Following the Canadian Securities Administrators’ (CSA) announcement of its proposed reforms to the client-advisor relationship in June, the Investment Industry Association of Canada (IIAC) commended the regulators’ efforts and stressed the need for clear guidance.
“The reforms set out in National Instrument 31-103 are detailed and sweeping, covering all major aspects of the wealth business,” said IIAC President and CEO Ian Russell in an open letter. “The development of clear guidelines to meet the best interest/client-first conduct rules will be critical to provide a bright line test for market participants, and for regulators responsible for monitoring compliance with the rules.”
Russell noted that the proposed measures diverge significantly from existing SRO rules and will apply to other registrants, which underscores the importance of clear guidance. Commending regulators’ efforts to level the playing field in the wealth business, he stressed the need to extend the proposed approach to the insurance industry, especially in light of the anticipated rule-making effort of the Financial Services Regulatory Authority (FSRA) in Ontario.
In a gesture of openness that Russell called “reassuring,” regulators have invited stakeholders to comment on the proposals until October 19. He said that the investment industry will judge and propose “reasonable alternatives” to the proposed rules and guidelines based on their practicality and their material improvement over existing best-interest conduct practices.
Running down highlights of tightened know-your-client, know-your-product, suitability, and conflict-of-interest requirements, he said conducting the consultations expeditiously is critical to allow for considerable systems work within and across firms. “As compliance systems are often interdependent across different firm functions and operations, the underlying technology can only be built effectively once the overall rule framework is in place,” he observed.
The letter also laid out some expected business impacts from the recent reforms. These included significant one-time fixed costs and increased variable costs of compliance, pressure on advisor fees and charges, added scrutiny of mutual-fund MERs and performance, a likely acceleration of the ETF market, more efforts to balance intensive documentation against client relationship-building, and an accelerated shift to white-label hybrid robo platforms.
“It is already apparent, however, that the break-out of MER fees and determination of ETF charges is a complicated and costly process,” Russell said with regards to enhancing fund disclosures. “This work should await the CSA post-implementation review of CRM 2, and a proper cost-benefit assessment on the merits of expanding the CRM 2 requirements.”
Referring to an IIAC-commissioned study by Deloitte Canada in 2016, Russell said that the reforms arrived at after public comment should be subject to a cost-benefit test to avoid unintended consequences and unnecessary costs for investors and intermediaries in the marketplace.
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