The Canadian securities industry may have come through the financial crisis relatively well, but regulators are focusing on finding the gaps that remain, and closing them.
Speaking to the IIROC Compliance Conference last week, Susan Wolburgh Jenah, president and CEO of the Investment Industry Regulatory Organization of Canada (IIROC), said that while it’s useful to reflect on what worked well in Canadian markets during the crisis, “it is even more important to identify significant gaps or weaknesses in our financial system in order to proactively address them.”
“Canada must continue to be a strong advocate for high standards of regulation, market conduct and investor protection,” she stressed. “Effective regulation demands proactive efforts to identify and address risks, systemic or otherwise, in order to prevent or mitigate harmful outcomes.”
In particular, market scandals since the crisis have pointed to a couple of areas of possible vulnerability. The recent bankruptcies of U.S.-based firms, MF Global and Peregrine Financial, which also took down their Canadian subsidiaries, highlighted the risks that operations of affiliates can pose to IIROC firms.
“We are focused on identifying material financial and operational risks and the imposition of heightened supervisory oversight in response,” she noted, adding that IIROC will be issuing new guidance in October addressing outsourcing arrangements. That guidance will define the business activities that are considered core to a dealer’s operations and that may not be outsourced; and, it will set out IIROC staff’s expectations regarding the appropriate due diligence procedures and the supervisory structures that must be put in place before entering into permitted outsourcing.
Moreover, in the wake of the collapse of China-based, Sino Forest Corp., and the Ontario Securities Commission’s examination of issuers based in emerging markets generally, Wolburgh Jenah noted that IIROC recently struck an advisory committee to examine underwriting due diligence standards. She said that the committee “is discussing current and best practices in the underwriting process, helping to identify gaps and exploring ways to address them…”
In addition to these recent market scandals, the ongoing evolution of the investment business is also giving rise to increased compliance risks. Wolburgh Jenah observed that, as the investment industry evolves and new and more complex products become available, “this creates greater risk that products will be sold to clients for whom they are unsuitable.”
“Dealers must respond with robust product due diligence standards. Advisors must be more focused than ever on their know-your-client, know-your-product and suitability obligations in order to provide the best possible advice to their clients,” she stressed. And, she called on firms and advisors to embrace the spirit underlying the Client Relationship Model reforms that were adopted earlier this year.
IIROC will continue to facilitate sharing best practices “to assist firms as we work together to raise the bar on industry professionalism and bolster investor confidence,” she said.
It’s also bolstering its compliance efforts to better assess sales practices in the growing fixed income market. “One of our current priorities is to implement a fixed income trade-reporting system to enable effective oversight and surveillance monitoring of dealer members’ trading activity relating to this significant asset class,” she said.