The regulatory fees that financial services firms are required to pay are, understandably, not especially popular among those firms’ compliance officers (COs) and company executives. However, the results of this year’s Regulators’ Report Card suggest that those COs and company executives recognize the necessity of these fees – and that survey participants increasingly are satisfied with the way these fees are structured.
In fact, the ratings for almost all of the regulators included in this year’s Report Card rose by half a point or more in “the fairness of the regulator’s fee structure for registrants” category. The only exception was the rating for the Ontario Securities Commission (OSC), which dropped by more than half a point amid complaints regarding the OSC’s method for calculating fees.
The Report Card results reveal general acceptance among members of the financial services sector of the fact that fees are a necessary way of funding the regulators’ operations.
“It is what it is,” says a CO with an investment dealer in Ontario. “Lower fees would be better, but we all understand [the regulators] need to raise money to operate.”
Adds a CO with another investment dealer in Ontario: “I don’t like paying the fees, but I recognize the regulator has a valuable and significant role to play, which requires resources.”
Some regulatory fees are structured so that the amount a firm pays is a function of its size, based on metrics such as assets under administration (AUA) or revenue.
For example, the annual membership fees that firms are required to pay to the Mutual Fund Dealers Association of Canada (MFDA) are calculated based on a firm’s AUA. As a result, larger firms typically pay considerably more than smaller firms do – and most COs and company executives say they consider this approach to be fair.
“[MFDA membership fees] are based on AUA,” says a CO with a mutual fund dealer in Ontario. “That essentially means the larger dealers are subsidizing the compliance of smaller dealers, but that’s a fair outcome.”
However, certain fees are standardized for all firms, such as the one-time entrance fee of $25,000 that investment dealers are required to pay to join the Investment Industry Regulatory Organization of Canada (IIROC). Some survey participants said that puts an unfair burden on smaller firms.
“I’m [with] a small dealer,” says a CO with an investment dealer in British Columbia, “[and] the big banks pay the same fees to register [with IIROC] as I pay – while having much larger economies of scale. So, obviously, they have a huge advantage there.”
Still, the Report Card’s results suggest that regulators are on the right track in keeping fees manageable.
The B.C. Securities Commission‘s (BCSC) rating in the fees category increased by the greatest margin, to 6.3 from 4.8 last year. Sandy Jakab, the BCSC’s director of capital markets regulation, says the higher score could stem from the fact that the regulator has avoided increasing its fees: “Our fees haven’t changed for 20 years, with the exception that when the exempt-market dealer and investment fund categories were added to the registration regime, we had to give them the same annual fee and application fee that other dealers have.”
In contrast, other regulators have managed to reduce some of their fees in recent years. For example, IIROC made changes to its market regulation fee model in 2012 that, according to an email from IIROC, resulted in approximately 85% of firms paying lower fees. IIROC’s rating in the fees category rose to 6.5 from 6.0 year-over-year.
The MFDA, which saw its rating jump to 6.4 from 5.8 in 2014, also has scaled back its fees, says Mark Gordon, MFDA president and CEO: “We do recognize that our costs [have a] direct impact on fees, so if we want to lower fees, we have to lower our own costs. This past year alone, we actually managed to reduce our operating costs by a $1 million – and that translated into a direct $1 million saving for our membership.”
The OSC’s rating was the only one to decline in the fees category this year, dropping to 5.1 – the lowest among all the regulators – from 5.7 last year. Some survey participants complained that their OSC fees had increased considerably in recent years; others simply said they pay too much.
“The fees are way too high,” said a CO with a mutual fund dealer in Ontario.
Some survey participants also complained about the OSC’s approach to calculating the level of participation fees that firms pay. Specifically, the regulator uses metrics from a historical reference year rather than using current information, which can result in fees that don’t reflect recent changes in a firm’s size or performance.
“This is a sore point,” says a CO with an investment-counselling firm in Ontario. “The OSC sets the fees based on 2012 performance, and sticks with that even if the company has changed.”
The OSC has heard similar feedback from various people in the industry and announced toward the end of the research period for this year’s Report Card that the regulator is changing its fee model to address some of these concerns.
Under the amended model, which takes effect on April 6, participation fees will be calculated based on firms’ most recent fiscal year’s information; thus, fees will track more closely with registrants’ current fiscal situation.
The changes also mean that the participation fees previously scheduled to increase in April will not rise.
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