While Canadian regulators have been working on rules to control the retail investment industry for more than 20 years, the 2008 financial crisis sparked more frenzied rulemaking from financial overseers in other countries. Reforms from the 2009 G20 Summit led to increased control of OTC derivatives trading and enhanced investor protection, transparency, and supervisory requirements. The Dodd-Frank Act, passed in 2010, introduced controls on the US financial services industry that were the tightest in decades.
While investor protection has certainly improved, an open letter from Investment Industry Association of Canada
President Ian C.W. Russell, titled Have we reached the high water mark of global reform?,
suggests the enhanced rules may have had unintended consequences.
Concerning the Dodd-Frank Act, Russell cited US President-elect Donald Trump’s pick for Treasury secretary, Steven Mnuchin, who said “the number one problem with Dodd-Frank is that it’s way too complicated and cuts back lending.” Similar concerns over impracticalities and possible unintended consequences were raised for a fiduciary standard advanced by the US Department of Labor.
Private sector stakeholders worldwide have also noted adverse market effects, with mounting evidence of reforms on bond inventories and collateral resulting in reduced transaction size and increased difficulty executing trades. This has significantly eroded bond liquidity: “The thirty-year bull market for bonds may be coming to an end, resulting in a downward trajectory for bond prices,” Russell wrote.
Respondents to the European Commission’s Call for Evidence, which invited public feedback on the effects of financial legislation implemented in response to the financial crisis, also provided examples of possible frictions, overlaps, and unintended interactions between different regulations. Uneven implementation of rules, due to differences in timing of rulemaking initiatives, has also resulted in disjointed and overlapping rules that have disrupted capital flows across jurisdictions.
Canadian regulators are likely to adopt a more measured pace of rulemaking over the next few years, the letter said. In particular, they will monitor adoption of and possible pushback against international banking regulations, making sure that Basel rules for Canadian banks will correspond closely with US and EU banking rules to ensure Canada’s competitiveness. Canadian securities regulators’ commitment to a post-implementation review of CRM1 and CRM2, as well as recent evidence of substantial increases in compliance costs for large and small investment firms, also increase the likelihood of amendments.
“There is a growing consensus that the pendulum has swung too far,” Russell wrote. “We have probably reached the high water mark of reform. However, this does not mean the water will recede quickly. Further reforms to regulation and adjustments to existing rule books will proceed slowly and carefully.”
Cost containment a priority for Canadian wealth managers
Wealth industry sees overall profit, but some firms struggle