Although the creation of a national co-operative securities regulator cleared a major hurdle with the Supreme Court of Canada’s ruling on the matter in early November, there’s another structural change taking shape in the regulatory landscape that could have an equally significant impact. That’s the imminent launch of the Financial Services Regulatory Authority (FSRA), the designated insurance regulator in Ontario.
The FSRA will affect the financial services industry in Ontario and nationally in several important ways. The FSRA will impose a comprehensive regulatory framework on insurance advisors and their firms to raise the standards of transparency and conduct. Namely, the FSRA will follow the lead of the Canadian Securities Administrators (CSA) and the Ontario Securities Commission (OSC), which have introduced reforms in the securities industry, such as the client relationship model initiatives and the recently proposed client-focused reforms. Consumers of insurance products will benefit from the improved transparency of product fees and charges, advisor compensation and higher standards for “know your client” and suitability requirements.
That these new rules and regulations are effective, practical and address regulatory gaps properly, without unintended consequences, is critical. To that end, the FSRA should hew closely not just to the recently released CSA proposals on the client-focused reforms, but to the extensive recommendations and alternatives to these reforms market participants have put forward. Efforts should extend beyond rule-making to the compliance-oversight process, such as adopting the successful risk-based compliance approach at the Investment Industry Regulatory Organization of Canada (IIROC), and to the clear need for improved access to consumer redress through an ombudservice.
The wealth-management business has moved steadily toward an integrated platform of financial products and services, with advisors at the fulcrum. Advisors offer holistic planning and a full spectrum of products and services to meet evolving intergenerational needs and preferences as clients make their way through the financial lifecycle. The FSRA will be the needed interlocutor to engage with the OSC and the CSA to ensure regulation facilitates this integrated advisory model rather than inhibits or imposes barriers to conduct.
The FSRA should promote rule harmonization between the insurance and securities industries to avoid opportunities for regulatory arbitrage. Furthermore, mutual recognition of rules and shared functionality among securities and insurance regulators should be encouraged. Such an approach could streamline the audit/compliance process, enabling regulators at IIROC to oversee and enforce certain insurance-regulated activities that investment dealers carry out, which would contribute to more cost-effective regulation. Indeed, a close working relationship between the two regulators will facilitate greater integration of rulebooks and functionality over time. Moreover, this integration will result in cost savings, such as a common infrastructure, for investor outreach and financial literacy initiatives.
A close working relationship between IIROC and the FSRA also would invigorate: the prevailing culture and conventional thinking on regulatory process, including in areas such as metrics to address regulatory gaps, whether through enforcement or new rules; the reliance on principles-based rather than prescriptive rules; the analytics employed to discharge needed cost-benefit for proposed rules; and the mechanism for effective reviews of the existing accumulating rulebook as the pace of innovation and change accelerates in the financial services industry.