It may be time for more “broken windows” policing in the Canadian securities industry. This concept, successfully applied in New York City, goes like this: if you fix the broken windows, you may be able to stamp out the seeds of moral indifference and prevent the real crimes that follow.
The securities sector constantly complains that the regulatory burden is on the rise, and that this is driving costs up and margins down. Yet, it seems increasingly clear that without all of this supervision, none of the rules would be followed. Whenever regulators check the sector’s work, they find violations of the most basic requirements.
Whether it’s collecting “know your client” information improperly, failing to disclose conflicts of interest or publishing misleading investment fund ads, there always seems to be firms getting it wrong. But there are few, if any, real consequences for these sorts of violations.
In recent years, the regulators have aimed to bolster their weak enforcement reputations by using the resources they have to pursue more cases of serious fraud. Often these involve firms and individuals operating outside the regulated industry: bringing them to justice may save their victims some grief, but it does nothing to help scare the industry straight.
The problem with that is when there is no real punishment for relatively minor compliance violations, due to lack of resources, firms become accustomed to ignoring both the letter and the spirit of the law. This breeds a culture of complacency, makes it easier to cut corners and creates an environment in which more serious abuses occur. Lax habits in opening accounts soon become an unsuitable recommendation or an unauthorized trade.
Indeed, the lack of penalties for minor transgressions keeps regulatory costs disproportionately high for firms that do comply; and, if anything, creates an incentive to cheat.
Perhaps if regulators were to come down a little harder – or at all – on the small stuff, they could prevent an escalation to bigger issues that truly hurts clients. This, in turn, would bolster investor confidence and leave regulators less apt to embrace more fundamental reforms.
© 2013 Investment Executive. All rights reserved.