Current regulations allow progress, but the current organization of financial services in Canada makes advancing difficult
A recent report from the Investment Industry Regulatory Organization of Canada (IIROC) and Accenture cited regulatory issues as one of the main barriers to innovation in Canada’s financial advice space. On the heels of that report, a prominent think tank has released its own paper echoing that sentiment.
In a commentary titled Next-Gen Financial Advice: Digital Innovation and Canada’s Policymakers published by the CD Howe Institute, author Chuck Grace called for policymakers to get ahead of the impending transformation in financial advice by clearing regulatory hurdles to that change.
“Our current regulations per se are not a barrier to this next generation of advice – but our regulatory practices are,” said Grace, a member of the finance faculty at Western University’s Richard Ivey School of Business and 35-year veteran of the Canadian financial services industry.
Companies are already making progress in using technology to automate certain processes, such as client onboarding, because there are no regulatory impediments to that work. Regulators surveyed for the research said they weren’t overly concerned with the perceived lack of audit trail with digital advice.
“Regulators we spoke with generally felt the adoption of digital technologies was more of a business issue than a regulatory one,” Grace said. Just as it has been up to firms to figure out which regulations govern changes to their business models from a human-centric point of view, they felt tech-based changes should proceed the same way.
But other industry stakeholders pointed to three main exceptions that had to be considered by regulators before next-generation digital advice could move forward. First, they noted that digital strategy relies on data, but tech-reliant firms can’t access the data they need today to create the right solutions. Open data is necessary for algorithms to work in a legitimate and verifiable way. “This poses a challenge in terms of privacy and security issues, but also an opportunity for regulators to encourage innovation,” Grace said.
Another issue arises from fulfillment. It is possible to develop platforms that deliver prudent advice, Grace wrote, but they can’t always execute on the plan. Regulatory silos between product regimes — securities and insurance, for example — create tremendous complexity in implementing a holistic recommendation. That means to remain compliant, digital firms’ trade engines must have permission for an electronic handoff between regulatory regimes.
Finally, firms today must work within and across the current regulatory silos, which are “complex, slow, and expensive to navigate.” Financial services companies are governed by regulators on both federal and provincial levels, with further segmentation occurring with respect to industries and products. That creates a significant barrier and cost delivering solutions that are broad enough to be multifunctional while considering the entirety of a person’s personal financial circumstances and needs.
Grace called for policymakers to take the lead and get in front of innovations by moving swiftly toward open banking, breaking down regulatory silos, updating advisor proficiencies for a new normal that requires technical skills, and de-risking innovation for both start-ups and incumbents.