While many are already technically compliant, regtech firm finds an unsettling number still face operational challenges and risks
The December 31 deadline for the client-focused reforms has come and gone, and investment dealer and advisor firms across Canada are expected to already be compliant from a know-your-product (KYP) perspective. But according to Dave Carr-Pries, vice president for Product and Marketing at InvestorCOM, there’s a worrying gap between those expectations and the reality in the industry.
“Here we sit two weeks into the new year, and I think there's still a lot of confusion at the advisor level,” he tells Wealth Professional.
Based on the regtech company’s own research, Carr-Pries says Canadian investment dealers can be categorized into four groups. The first category consists of large players who go through lengthy project implementations regularly, and therefore realized they had to begin their transition in early 2021 or before. Firms in the second category, early adopters, are either visionary firms that immediately recognized the need for tech-based solutions to CFR compliance, or firms that were faced with a specific business challenge that happened to align with the CFRs.
A majority of firms fell into the third category; deliberate and planful, they focused their attention on the conflicts of interest provisions to meet the July 1 deadline before moving on to the KYP work, with most of the heavy lifting on that front happening after Canada Day.
“There was a surprisingly large group of firms who really only started preparations in the fall,” Carr-Pries says, referring to the fourth category, “which meant it was either a really mad dash to be in compliance by the end of the year, or in many cases it meant [adopting] some mitigating strategies, and a lot of work to finish up in 2022.”
While most firms were technically in compliance as of January 1, he’s still hearing a lot of uncertainty at the advisor level as a result of delayed rollouts of technology solutions, gaps in training, or other issues. Some firms are addressing the KYP challenge through mitigating solutions such as form-based processes, which means they’re technically not out of compliance, but their advisors and office staff are carrying a heavy administrative load.
There are several reasons why some firms weren’t able to meet the deadline successfully, according to Carr-Pries. While the principles behind KYP rules didn’t change significantly, there was a fair bit of delay from the self-regulatory organizations in issuing the final guidance around KYP rules, which led to challenges for firms that took a wait-and-see approach. Others were financially constrained: in the middle of 2020, when many firms were finalizing their budgets for 2021, it was not yet clear to them whether regulatory compliance technology would turn out to be an investment they’d need to make.
“When things finally took shape in 2021, and it became clear that advisors really need some technical assistance to comply with KYP requirements, it was too late to get funding,” Carr-Pries says.
Many also struggled with the principles-based nature of KYP. While regulators intended for it to create flexibility that would accommodate different business models, a lot of dealers found it hard to differentiate a “significant change” from a “material change” in an investment product, for example, or how many fund alternatives an advisor has to consider before they can say they’ve done their duty with respect to product due diligence.
Dealers who straggled in compliance, Carr-Pries says, now face numerous challenges and risks. A significant one concerns the costs of training and retraining advisors and staff as different solutions are phased in. Firms that used stop-gap manual processes as a stop-gap are liable to experience disruptions as they deploy their permanent technological solutions. Some technological solutions, he adds, go through several phases of deployment.
“There’s that continuous change management; it's hard to say, we've done it once, and we're done,” Carr-Pries says.
Because the first few months of the year are a busy selling season for advisors, delaying implementation past January 2021 means, for all intents and purposes, putting it off until March and April. Advisors using manual form-based solutions are effectively caught between having to collect and document disparate pieces of information and the hectic pace of their business.
“I'd say it only took one week into the new year before I started getting phone calls from wholesalers at fund companies, who were getting this deluge of calls from advisors asking for product information,” Carr-Pries says. “They want to support their advisors, so they’re contacting me and saying ‘how can we support the dealer and advisor community in a better way?’”