BT Financial industry regulators are more closely monitoring firms’ activities, and firms must learn to adapt to increased oversight and greater compliance responsibilities, regulators said on Thursday.

At the Investment Industry Association of Canada’s annual conference in Toronto, Stephen Luparello, vice chairman of the U.S. Financial Industry Regulatory Authority, said regulators generally have become much more actively involved in firms’ day-to-day operations since the financial crisis.

He said that years ago, it was typical for regulators to have an “arms-length” relationship with firms, where they would check in periodically.

“I think that’s fundamentally changed,” Luparello said. “That arms-length distance that used to exist between the firms and the regulators is a luxury that is no longer afforded.”

FINRA and other regulators now feel the need to be monitoring firms’ activities on a day-to-day basis, he said.

The same is occurring in Canada, said Ian Russell, president and CEO of the Investment Industry Association of Canada. He said the regulatory changes reflect new realities in the marketplace.

“Clearly, things in the marketplace are quite different than they were 20 years ago…and that calls for a different approach to regulation,” he said. “The remedy is really calling for a much more engaged approach by the regulators, and in fact we’re seeing that in Canada.”

As oversight increases, Russell said regulators need to be sensitive to the resulting compliance costs for firms, and should ensure that there aren’t any unintended consequences. He said it’s critical that regulators continue to consult with industry members as regulations evolve.

“Rules come into play, and they don’t always work as effectively,” he said. “I think that’s where the consultation process works.”

Wolburgh Jenah acknowledged that small and medium sized firms struggle with the costs of compliance, especially at a time when market turmoil is taking a toll on their profitability.

“We as regulators do have to be sensitive to that issue, because part of our mandate is to ensure that markets are fair and efficient, and that there’s competition,” she said. “So we’re always balancing these issues.”

But Wolburgh Jenah said compliance is a reality of the business, and firms must find a way to manage the costs associated with it.

“The fact of the matter is that compliance is a necessity, and it’s never going to go away. So the issue is, how do you enforce those requirements in a cost-effective way?”

She said firms should stop viewing compliance as a burden and a cost, and instead view it as a tool that will help them avoid encountering problems in the future.

“Maybe if there was more of an effort to really think about compliance as a value added adjunct to the fundamental business of the entity,” Wolburgh Jenah said, “we would see a bit of a shift that would be very positive, both for the health of the firms and also in terms of investor confidence.”

IE