With no shortage of initiatives in progress, it would appear that retail investor protection is getting plenty of attention from regulators. But there’s still a wide gap between what is underway and what was achieved in the past year, leaving much to be done in the year ahead.

Retail investor protection did get a boost this past year with the implementation of registration reform, which not only rationalizes and harmonizes the advisor registration regime across the country, but also brings some new categories of firms under greater oversight and aims to cultivate a better culture of compliance throughout the industry.

In addition, in mid-December, the Canadian Securities Administrators approved the new complaint-handling standards being proposed by the self-regulatory organizations — the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada. Under these new rules, financial services firms must follow certain standards and timelines for investigating and responding to client complaints.

More standardized, regimented complaint-handling procedures may make things a little easier on clients when they run into problems. And, ideally, firms should be reducing the reasons that clients have to complain in the first place.

On that front, there are a host of reform initiatives underway, most of which have been ongoing for several years now, including: a proposed new point-of-sale disclosure regime for mutual funds and segregated funds; attempts to redefine the client/advisor relationship; efforts to enhance investor involvement with policy-making; and a proposed rule to bring greater oversight to investment dealers’ financial planning activities, among other things. Yet, investors are still waiting for all of these things to bear fruit.

Among these various initiatives, the so-called “client relationship model” that the SROs have been working on for several years now (coming out of the ashes of the fair-dealing model, the Ontario Securities Commission’s effort to rethink retail regulation entirely) probably deserves to be at the top of the list.

When the CSA adopted registration reform this past September, it suggested that the CRM — the SRO component of the registration-reform project’s response to issues such as up-front disclosure, suitability, managing conflicts of interest and performance reporting — could be in place by the end of 2009. That hasn’t happened. Now, the hope is that the CRM will take effect before next summer.

Karen McGuinness, vice presi-dent of compliance with the MFDA, says the SRO is working with IIROC both to harmonize their respective versions of the CRM and to co-ordinate the timing of their adoption. “We expect to submit the next version of our proposals to the CSA early next year,” she reports, “and hope they will be finalized by the spring.”

The CRM rules (along with the new complaint-handling standards and a new rule improving the pricing and transparency of over-the-counter securities) have also been singled out as top priorities for the coming year by IIROC’s president and CEO, Susan Wolburgh Jenah.

In a recent speech, she also pointed out that many of the same issues that are addressed by the proposed CRM rules are under active discussion in other jurisdictions: Britain’s Financial Services Authority is planning to eliminate commissions and raise proficiency requirements; U.S. regulators are looking to impose a fiduciary standard on all firms that deal with retail investors, regardless of whether they are broker-dealers or investment advisers; and the Australian Securities and Investment Commission is recommending to domestic policy-makers that firms dealing with retail investors be held to a fiduciary standard and that Australian policy-makers also consider outlawing commissions, among other things.

Canadian CRM rules don’t contemplate anything nearly so radical. Canadian regulators hope to deal with these same issues largely through improved disclosure; and, as Wolburgh Jenah noted, although the CRM rules don’t go as far as introducing a fiduciary standard, they “would elevate the current standard of care and loyalty.” Whether this is adequate to address some of the long-standing retail investor concerns remains to be seen.

Investor advocate Ken Kivenko says that the proposed CRM, along with new guidelines on suitability and know-your-client requirements, should be the top priority for regulators in the year ahead, followed closely by better access to restitution and establishing investor advisory committees at the regulators.

The restitution issue is another long-running complaint from investors. Several years ago, a legislative committee in Ontario recommended that the topic be examined with a view to providing better access to restitution than is currently available (through channels such as the Ombudsman for Banking Services and Investments, arbitration or the courts); the government at the time pledged to act on that recommendation, but never followed through. There doesn’t appear to be any move to do so now, either, although there is some hope that the push for a national regulator will, if it succeeds this time around, include some mechanism to improve access to restitution.

In mid-December, IIROC did address one component of the restitution system: it published the results of a review of its arbitration program, launched in 2008, seeking comment on possible changes to the program, including raising the award limit to $350,000 or higher from its current $100,000. The comment period for that review closes in mid-March.

The difficulty in getting greater involvement by retail investors in policy-making has long bedevilled the regulators as well. Retail inves-tors are the intended beneficiaries of many regulatory efforts, as they are at a huge disadvantage regarding resources and knowledge when dealing with the industry — and so most in need of protection. Yet, getting useful input from retail investors on proposed rules is never easy.

The OSC did have an investor advisory committee for a couple of years — although it was not nearly as robust as a similar body that exists in Britain — but the experiment was abandoned after the initial trial. It was replaced by a joint OSC/IIROC/MFDA/OBSI committee that did some work on retail investor issues, although that committee is entirely made up of regulators and one of the driving forces behind the effort, OSC vice chairman Larry Ritchie, has since been seconded to the transition office working to create a national regulator.

At legislative hearings held in the spring of 2009, the OSC had pledged to create a new investor secretariat to increase investor involvement at the regulator, but, with Ritchie having left for the transition office, it appears that momentum to follow through on that promise has dissipated. The OSC maintains that its staff “are currently considering a number of different ways to consult with investors and for obtaining investor feedback on proposed rules, policies and other initiatives, including ways to promote improved representation of the views of investors in the OSC’s consultation process.”

According to Pamela Reeve, an associate professor of philosophy at the University of Toronto and one of the members of the original investor advisory committee at the OSC: “The lack of an independent, funded investor advisory panel to monitor and comment on regulatory initiatives from a consumer perspective [is a] major ongoing problem in the retail investor area.”

Reeve notes that the latest proposal for a national regulator does call for a funded, independent advisory panel, similar to what exists in Britain and Australia, adding: “Creating such a body should be a priority and should not have to wait another two to three years for implementation.”

Although the investor community waits for a new investor advi-sory committee to be created, the OSC reports that it is working to “refresh” its focus on investors in other ways. This includes internal efforts to improve its attentiveness to investor issues and more active external outreach through the Investor Education Fund (which is funded by OSC enforcement settlements but operates independently from the commission).

Internally, the OSC has created an investor steering committee, composed of OSC directors and managers, that helps prioritize policy work. “The committee has been busy recommending improvements to OSC procedures, programs and decision-making criteria with the investor in mind,” says Wendy Dey, the OSC’s director of public affairs. She notes that the steering committee highlights the investor angle in rule-making and policy initiatives to OSC staff to help them solicit feedback.

In addition, Dey says, operational changes “to the way we work and interact with investors” are also considered — although she notes that the OSC recognizes that these sorts of efforts do “not replace direct investor input.”

Externally, Dey reports, the OSC’s contact centre has been reorganized and better staffed in an effort to provide better assistance to investors with their inquiries.

The Investor Education Fund has also been ramping up its efforts. In late November 2009, the fund launched a new website designed to improve consumer knowledge about investing and managing money.

And it has been teaching people directly about financial issues: Dey reports that since April 1, 2009, the Investor Education Fund has made presentations to 51,000 high-school students, trained 463 teachers to do some financial education in their classrooms and has given lectures about fraud prevention directly to 335 investors.

The preventative medicine of investor education is, of course, essential, but it’s never going to eliminate the need for better investor protection. Regulators should have plenty of work ahead of them on that subject in the coming year. IE