The financial services sector has laboured mightily to enunciate its concerns about a slew of fundamental regulatory reforms dealing with client/financial advisor relationships proposed by the Canadian Securities Administrators (CSA).

The initial consultation period for a set of regulatory reform proposals that the CSA released in April came to a close at the end of September (shortly after Investment Executive [IE] went to press). After that, the CSA intends to hold public hearings to explore the feedback it receives. However, as of late September, those sessions had yet to be scheduled.

The focus for the industry has been on finalizing submissions for those hearings. The CSA proposals, which include overhauling some of the fundamental tenets of retail investment industry regulation (such as “know your client,” “know your product” and suit ability standards); cracking down on the titles that advisors can use; and, at least in some provinces, the introduction of an overarching statutory “best interest” standard for advisors.

Given the scope and possible significance of the proposals, the industry’s efforts to develop its responses is similarly monumental. For example, the Toronto-based Investment Funds Institute of Canada (IFIC) has formed a large task force to develop a response. The trade group’s Client-Advisor Relationship Task Force includes representatives from about 60 firms. According to Sara Clodman, IFIC’s senior manager, public affairs, the task force is evenly split between fund portfolio managers and fund dealers (along with a few affiliate members); the goal is to capture a diverse set of views regarding the CSA’s extensive set of proposals.

“The dealers [involved in the task force] cover a wide range of corporate structures – independents and bank-owned firms – and business models, so the group really represents the full range of industry perspectives,” Clodman says. “With 60 participants on the task force, we have a deep understanding of the impacts of the proposed reforms.”

Although IFIC’s detailed submission to the CSA was still being finalized at the time of writing, the institute recently pushed back on further major reforms – arguing that initiatives such as the second phase of the client relationship model (CRM2) reforms and point-of-sale mutual fund disclosure requirements should be given time to work before regulators decide whether any further fundamental changes are needed.

The Investment Industry Association of Canada (IIAC) takes much the same line. Although the IIAC’s finishing touches on detailed response to the CSA also were incomplete at the time of writing, the association has repeatedly insisted that regulators assess the impact of CRM2 before deciding whether further changes are necessary. And the IIAC has resisted calls for a statutory best interests standard, arguing that the existing regulatory regime already ensures a high standard of conduct.

The IIAC, in addressing the CSA’s latest paper, has put together its own large team “made up of a cross-section of IIAC member firms from across Canada, including bank-owned, independent and boutique firms, with differing business models,” says Michelle Alexander, vice president and corporate secretary at the IIAC.

She notes that the dealers are setting out to document what their current business practices are and how those may differ from the proposed reforms; to identify particular proposals that the dealers believe would be feasible to implement, in terms of both the cost and the implications for the existing back-office systems; and, finally, aim to provide the dealers’ perspective on whether the reforms proposed by the CSA will actually, says Alexander, “deliver the outcomes for clients [that] the CSA seeks to achieve.”

The IIAC’s working group also is analyzing the extent to which the Investment Industry Regulatory Organization of Canada‘s (IIROC) existing rules “may already fulfil the CSA’s objectives,” Alexander adds.

Indeed, regarding the issue of a best interest standard, for example, IIROC is championing the idea that its rules already require advisors to put clients’ interests first when conflicts arise.

IIROC president and CEO Andrew Kriegler reiterated this position at an industry reception in mid-September, although he acknowledged that IIROC has some work to do to make sure that firms and advisors are adhering to the spirit of these rules.

“Ensuring that, for example, firms not only have but follow clear policies and procedures on compensation-related conflicts is an effort we’ve begun, but which will take time to complete,” he said. And, he noted, the interpretation of what constitutes a conflict of interest must be interpreted broadly, which “will take time and may require some rewording of our rules.”

Investor advocates such as the Canadian Foundation for Advancement of Investor Rights certainly are skeptical of the claim that IIROC’s rules already require advisors to put their clients’ interests first. However, what the provincial regulators think of IIROC’s position and whether a genuine best interest standard in the IIROC world would be enough for regulators that favour that approach remains to be seen, or whether those regulators believe that there still needs to be a statutory standard to cover mutual fund dealers, exempt-market dealers (EMDs), portfolio managers and other sorts of firms.

The EMDs is another group that is working hard on a response to the regulators. In mid-September, the Private Capital Markets Association (PCMA) held an EMD industry roundtable to discuss the contents of the association’s draft submission and solicit feedback from the wider EMD industry. At that roundtable, the PCMA indicated that it intends to argue that many of the CSA’s proposals are fundamentally at odds with the realities of the EMD business – for example, the proposals expect EMDs to behave as full-service dealers or financial planners when, in reality, EMDs operate more like investment bankers, raising capital for issuers rather than building diverse retirement portfolios for retail investors.

This view that the CSA’s proposals appear to embrace a financial planning approach to the retail investment business is echoed in one of the submissions filed with the CSA from the Canadian Institute of Financial Planners (CIFPs).

In its submission, the CIFPs supports many of the CSA’s recommended reforms, including the proposal from some of the securities commissions for a statutory best interest standard, although, the submission warns, “a one size fits all [standard] will not work.”

The CIFPs’ submission suggests there should be a difference between the standards imposed on planners and other sorts of advisors – with planners subject to a “full” best interest standard and other advisors operating under a lower standard.

© 2016 Investment Executive. All rights reserved.