right or wrong choice
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A foundational task for the retail investment industry’s new self regulator is eliminating duplication and disparities in the rules governing dealers. But the industry is concerned that the iterative approach being taken is clunky and costly.

The Canadian Investment Regulatory Organization (CIRO) is harmonizing rules for mutual fund and investment dealers in five stages, beginning with proposals published last October. Those proposals aim to establish the structure for a new harmonized rule book.

CIRO issued Phase 2 proposals in January, which are out for comment until March 11. Those proposals aren’t expected to be controversial, as they largely adopt existing requirements in the investment-dealer rules — including margin, debt market and trading rules (best execution and client priority requirements) — into the consolidated rule book.

Feedback on Phase 1, however, highlighted fundamental concerns with the SRO’s approach.

Comments called for CIRO to implement the new rule book in a “Big Bang” — adopting the harmonized rules once all reforms are final rather than incrementally, which is the approach taken so far.

For example, the Investment Funds Institute of Canada’s (IFIC) submission asked CIRO to implement all rule changes simultaneously to “avoid duplication and reduce implementation risk.”

CIRO has stated that the phased approach is meant to minimize disruptions throughout the consolidation process.

However, IFIC argued the phased approach will be more disruptive: “We are concerned that moving too quickly in a piecemeal fashion will cause regulatory inconsistencies, client confusion and significant implementation risk.”

Specifically, IFIC said adopting new rules in stages will put greater demands on firms’ compliance, operational and IT resources. And as rules are incrementally revised, repeated updates to the same documents and processes will dramatically increase costs.

IFIC suggested implementing all new rules at the same time would also be easier for clients.

The call for a big bang was echoed by the Investment Industry Association of Canada and iA Wealth (comprising Investia Financial Services Inc. and iA Private Wealth Inc.).

“A phase-by-phase implementation process would make it more challenging to provide meaningful holistic commentary and may result in confusion in the application and interpretation of the [consolidated dealer] rules,” iA Wealth’s submission stated, adding this approach could add operational and technology costs for dealers.

Additionally, iA Wealth recommended CIRO extend the comment period from 60 days to 90 days for Phases 2 and 3, and to 120 days for Phases 4 and 5, to ensure dealers “can meaningfully engage in the consultation process.”

Other stakeholders want the harmonization to modernize the regulatory landscape.

The Federation of Mutual Fund Dealers (FMFD) stated in its submission that the focus should not be only on streamlining regulations but also on accommodating investor preferences: “This approach may require prioritizing inclusivity over rule efficiency or simplicity, but it is essential for reducing limitations on investor choices and fostering the distribution of financial advice.”

This call to reshape the regulatory landscape was echoed by IG Wealth Management. The Winnipeg-based firm’s submission stated that research has highlighted the “need to modernize the regulatory framework to better align with the way financial services are delivered and the client experience.”

IG noted the research — including reports for the Investment Industry Regulatory Organization of Canada and the FMFD, along with work by the Ontario Securities Commission’s Investor Office — emphasized the industry’s shift to holistic advice and financial planning. “Yet much of the current regulatory regime focuses on specific account types and trades, rather than needs and goals at the relationship level,” IG said.

The rule book consolidation will remove product-based regulatory silos between the investment and fund-dealer channels, but CIRO should go further, IG added.

Industry firms aren’t the only ones hoping for more from the consolidation.

Investor advocacy group FAIR Canada acknowledged investors may benefit indirectly from aspects of the harmonization, such as the effort to minimize regulatory arbitrage between investment dealers and mutual fund dealers, but lamented the lack of a broader vision for investor protection.

FAIR Canada recommended CIRO apply an ordinary investor’s perspective to its work of simplifying registration, and that CIRO enhance advisor proficiency, improve continuing education and reduce investor confusion due to misleading industry titles and qualifications as part of its rule book rewrite.

Investor confusion around the industry’s registration and proficiency regime was highlighted in FAIR Canada research published in January. That research, conducted using focus groups, found that investors generally had little or no understanding of their advisor’s credentials.

“In Ontario, this confusion and lack of awareness is compounded by a title protection regime that further obscures the limitations of certain registered individuals who also use the ‘financial advisor’ title,” stated FAIR Canada’s submission to CIRO.

FAIR Canada’s research also revealed that many investors participating in the focus group assumed their advisor would recommend what’s best, and didn’t ask about licensing and qualifications.

Furthermore, few investors used a rigorous process to find their advisors, with one choosing a rep they found on Instagram and others using the person working at their bank branch that day. “I just trusted that the bank would use somebody reputable and knowledgeable,” an investor quoted in FAIR Canada’s research said.

Given these factors, FAIR Canada suggested to CIRO that harmonizing the registration regime represents an opportunity to structure it “in a less complex, less confusing and more investor-centric way.”

This article appears in the February issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.