Is CRM3 on the horizon?

CRM2, an initiative of the Canadian Securities Administrators (CSA), the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, covers mutual funds and securities.

Products that fall under the jurisdiction of other regulatory bodies, such as insurance, PPNs, certain real estate and mortgage investment products, and guaranteed investment certificates, are therefore not subject to CRM2.

This disparity has been a source of concern for some in the financial services sector. Some financial advisors and financial services firms that are subject to the new rules, for example, have expressed frustration that their counterparts in the insurance realm are not facing the same disclosure requirements.

“There’s a competitive concern,” says Barbara Amsden, managing director with the Investment Industry Association of Canada (IIAC). “Competitors will not be subject to the same rules or subject to the same rules in the same way.”

Segregated funds have been flagged as particularly problematic, given that they’re very similar to mutual funds but are classified as insurance products and, therefore, are not subject to the new disclosure requirements. With fees and commissions for mutual funds set to be outlined in far greater detail compared with those for seg funds, it could become difficult for clients to make accurate comparisons between these types of products.

“The advisor who is selling a mutual fund has to specifically talk about the trailer that’s embedded, and the seg fund sales person does not,” Amsden says. “It may seem that the mutual fund is a more costly product.”

Inconsistent disclosure practices could also complicate the sales process for advisors, particularly dual-licensed advisors who are forced to keep track of different procedures for different products.

A CSA document released in February indicates that although the CSA does not have the jurisdiction to impose requirements pertaining to the distribution of non-securities products, such as seg funds, the regulators urge advisors to apply the CRM2 disclosure rules to all investment products.

“We encourage registrants to provide their clients with information that meets the standards set in the CRM2 amendments in respect of all of their investments,” the CSA document says. “This will enable investors to better understand the relative costs of different investments and their performance.”

Some firms and advisors report that they are already taking the initiative to apply the new disclosure rules to seg funds and other products that they sell. However, Thiele is doubtful that a majority of advisors will go above and beyond the requirements specifically set out in CRM2.

“I’m not sure it’s practical to believe that even the most organized registrants are going to have enough time to do this on the securities side and then take it upon themselves to do it on the insurance side or with other investment products,” Thiele says. “That’s asking way too much for, at least, the timetable that the CSA has put forward.”

In order for the regulators to achieve their goal of empowering investors with the knowledge to better evaluate the investment products they purchase and the advisors they work with, Thiele believes the rules must eventually be extended to all investment products.

So, it’s possible that the regulators could eventually take further steps to establish consistent disclosure standards across the whole investment industry, Amsden says: “We suspect that there’s going to be a lot of effort put [forward] to ensure clients are able to compare products with all equivalent products. There will be continued pressure to have greater transparency and easier access to this information.”

There are certain logistical challenges associated with applying a single set of rules across different segments of the financial services sector, which are regulated by different bodies. Insurance regulators, for example, tend to take a principles-based regulatory approach, providing firms with flexibility in the way they comply with the rules. In contrast, securities regulators are more prescriptive in their approach to the rules, spelling out the specific steps that firms and registrants must take to comply.

“We’re talking about two different regulators, so it’s a reality of two different approaches and two different objectives that we’re working with,” says Paul Holba, vice president of retail investments distribution with Empire Life Investments Inc. in Burlington, Ont.

Extending the application of the CRM2 amendments to a broader segment of the investment business may not be necessary to achieve the regulators’ goals, Holba believes. Once advisors have become accustomed to providing the new disclosure for securities products – and clients become accustomed to receiving it – he says it would be a natural extension for the financial services sector to begin providing the same disclosure for non-securities products, even in the absence of explicit regulatory requirements.

Ultimately, that process will be driven by the client, Holba adds: “If there’s a set of prescriptive rules that are being followed on one side of the industry, and disclosure forms are there but not on the other side, the customer is going to ask for them.”

Enhanced disclosure wouldn’t necessarily represent a drastic change for those in the insurance space, says Valerie Biggs, chief compliance officer with Empire Life Investments and Empire Life Insurance Co. in Toronto. Even though the regulatory approach is much less prescriptive on the insurance side of the investment business, she says insurance firms and advisors are already subject to many of the same principles that are captured in CRM2.

“There has always been an expectation from the regulators on both the securities and the insurance sides of the business that advisors deal fairly, honestly and completely with their clients,” Biggs says. “There has always been an expectation of transparency. It’s just phrased differently, and the regulatory framework approaches it differently on each side of the industry.”

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