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The next steps in streamlining and reducing investment regulation

Opinion: The best way to reform securities regulations is for regulators and industry to work together

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By Ian Russell

The Canadian Securities Administrators (CSA), a group representing regulators in all 10 provinces and three territories, recently released its much-anticipated package of “client-focused reforms” of market conduct rules. The investment industry in general, as well as the association I represent, which is made up of 120 large and small investment dealers, are pleased that many of the recommendations we put forward have been incorporated into the new rules framework.

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The more practical, less prescriptive new regulations will ease the compliance burden for investment dealers and their clients and reduce costs and inefficiencies in the retail advisory business. The regulators have found a better and fairer balance between higher standards for “Know Your Client” (KYC), “Know Your Product” (KYP) and conflict of interest rules, on the one hand, and the heavier regulatory burden borne by the investment industry and its clients, on the other. Many of the expanded KYC and KYP rules are more practical and can be satisfied on a “reasonable efforts basis.” They are also scalable, allowing investment dealers with different business models and size and scope of operations to comply with them more easily.

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The reforms also establish a rules framework for leading-edge, life-cycle financial advising

The reforms also establish a rules framework for leading-edge, life-cycle financial advising. Dealers must address material conflicts of interest in their operations, though, as members of a self-regulatory organization (SRO), they are already subject to similar rules. Now non-SRO members will also be subject to these conflict of interest rules. The CSA has established an implementation committee that includes the industry and will provide a staged one-to-two-year transition to address business and technology issues in the rules.

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The new client-focused rules have shown that the CSA can work effectively to achieve broad consensus on a formidable set of complex rules and in doing so incorporate positive suggestions from the industry and other stakeholders. The success of the 13 jurisdictions that are part of the CSA in achieving uniform market conduct rules raises the awkward question whether, if the CSA can work this effectively on an ongoing basis, the new co-operative securities regulator being implemented by the federal government, B.C., Ontario, Saskatchewan, New Brunswick, P.E.I., Nova Scotia and the Yukon, is really worth the lengthy and costly effort of setting it up, especially as regulatory streamlining will remain a high priority, requiring close collaboration among existing regulators in streamlining rules and regulatory processes.

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At a minimum, the federal government should focus its efforts on working with Quebec and its financial institutions to operationalize a Canada-wide systemic regulator to oversee the surveillance of risk in the Canadian capital market as a whole.

The CSA now needs to work on other pressing parts of the burden-reduction agenda. We need further progress on rules governing the electronic dissemination of regulatory documents. High on the list is the “access equals delivery” model for prospectus delivery. This will reduce costs to underwriters and, more importantly, corporate issuers and in so doing help encourage capital formation across the country.

CSA members also need to collaborate on greater uniformity in the terminology and procedures adopted in similar regulations across their jurisdictions. An example is “outside business activities.” Why shouldn’t this mean the same thing in all Canadian jurisdictions? In 2016, the CSA embarked on: an overhaul of the electronic systems in national markets, a registration data base for advisers and a storehouse for documents in both public and private capital markets. In an era of data analytics, timely access to comprehensive statistics in the marketplace is critical. This project needs to be given real priority and there needs to be greater transparency about what progress, if any, is being made.

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IIROC, the industry’s self-regulator, also has an important role to play in streamlining and burden reduction in the domestic marketplace. As a first step, it needs to quickly implement the new client-focused rules for investment dealers and then move on to implement the same rules for other parties offering financial advice to the public. Beyond that it should review and streamline its own regulatory processes, so as to encourage efficiencies and ease the burden for smaller investment dealers. The self-regulator also needs to consider more flexible registration categories on its platform, with a narrower rulebook or fewer rules for those dealers offering restricted activities limited to certain plain-vanilla and low-risk financial investments. This will enable advisory firms to adjust their business models to changing demands for financial services and to specialize in new business niches in the most cost-effective way possible.

An effective approach to streamlining securities regulation that retains and improves professional standards and overall business competitiveness requires close collaboration among the regulators and a willingness to hear and heed the good ideas of practitioners. This formula worked well for the development of the client-focused reforms. It needs to be continued into the future.

Ian Russell is president and CEO of the Investment Industry Association of Canada

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