CRM2 is causing a big disruption to business

“It’s the amount of time required from a compliance standpoint [that has been disruptive],” says a CO with a mutual fund dealer based in Western Canada. “Reviewing procedures, documents, internal policies – the impact has been tremendous.”

In fact, 71% of survey participants characterized the implementation process related to CRM2 thus far as being somewhat disruptive, very disruptive, or completely disruptive to their businesses. Only 29% of those surveyed described the process as being minimally disruptive or not disruptive at all.

The regulatory regime known as CRM2 will involve providing clients with greater levels of disclosure regarding investment costs and performance. The requirements for firms to be compliant with CRM2 are coming into force in stages, with Dec. 31, 2015, and July 15, 2016, being major deadlines to implement the changes required.

Although survey participants agreed that the overall goal of CRM2 to protect the interests of clients is laudable, they also feel that the process of developing the new regulatory regime has not been handled well by either the provincial regulators or the self-regulatory organizations (SROs).

In particular, disagreements between the SROs – the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) – and the provincial regulators has resulted in delays in formalizing regulations, thus burdening the industry with tighter timelines.

“The regulators don’t seem aligned,” says a CO with an investment dealer based in Ontario. “It’s the SROs against the [Canadian Securities Administrators (CSA)] – and it feels like we’re paying the price.”

In addition, the repercussions of the amount of work required to implement new reporting systems and train financial advisors to communicate with clients about the new reporting documentation has resulted in great cost to businesses.

“CRM2 has been disruptive when it comes to budget and information-technology resources, in the sense of diverting people and capital away from other projects,” says a CO with an Ontario-based firm licensed to operate on IIROC’s and the MFDA’s platforms.

As well, some survey participants said that preparing for CRM2 has been especially disruptive for their firms because they’re also implementing or preparing for other non-CRM2 compliance regimes, such as regulations involving Canada’s anti-spam legislation and the regulations regarding the U.S.-Canada Intergovernmental Agreement (through which the two countries are implementing the U.S. Foreign Account Tax Compliance Act).

“We’re taking multiple hits at the same time,” says a CO with an Ontario-based firm licensed to operate on both the MFDA’s and IIROC’s platforms.

Most COs and company executives surveyed also expressed doubt that CRM2 would achieve the goals regulators intend, despite all the effort and expense involved in developing and implementing the regulatory regime. In particular, many said, clients will be inundated with information that will lead to more confusion than clarity.

“As much as I agree with the principles behind CRM2, 95% of clients will ignore all this new disclosure,” says a CO with an Ontario-based investment dealer. “The amount of money and time that has been put in by the industry is just not worth it. The clients who will pay close attention [to the new disclosure] will be the same clients who were paying close attention before.”

Adds a CO with a Quebec-based investment dealer: “When you’ve built a 20-year relationship [with clients], this is all just a waste of time and paper. Happy clients get mad and annoyed because you’re shoving paper at them.”

Then, there are the COs and company executives with smaller firms who feel that the CRM2 implementation process is penalizing their businesses unfairly because they lack the resources that the bigger players have to absorb the costs related to adopting the new regulatory regime.

“If what the CSA wants to do is drive small firms out of the business, then it’s achieving this goal,” says a CO with a firm in Ontario licensed to operate on both the MFDA’s and IIROC’s platforms.

Regulators, for their part, say CRM2 will provide clients with crucial and beneficial information to achieve their financial goals – and to assess the value of the financial advice they receive.

Furthermore, regulators say, they have been working with the industry’s firms at every step of the implementation process to help them to prepare for CRM2. This includes providing firms with guidance in the form of notices, planning tips and “frequently asked questions” and engaging in ongoing dialogue with firms to understand their needs and concerns.

“We know this is going to be a lot of work for the industry,” says Mark Gordon, president and CEO of the MFDA. “Our goal is really to help prepare the members, as well as the approved persons, to deal with the challenges this is going to present come 2016.”

Still, there are some investment industry COs and company executives who said that the process of implementing CRM2 has not been very disruptive to their businesses because the new regulations happen to align well with many of their existing practices.

“There’s been some disruption, but it hasn’t been too bad,” says a CO with an investment dealer based in Ontario. “Also, many of the changes taking place are practices we already follow in our business model.”

Meanwhile, other COs and company executives said that CRM2 hasn’t affected them as much as other firms because of their respective business models. Says a CO with a Quebec-based investment dealer: “We’re a small introducing broker. It hasn’t been too disruptive because our carrying broker takes the burden for us.”

And still other survey participants indicated that although the disruption associated with CRM2 has been moderate so far, that is likely to change when the regulatory regime comes fully into force next year.

“The first wave has been pretty minor, because we were already doing disclosure,” says a CO with an Ontario-based mutual fund dealer. “The next wave will be different.”

© 2015 Investment Executive. All rights reserved.