Planners were asked for the first time in this year’s Report Card how well they thought their firms were dealing with the brave new world of increased compliance. Their response was impressive, with the average score of 8.7 out of 10 — making it the highest-rated category.
Eight of the planning firms surveyed received a mark of 9.0 or higher, with advisors at PFSL Investment Canada Ltd. of Mississauga, Ont., rating their firm’s compliance department an outstanding 9.8.
The overall scores seem to reflect the reality of increased regulation of mutual funds dealerships now that the Mutual Fund Dealers Association of Canada is up and running and playing hardball.
In its first round of dealer audits, MFDA examiners have found evidence of some glaring problems, and enforcement promises to get tougher in the near future.
Reporting requirements have already been tightened. Since March 1, members have to report monthly rather than quarterly, and the MFDA expects to begin enforcement hearings at the end of June.
Meanwhile, advisors appear to be putting a good face on compliance. Several PFSL advisors say the firm’s compliance is one of the best aspects of working there. An advisor in Central Canada says the firm’s “credibility and adherence to compliance regulations” is its best virtue. Another PFSL advisor in the Atlantic provinces brags that the firm has “the best compliance department in the industry.” Yet another PFSL advisor expresses appreciation that the firm is “very high” on compliance and tries “to make sure that we don’t screw up and lose our business.”
The importance of the last sentiment was echoed by Geoffrey Charlton, executive vice president of Berkshire Investment Group Inc. in Burlington, Ont. “The only thing that can take an advisor out of his or her business is to do something that is not compliant,” says Charlton, whose firm scored 8.7. “From Day 1, we have tried to create a compliant firm. We help advisors build their practices on solid foundations. We’re ruthless about this; we make no apologies.”
However, the compliance numbers are not without some mixed messages. Sometimes a low rating refers to the advisors’ discomfort with what can be a stricter regime, not a firm’s failure to impose a stricter regime. Take W.H. Stuart & Associates, for example: it scored the lowest, at 7.4. However, an Ontario advisor says the firm puts a “high emphasis” on compliance, and another says it “has a compliance orientation.”
An advisor in Atlantic Canada for Toronto-based Laurentian Financial Services gave this typical review of a compliance department: “It’s good, but a pain in the ass.” Laurentian scored a 9.0.
The compliance department is sometimes called the “anti-business department,” admits Chris Reynolds, president of Investment Planning Counsel of Canada Ltd., the planning arm of IPC Financial Network Inc. in Mississauga, Ont. “Advisors don’t really like compliance,” he says, “which means compliance is probably really good.”
However, he says, the general attitude is changing.
But even if that attitude doesn’t surface in the marks the planners award their firms, it is reflected in the comments they make. Frustrated advisors say compliance can be among the worst aspects of their firm. And a Berkshire advisor from Atlantic Canada spoke with concern about the compliance changes that have overtaken the industry.
While the industry weighs the idea of a single securities regulator, another layer of country-wide enforcement, the MFDA, is cranking up.
Inconsistent
“The challenge we have is every province and every regulatory body has its own way of doing things, which is not consistent,” says Robert Frances, president and CEO of Montreal-based Peak Financial Group. “One will tell you to use red paper; the other will say you need blue paper. And you end up with purple paper all over the place — and nobody is happy.”
So far, the MFDA has conducted 83 examinations among its approximately 200 member firms. Six referrals to enforcement have resulted, says Karen McGuinness, the MFDA’s vice president of compliance.
Among the most common deficiencies
spotted in the reviews, says McGuinness, is a lack of evidence showing supervision of advisors. “Some members downplay this,” she says, “but they should take it seriously.”
For example, there should be evidence that supervisors have done more than simply initial know-your-client documents, especially since “suitability” is the top client complaint. Of the 123 client complaints the MFDA has received year-to-date, 27 are about suitability. Four of the complaints have escalated to investigations.