An unprecedented period of CSA policy development and rule implementation is coming to a close.
Collectively, the implementation of the client-focused reforms (CFRs), the ban on the payment of upfront sales commissions including deferred sales charges, and the ban on trailing commission payments to order execution only dealers will permanently reshape the advisor-client relationship and how retail mutual funds are distributed in Canada.
The industry is now working to implement these changes over the next 15 months.
The consultations that led to the adoption of these rules began three and a half years ago. This may seem like a long time, until one considers the significance of the regulatory issues on the table: whether there should be an overarching best interest standard for dealers, whether all embedded commissions should be banned and how best to manage conflicts of interest.
The consultations also commenced on the heels of the industry’s implementation of the Client Relationship Model (CRM2). The CRM2 reforms provided investors with arguably the best disclosure regime in the world for clients of investment dealers and mutual fund dealers.
The breadth of interests impacted by these reforms required a robust, comprehensive and rigorous consultation process that provided a fair opportunity for all stakeholders to be heard and have their views considered.
Any consultation process that involves multiple stakeholders with diverse interests will take time to get right. And by “right,” we mean rules that not everyone likes but everyone can live with. The CFRs and embedded commission consultations required two major concept papers, two drafts and two final rule proposals in order to gather and assess all the feedback and submit final rules to government for approval.
Regulators, the industry and investor advocates all had strong views on the rules’ ability to adequately protect investors and support efficient, effective and competitive capital markets. However, the ultimate test of any consultation process is whether stakeholder views were fairly considered. The answer is yes.
At a high level, the amendments recognized that cost is only one factor in a suitability determination; that financial advice has significant value; that supervision systems can be implemented in a scalable or “proportionate” fashion, depending on the business model; and that the CFRs should be conformed to existing SRO rules where that makes sense.
The hard work of implementation is underway: building new information technology systems, drafting policies and procedures, and training. Industry education providers like IFSE have to revise and upgrade their courses to conform to the new regulatory framework.
Regulators do not expect perfection in the first round of compliance reviews. There are many ways for individual firms to implement the requirements. What regulators will expect is good faith efforts to comply. There is nothing to be gained by “gotcha” examinations or enforcement referrals.
So, what is next?
The CSA should prioritize the development and implementation of a modern technology infrastructure beginning with the implementation of SEDAR+, the project to rebuild the CSA electronic filing systems. And while stakeholders benefit from the rigorous rule development consultation process, there has been little public consultation on the direction, objectives and importance of SEDAR+.
The benefits of modern, state-of-the-art electronic filing systems are obvious: better compliance, reduced regulatory burden and enhanced investor protection. The benefits of consultation have been proven, and stakeholders need to be brought into this process.
Given the scope of reform and the importance of the investor benefits, a period of relative calm in the policy development department would be in order to consolidate new systems, guidelines and best practices and ensure the best outcomes for investors.