The first wave of covid-19 put regulatory policymaking on pause last spring, but as the second wave rages, a vision for post-pandemic regulation is taking shape.
Ordinarily, the Ontario Securities Commission (OSC) holds a consultation each spring on its policy priorities for the coming year. Last year, however, the OSC skipped this exercise, as the investment industry and regulators scrambled to deal with the pandemic’s immediate economic, financial and operational effects.
Having scrapped the traditional springtime consultation, the OSC instead issued its proposed priorities for fiscal 2022 in mid-November. The responses to those priorities reveal how the pandemic is shaping expectations for the future of regulation.
Regulators’ quick, decisive response to the pandemic — granting the industry relief in the face of sudden pressures — is ramping up expectations for regulators to be just as nimble and effective once conditions return to normal.
For investor advocates — who have witnessed regulators’ efforts to enhance investor protection drag on through years of consultations — one of the chief lessons from the pandemic is that regulators can move swiftly when they want to.
“We have seen lately clear evidence that the OSC can move very quickly and dynamically in response to industry needs and government directives,” stated the OSC’s Investor Advisory Panel (IAP) in a submission to the OSC. “Investors expect the same agility and attentiveness from the OSC on issues and initiatives related to their protection.”
The IAP said it expects the speed of policymaking to accelerate dramatically and also urged the OSC to give up on preserving deferred sales charge (DSC) fund structures.
“The facade of DSC necessity is gone,” the IAP said, adding that “efficiency, cost-saving, burden reduction and consumer confidence would all be better served by the OSC abandoning development of a convoluted framework just to preserve DSCs.”
The seamless pivot to remote work during the pandemic has sparked hope that regulators will expedite the industry’s technological transition. In a submission to the OSC, Toronto-based fund industry giant Fidelity Investments Canada ULC argued for eliminating paper regulatory filings, allowing e-signatures and defaulting to electronic delivery for investor materials.
While regulators have taken steps in this direction — and research indicates that most investors prefer to communicate electronically — Fidelity said the industry still faces paper requirements, which have forced firms to keep workers coming into offices.
“The pandemic has shown us not only that we can adapt very quickly to an electronic model that services the needs of the industry and investors in a practical way, but that an electronic model more [effectively] addresses the OSC’s goals of reducing regulatory burden and improving the retail investor experience,” Fidelity stated in its submission.
Fidelity also called for other measures to curb compliance costs, such as eliminating the requirement to send investors annual reminders, abolishing interim reports and streamlining Fund Facts requirements to allow companies to prepare a single document for each fund, instead of requiring one document for each series of a fund.
Fidelity estimated that doing away with interim reports would save the firm $3 million per year, and about $50 million for the industry as a whole. Streamlining Fund Facts requirements would save Fidelity about $1 million annually by reducing the number of Fund Facts from almost 3,400 to 542.
“The real beneficiaries of this change would be the investor, the financial advisor and the dealer,” Fidelity suggested, arguing that streamlined requirements would make it easier for investors to compare funds.
Markham, Ont.-based Broadridge Investor Communications Corp. echoed the call for regulators to modernize the investor experience in its submission to the OSC, noting that the participation in shareholder meetings increased when regulators allowed those meetings to be held virtually.
Industry trade group the Private Capital Markets Association of Canada (PCMA) said the OSC should prioritize capital formation by expanding the availability of exemptions and reducing some of the regulatory demands on exempt offerings and exempt market dealers.
The PCMA also proposed that the OSC grant another long-standing advisor wish: enabling all reps — not just mutual fund reps — to flow their commissions through a personal corporation to save taxes.
There are, however, concerns that accommodating industry needs that arose during the Covid crisis could become a habit for regulators. For instance, bowing to industry demands, the Canadian Securities Administrators (CSA) delayed implementation of certain aspects of the client-focused reforms (CFRs), now slated to take effect at the end of this year.
The IAP is demanding the OSC stick to the revised implementation deadlines for the CFRs and not delay their adoption further.
The IAP also recommended that the OSC spearhead comprehensive, co-ordinated enforcement of investor protection rules throughout the financial industry — among statutory regulators, self-regulatory organizations (SROs) and across the securities and insurance sectors.
“This is not just a desirable outcome. It is essential if Ontario and Canada are to maintain the integrity, credibility and attractiveness of our capital markets,” the group stated in its submission.
The IAP also argued that regulators should do more to ensure that ill-gotten gains are returned to harmed investors by requiring investor compensation as part of enforcement settlements and considering a compensation fund for victims of investment fraud.
Several commenters called for improved investor restitution, including advisor trade group the Independent Financial Brokers of Canada (IFB).
In its submission, the IFB suggested the OSC should have the ability to direct sanctions collected from firms and advisors to harmed investors. The group also said the OSC should resolve the divergent approach to DSCs in Ontario and the rest of Canada, and recommended that the OSC improve its engagement with advisors.
“Securities firms, dealers, and investment manufacturers do not speak for advisors,” the IFB said.
These ideas for a post-pandemic world come amid major reform initiatives that continued last year despite the pandemic: the CSA’s effort to overhaul the self-regulatory structure, and a sweeping review of Ontario securities law by a provincial government task force.
Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers, said the CSA’s SRO review “is currently on track.”
As for the task force, its final recommendations were delivered to Ontario’s then-finance minister, Rod Phillips, in mid-December, but have yet to be released publicly.
The task force signalled it would recommend sweeping changes to both regulatory policy and the OSC itself. However, it remains to be seen how much traction these ideas gain with the new finance minister, Peter Bethlenfalvy, as the Ontario government grapples with the pandemic’s swelling second wave.