For concrete proof that different segments of the financial services industry can work together — and help investors — look here.

Recently, the Joint Forum of Financial Market Regulators — made up of securities, pension and insurance regulators — set up a special committee. It wanted to look into a proposal by an industry working group that it believes will lead to greater choice in products for pension plan sponsors and members, and will cut costs for regulators, consumers, sponsors and service providers.

The working group, comprised of representatives of the Investment Funds Institute of Canada, the Canadian Life and Health Insurance Association and the Association of Canadian Pension Management, was established by the Joint Forum to look into problems resulting from the different investment rules that apply to managed funds in the pension, securities and insurance worlds.

The ultimate goal would be to harmonize all these requirements across all three sectors. But this kind of regulatory utopia requires money and lots of time to answer the concerns and wishes of several regulators and government levels.

As an immediate recommendation, the working group has offered a less costly, less disruptive idea that will also be quicker to implement. It’s called “deference,” and means the regulator of one sector accepting the regulations of another in the area of investment restrictions.

Here’s how it would work: a pension plan administrator would be allowed to include a retail mutual fund or a segregated fund as a holding in a defined benefit or defined contribution plan without that mutual or seg fund also having to comply with the pension investment restrictions (as regulators have already accepted that these products are safe for retail investors). Similarly, securities and insurance regulators would have to be willing to accept the investment rules imposed by each other or by pension regulators to avoid unnecessary regulatory overlap.

In the area of investment restrictions, the differences are often based more on history and nuance than substance. As just one example, pension, insurance and mutual fund rules all impose requirements to ensure that a fund’s portfolio is not overly concentrated. Each regulator imposes a 10% limit, but each calculates it differently. The limit applied to pension and insurance products is based on book value, while the limit for retail mutual funds is based on market value. The difference may seem minor, but it can cause a lot of headaches when the restrictions are applied. When a seg fund “wraps” a mutual fund, it’s next to impossible to confirm the regulatory compliance. What ends up happening is that pension plan sponsors and administrators don’t want to take any chances with this uncertainty and often shun mutual funds and retail segregated funds, reducing the number of investment options and avoiding some well-run investment funds.

In the end, the working group believes the public interest would be better served with this deference model: it would provide a much more simplified administration process and lead to cost reductions for regulators, consumers, sponsors and service providers. It would also lead to greater choices for plan sponsors and members, providing increased competition and diversification.

The Joint Forum has reviewed the deference model and is making it one of its priorities this year.

IFIC has a long history of calling for similar regulation of similar products, so we were pleased to be part of this agreement.

The deference model will not mean any added cost to companies and there’s no risk for regulators. But it also strengthens the underlying core mandate of all regulators: to meet the needs of and support the best interests of investors.

Speaking on behalf of IFIC, I believe all industry participants should see this is as a step in the right direction toward a harmonization process that will benefit all. It will be interesting to see how this develops and where our next steps lie. IE

Tom Hockin is president and CEO of the Toronto-based Investment Funds Institute of Canada.