Gearing up to implement CRM 2

The biggest challenge for firms is expected to be the new reports that they will have to start producing – such as the new annual cost reports and new performance reporting. In consultations that the regulators undertook in developing these rules, the industry warned that these new reports will be costly to produce, and that some of the disclosure they are intended to deliver could prove confusing to clients.

The CSA is acknowledging these concerns by allowing for, what it calls “unusually long” transition periods, of up to three years in some areas, in order to give the industry time to build the systems that will be needed to provide the required disclosure.

These prolonged transition periods are also intended to give the industry time to ease any confusion that clients may experience — a chore that will largely fall on advisors, who could be called on, not only to justify their trailer commissions, but also to explain new performance reporting measures. For example, firms that are currently reporting time-weighted rates of return to clients will now have to switch to reporting money-weighted returns (or report returns under both methodologies).

The CSA acknowledges that this may cause some client confusion, but it points to the transition period as a measure designed to give the industry plenty of time to explain the change.

And if this process pushes firms and advisors into conservations with their clients about the returns they report, and the cost of achieving them, then ultimately the CRM reforms will have served their purpose.

The initial CRM reforms, which were finalized in 2009, addressed “relationship disclosure”, and managing conflicts of interest, among other things.

It’s too early to say whether those reforms have made much of a difference. The Investment Industry Regulatory Organization of Canada (IIROC) only finalized its version of the first phase of the rules in March of last year, and they are still in the process of being implemented.

The Mutual Fund Dealers Association of Canada (MFDA) was a bit faster off the mark, adopting its reforms in 2010 — which means that it has had some time to assess the impact of those initial changes. Earlier this year, the MFDA issued a bulletin detailing the results of its reviews of firms’ upfront disclosure in the wake of its CRM reforms.

Although the MFDA found that “generally” firms are delivering disclosure that meets its requirements, there are also certain areas in which it found deficiencies. In particular, the bulletin indicates that its compliance sweep turned up weaknesses in firms’ disclosure about proprietary products, suitability, and compensation.

For example, it notes that it uncovered a few cases of firms not being clear enough in telling clients that they only sell proprietary products; or not adequately distinguishing between proprietary and third-party products.

It also uncovered weaknesses in compensation disclosure: in some cases, firms failed to reveal much more than the fact that there are costs associated with investing. Dealers should be spelling out the types of compensation that they may receive, the MFDA suggests, along with disclosure of referral fees, and other sorts of compensation they may receive, in addition to the usual sales commissions and trailer fees.

In general though, the MFDA is satisfied that firms are meeting the new requirements. “Overall the disclosures met the requirements, and there was no one area that I could point to as a common problem,” says Karen McGuinness, vice president compliance at the MFDA.

“In some instances, we did find that either the disclosure was too general — for example in the compensation area — or way too specific,” she notes. But, she says there were only a few firms where it required revisions.

This is the second article in a three-part series on the Client Relationship Model.
On Thursday: What’s at stake as CRM reforms are implemented?