This letter is in response to a July 29 column written by Ian Russell, Closing the circle to benefit investors.
The Canadian Securities Administrators’ (CSA) consultation on the self-regulatory (SRO) framework presents a unique opportunity to assess the merits of the existing framework in terms of how efficiently it operates, how effectively it protects investors and the role SRO entities might play going forward.
There is broad agreement that the current multi-regulatory model is not meeting the needs of retail investors and is not cost-effective. Dealers under the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) service about $3.5 trillion of investor savings, so any decision on a SRO framework merits the highest level of due diligence.
It appears from the column “Closing the circle to benefit investors” that the Investment Industry Association of Canada favours a “quick fix”: simply merging the MFDA and IIROC. Most industry participants are positioning a merger as a big improvement for investor protection. According to the messaging, there will be less investor confusion, greater access to more products and possible reduced fees and costs. In reality, we believe much of the industry motivation for change is regulatory burden reduction, lower administration costs and increased sales to retail investors. The large integrated firms will increase their competitive advantage over smaller firms.
An expedited merger, notwithstanding the potential of some cost savings for the industry, would essentially perpetuate the problematic status quo of poor governance, ineffective enforcement and inadequate attention to the public interest. A hasty merger would allow the industry to paper over the shortcomings of the current SRO system so they persist for years to come.
The Ontario Capital Markets Modernization Taskforce eschewed this oversimplified merger approach and proposed instead a single new SRO with a new accountability framework, including the direct involvement of the CSA in SRO governance. The Taskforce also recommended the Ombudsman for Banking Services and Investments be given a binding decision mandate — a mandate vigorously opposed by SRO member firms. This is the type of meaningful reform that would go a long way toward restoring the public’s trust and confidence in the SRO system.
Investors’ top priorities for a redesigned SRO system, contrary to industry assertions, do not include the elimination of confusion or access to more products. Instead they include more effective regulation, stronger enforcement, improved complaint handling, a higher standard of conduct from persons providing personalized financial advice and lower fees. Investors are focused on outcomes. They want an SRO regulatory framework that outlaws misleading titles, provides more transparency in reporting the full cost of advice, and offers restitution when they have been provided with bad advice. They want regulation that will watch their back and a regulator they can trust.
The 2020 Edelman Trust Barometer: Canada found that just 56% say they trust the financial services industry, down eight percentage points from 2019. Better SRO regulation can improve these numbers. Earlier this year, Morningstar published its Global Study of Regulation and Taxation in the Fund Industry, finding regulation in Canada to be adequate, but not always proactive. The organization ranked Canada as “below average.”
Investors do not want a situation where the longstanding deficiencies of the two existing SROs are spliced into the DNA of a combined SRO. They don’t want an SRO where members’ inherent conflicts of interests are left unchecked by weak governance, lax CSA oversight and limited investor engagement. Most importantly, the SRO regulatory framework needs to be investor-focused and act in the public interest.
Canadians saving for retirement or their children’s education need and deserve a new single SRO with more fairness, transparency and stakeholder participation. An ambitious plan for a new SRO does not have to be complex — what it needs is the will of the CSA to effect real change and do the right thing. There is more than adequate time for thoughtful reflection and discussion among all stakeholders since the CSA is unlikely to endorse a merger in the midst of Covid-19 related operational changes and implementation of the Client-Focused Reforms.
A bold CSA plan for a modern SRO framework will result in a win-win for all stakeholders.
Ken Kivenko is president of Kenmar Associates, an investor protection organization, in Toronto.