A consolidated SRO model is not a bridge too far

Two industry veterans explain why model would be more efficient and cost-effective

A consolidated SRO model is not a bridge too far

Over the past year or so, consolidation of the self-regulatory system has been a dominating theme in efforts to reduce regulatory costs and strengthen efficiencies for investment dealers. Both SROs—IIROC and the MFDA—published papers last summer describing distinct models of consolidated structure.

The IIROC approach is a simple amalgamation of the IIROC and MFDA platforms focused on achieving significant savings on operating costs ($380-$490 million over the next 10 years based on Deloitte LLP assessment), especially for dual-platform dealer models, and improving regulatory efficiencies through streamlined regulatory procedures, such as ETF distribution and inter-changing IIROC and MFDA advisors on dealer platforms.

In contrast, the MFDA proposes a more ambitious consolidated SRO platform drawing together not just IIROC and MFDA firms, but most registrant firms operating in the retail marketplace. The Ontario Capital Markets Modernization Taskforce follows the direction of the two SROs, linking the different proposed SRO models through a two-step consolidation process, with the IIROC-MFDA amalgamation as an initial step, and a wider amalgamation of other registrants over a subsequent period. A key objective of the MFDA and the Modernization Taskforce in advocating a consolidated SRO model is to achieve a national and more unified and simplified regulatory structure through a single rulebook (with certain rules appliable to certain institutions) and an over-arching compliance oversight and enforcement regime.

Many objections have been raised to the consolidated SRO model that includes IIROC and MFDA dealers, portfolio managers and exempt-market dealers. It is considered impractical to integrate these different financial institutions in the retail markets with different functions, different rulebooks, and with different regulatory and adjudication regimes.

On the other hand, the broad-based SRO model proposed by the MFDA and Taskforce could be feasible and could make sense, if the institutions migrating into the consolidated SRO model were brought together with each individual regulatory framework (rulebooks and specialized regulatory personnel). For example, the individual rulebooks, whether prescriptive or principle-based, might be included in a single SRO rulebook, but providing significant exemptions from many rules, and with the existing regulators restricted to the rules of their respective institutions. However, if we build this disaggregated model, then what’s the point of doing it in the first place?

The purpose of pressing on is to exploit the key fundamentals of self-regulation itself; a closer relationship between institutions and regulators, to foster more efficient rules and compliance requirements and to work more collaboratively with all SRO institutions on employing best practices in order to deliver products and services to clients.

The key benefit of a single SRO platform for different firms in the retail markets is the potential cost savings and the ability to deliver more services to investors by converting different specialised regulatory entities to a single consolidated SRO for compliance oversight. For example, financial institutions with separate specialised regulated affiliates in the wealth markets would be able to convert to a single SRO regulator, enabling a single compliance platform for all retail affiliates.

Even with separate rules for the individual operating entities, the single compliance platform for staffing and technology and systems will achieve efficiencies and cost savings. Similarly, single independent firms with a limited product line and registration category could expand product and services on the single SRO compliance platform, as the regulatory barriers that limit certain different types of financial products and services on a single firm platform are removed. This scaling of business on a same platform would improve operating margins and attract new entrants into the marketplace.

The cost savings and wider margins from a single SRO compliance platform will benefit investors through lower prices, a wider range of financial products and services offered by more entities, greater competition and technological innovation. Over time, the rule frameworks across different types of retail firms will likely harmonise and streamline, to a certain extent, benefitting firms and investors. Finally, the SRO framework would facilitate similar retail firms, as well as firms across different retail lines or functions, to work together to develop best business practices and conduct in the retail sector to benefit investors in the marketplace. 

A consolidated SRO model would not only contribute efficiencies and cost-savings, and better industry practice and conduct, but act as a catalyst to integrate financial products and services on a single firm platform to improve access and convenience to investors.

Ian Russell is the President & CEO of the Investment Industry Association of Canada

John Cucchiella is Vice President of Corporate Development and Investor Relations, Forest Gate Financial Group