industry.

© 2014 Investment Executive. All rights reserved.