One of the investment industry’s perennial criticisms for regulators is their lack of sensitivity to the issues facing small dealers. This remains a core concern in this year’s survey of industry compliance officers (COs).
The latest edition of the Regulators’ Report Card found that treatment of the industry’s smaller players is still an issue for many firms. A number of respondents to this year’s survey complained that regulators are not sympathetic to the issues faced by smaller firms, that they don’t tailor their audits to the size of the firm being reviewed, and that they introduce rules that weigh more heavily on smaller shops.
“They seem generally concerned with all the regulations being followed, and they don’t seem to care about the operational challenges. If you want to be in the business, you have to comply,” says the CEO of a small investment dealer.
The central issue for smaller firms is that they typically don’t have the scale to absorb new compliance requirements as easily as the larger firms. According to the latest data from the Investment Industry Association of Canada (IIAC), through the first nine months of 2018, the operating costs for smaller investment dealers grew at about twice the rate as they did for the big firms – costs were up about 9% at the large full-service firms, and up 18% for small introducer firms over the period.
For some firms, these cost increases can prove momentous. One respondent to our survey reported that they are in the process of selling their firm primarily due to the impact of rising regulatory costs.
“Small shops are being squeezed out due to regulations,” says a CO with a small fund dealer. “It’s a bad cycle: as small firms close down, fewer resources will be provided to support them.”
According to the IIAC, approximately 50 small and mid-sized firms have exited the industry since 2013, either by merging with a rival or simply closing – a phenomenon that is due, in part, to rising compliance costs.
Not only did the smaller firms seem to have felt the impact of regulatory policies more acutely than the bigger firms, but they also reported having less of a voice in shaping those policies in the first place. “Banks have deep pockets and can influence certain issues and leave small firms in the cold,” says a CO at one investment dealer.
Another compliance executive recommended that regulators do a better job of reaching out to the smaller firms and engaging them in the policymaking process. “Giv[e] that voice to the smaller dealer, compared to the bigger banks. I don’t know the perfect solution, but it’s worth trying to hash out,” says the CO of an independent investment dealer. “The smaller dealers are trying to do the right thing for clients.”
For others, the apparent disparity was a fact of life, rather than an effort by regulators to favour larger firms. “They do listen, but the small firms’ concerns are last on the agenda,” says the CO of an independent dealer.
“It’s difficult for them to accommodate small firms,” agrees a vice president with an exempt market dealer, who noted that, despite being a small firm, they weren’t feeling overly pressured by regulation.
While the overall message from this year’s survey was continued concern about regulators’ approaches to smaller players, regulators also received praise for efforts that seem to recognize the realities of small firms.
One respondent said the Mutual Fund Dealers Association of Canada (MFDA) had done a good job with its cybersecurity initiative, which particularly aims to help smaller firms (see MFDA the higher-rated SRO). Another compliance executive lauded the B.C. Securities Commission (BCSC) for its sensitivity to the needs of its local venture market.
These plaudits were also reflected in some of the scores that regulators received this year in the category of “sensitivity to the concerns and issues of small firms.” The category rating was up significantly for the MFDA, jumping from 5.3 last year to 6.7 this year, and to a lesser extent at the Autorité des marchés financiers, which saw its category rating climb from 4.9 last year to 5.8 this year. And while the BCSC’s category rating dropped this year, it still boasted one of the highest ratings among the regulators for its sensitivity to the concerns of smaller firms.
Despite these bright spots, the industry wanted to see the regulators doing more to accommodate the different needs and capacities of smaller firms. The CO of an independent fund dealer suggested that the MFDA should try to provide more outreach, training and resources to help them keep up and comply with the regulators’ ever-changing demands.
“Maybe there should be a specialist approach,” says a compliance executive with an independent investment dealer, pointing to the approach of the U.S. self-regulatory organization, the Financial Industry Regulatory Authority, as a possible model.
For others, the struggles of the small dealer seemed unavoidable, regardless of the regulators’ approach. “They’re making good efforts, but market conditions are still pushing smaller dealers out,” laments the CO of a large independent investment dealer.