Regulation of the global financial system is set to undergo drastic, fundamental changes, and investment advisors should ensure their voice is heard in the regulatory process, legal experts said on Wednesday.

“The system of global financial regulation is flawed, and has to somehow be addressed. If it’s not addressed, it will happen again,” said Richard Marshall, a partner at Ropes & Gray LLP, speaking in Toronto at the annual conference for the Investment Counsel Association of Canada.

It is impossible to predict the types of reforms that could take place, but Marshall said they would likely include shifts in one of two directions: more integrated global financial regulation, or barrier-building protectionist regulation similar to that of the 1930s.

“It is possible that there will be a radical change in one of the two directions,” Marshall said.

He pointed to a recent suggestion by U.K. Prime Minister Gordon Brown, calling for the establishment of global regulator to oversee risk management at financial institutions around the world, as one possibility.

Factors almost certain to be acknowledged in the regulatory debate are the lack of rules pertaining to hedge funds and derivatives, and risk management at financial institutions, the experts said.

New regulation could have a huge impact on investment advisors, and yet the industry has largely failed to make its voice heard in the reform process, according to David Tittsworth, executive director of the Washington, D.C.-based Investment Adviser Association.

“Even though we’re a big profession or industry, I think we’ve been somewhat asleep at the wheel,” Tittsworth said.

He acknowledged that for such a large industry to work together in advocacy is extremely challenging. The fact that many different trade associations seek to represent the same industry, for instance, creates diversified perspectives and confusion for policy makers.

Still, industry members all face the same challenges and the same regulations. The industry’s voice is less likely to be heard if investment advisors do not work together, Tittsworth said. “We face some significant challenges and it’s something that we have to come together on.”

Financial professionals in Canada should be particularly wary of the prospect of a more protectionist global financial system, given its economic dependence on other countries, according to Marshall.

“Restricting the movement of capital, the movement of financial products — it’s a risk out there, it’s a danger,” he said. “It would be very dangerous to move to a system where we close the borders and repeat the mistakes of the 1930s.”

The new U.S. administration is likely to welcome international opinions on regulatory reform, including Canadian perspectives, Marshall said, and he encouraged industry members to have a say.

“Everything is up for grabs in the current debate,” he said.

IE