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Self-regulation within the financial services industry faces an overhaul that promises to resolve some long-standing complaints, but the journey probably won’t be easy.

In early August, the Canadian Securities Administrators (CSA) issued a position paper setting out their new vision for the self-regulatory framework. The CSA’s plan will combine the industry’s self-regulatory organizations (SROs) — the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) — in a new single regulator, with contingency funds rolled together too.

While IIROC has long pursued a merger with the MFDA (the latter has mostly resisted), the CSA’s proposal will not be the hasty marriage IIROC was seeking.

An IIROC proposal published last year envisioned a union with the MFDA that could be wrapped up within three months. IIROC stated its plan would begin paying off within a year, with the deal’s benefits amounting to “hundreds of millions” of dollars over the next 10 years.

Instead, the provincial regulators are plotting a comprehensive makeover that’s likely to take years rather than months. The CSA’s paper set out a planned overhaul of the SRO structure that includes a new governance framework and new mechanisms for investors. The paper also detailed a series of policy issues to tackle as part of the reform effort.

The CSA is forming a working committee that will lead the project and oversee its execution, but a formal timeline to implement the reforms hasn’t been set.

Once the committee finalizes the corporate structure for the new SRO, the CSA will announce the implementation schedule.

“At this stage, we are not in a position to determine when this work will be completed, but it is definitely a priority for the CSA,” said Pascale Bijoux, senior advisor, communications and stakeholder relations with the CSA, in a statement.

Past experience shows that regulatory mergers are not typically brisk affairs.

When IIROC was created by merging the Investment Dealers Association of Canada Inc. (IDA) with Market Regulation Services Inc., the deal was in the works for several years before the merged SRO debuted in mid-2008.

Back then, the CSA was well aware of the challenges. In a 2006 report, the regulator’s SRO Oversight Project Committee noted that while consolidation could generate a number of benefits — including reduced fragmentation and lower compliance costs — there was no shortage of potential pitfalls. Those included divergent approaches to rule-making, the difficulty of prioritizing policy for a larger, more diverse membership and potential staffing and morale problems.

“A merged SRO may not be as close to the market, is unlikely to be much cheaper and might discourage the development and retention of staff with adequate expertise,” the CSA committee cautioned at the time.

Many of these same issues are likely to confront today’s new SRO — with the added complication of greater CSA involvement and a host of policy issues to address alongside the structural reforms. The CSA plans to tackle long-standing bugbears within the SRO framework, promising to streamline and harmonize the existing SROs’ rulebooks, for example.

The CSA also intends to resolve the disparity in how investment dealer reps and fund dealer reps can structure their businesses. In most provinces, mutual fund reps can flow their revenue through corporate structures to gain favourable tax treatment, a strategy that traditionally has been prohibited for investment dealers.

Fund reps were using these structures long before the MFDA was created, back when their dealers were under the direct oversight of the securities commissions. At the time, the IDA prohibited these kinds of arrangements for investment dealers. The industry has pushed policy-makers to resolve the discrepancy for more than 20 years to no avail.

Now, as part of the SRO reform, the CSA plans to create a working group to settle the issue once and for all, possibly by proposing a rule that would allow for “directed commission” arrangements for all reps, and by considering a professional incorporation model for the securities industry.

The CSA also plans to tackle another long-standing nuisance for investment dealers: the so-called “270-day” rule, which has prevented investment dealers from employing mutual fund-only reps alongside full-service reps.

That requirement, which was adopted to avoid undermining MFDA membership if firms were able to operate mutual fund sales forces within investment dealers, probably has outlived its usefulness, the CSA concluded in its paper.

As a result, that barrier will be dismantled under the new SRO by allowing firms to operate separate mutual fund dealer and investment dealer businesses within a single corporate entity. That will enable firms to consolidate their back-office and other administrative functions.

On the upside for fund dealers, the CSA envisions permitting them to more easily sell ETFs by using introducing/carrying broker arrangements with investment dealers.

The CSA also plans to increase industry flexibility by allowing more part-time advisors, and part-time chief financial officers and chief compliance officers that serve multiple firms.

As for investor representation, the CSA proposed that the new SRO adopt mechanisms similar to what’s been introduced at the Ontario Securities Commission in recent years. An investor advisory panel would provide feedback on policy issues, and an investor office within the new organization would champion projects such as enhanced investor education.

On the governance front, the new SRO is being designed in line with proposals from an Ontario task force to ensure adequate independence from the industry for the SRO’s board and its greater accountability to the CSA. The proposed board structure includes an independent chair and a majority of independent directors; tougher independence requirements; and greater latitude for the CSA to name the CEO and directors of the new SRO, and to guide its policy-making.

The CSA has sketched out an ambitious new vision for self-regulation. Whether it can deliver, and how long it takes, remains to be seen.