Although regulators are doing a better job in general of protecting investors without making business operations too onerous for the investment industry, regulators still have room to improve in achieving a better balance between these two critical tasks, according to the results of this year‘s Regulators’ Report Card.
When the company executives and compliance officers (COs) surveyed for this year’s Report Card were asked to rate “the regulators’ effectiveness in balancing investor protection without restricting business,” they gave the regulators an average score of 6.1, up from 5.7 last year. Notably, four of the six regulators in the survey saw their ratings in this category increase by half a point or more year-over-year.
Survey participants indicated they’ve felt the impact of a growing regulatory burden. However, as regulators focus increasingly on protecting investors, those regulatory obligations are accepted as a reality of doing business.
“Nobody has an issue with rules that protect clients – that’s absolutely what we want,” says a CO with an investment dealer in Ontario that falls under the purview of the Investment Industry Regulatory Organization of Canada. That said, this CO noted that many regulatory requirements “just seem to be bureaucracy for bureaucracy’s sake.”
The B.C. Securities Commission (BCSC) earned the highest rating in the category, at 7.3 – up significantly from 6.4 last year – because that regulator is “excellent at keeping [this balance] in check,” says a CO at an exempt-market dealer in Alberta. “The [BCSC] totally understands that if you stifle investment, everything slows down.”
The BCSC strives to find an appropriate balance between inspiring investor confidence and supporting fair and efficient capital markets when implementing rules and making decisions, according to a statement that regulator emailed to Investment Executive (IE). Each time the BCSC considers a new rule, it focuses on addressing the issue or risk at hand in the least burdensome way.
The Ontario Securities Commission (OSC) also enjoyed a substantial improvement in its rating for this category this year, rising to 5.7 from 4.9 year-over-year.
“[This is] a very difficult job for [the OSC], as it has to weigh so many stakeholders’ needs when making decisions,” says a senior compliance manager with a portfolio- management firm in Ontario. “But from an outcomes perspective, [the OSC] is sensitive to the needs of all stakeholders.”
However, some survey participants said the OSC emphasizes investor protection far too much, which hampers doing business for their firms.
“The pendulum has swung too far,” says a CO with an investment dealer in Ontario. “[Regulation] is getting to the point at which small clients and small firms can’t exist anymore.”
A CO with an investment dealer in Ontario added that the OSC’s investor protection efforts are creating an environment in which any investor can pursue action against a dealer or a financial advisor simply by claiming the investor wanted to take a conservative approach in their portfolio: “[The OSC has] fallen for a bit of a fallacy of investors always pleading ignorant.”
The Mutual Fund Dealers Association of Canada (MFDA) received the lowest rating in the category, at 4.7, down from 5.0 last year. COs and company executives complained that the MFDA fails to consider its member firms when implementing rules and regulations, and once policies are in place, the self-regulatory organization (SRO) never reviews those policies to evaluate whether they’ve had the intended impact.
“There’s no balance for the business because the [MFDA] doesn’t do any economic analysis,” says a company executive with a mutual fund dealer in Alberta. “[The regulator] never revisits [policies and] doesn’t pull anything back” – even if certain policies fail to address the problem at hand.
Adds a CO with a mutual fund dealer in Ontario: “I understand investor protection, but the regulations and rules do impede business – and I find them unfair.”
Investor protection is at the core of the MFDA’s mandate, according to a statement that SRO emailed to IE. When implementing rules, though, the SRO analyzes the potential costs and benefits for both industry players and investors, then considers how rules can be applied in a practical and efficient way. The MFDA also solicits input from the industry when developing new policies in an effort to assess the potential impact on industry players.
Nevertheless, some COs said that in spite of increased regulatory oversight and compliance responsibilities that regulators have imposed upon the investment industry, investor protection has not improved.
“There’s just as much money being stolen as there has ever been,” says a CO at a mutual fund dealer in Quebec. “Clients are getting more paper they don’t want, and [regulation] is making no measurable difference.”