The next steps in the financial industry’s digital makeover will include clarity around the use of tools such as e-signatures from clients and, in the years to come, more proactive rulemaking for firms and advisors.
So says the Investment Industry Regulatory Organization of Canada (IIROC) in a new report it penned alongside global management firm Accenture Consulting, after interviewing, consulting and surveying more than 100 compliance and industry executives on how the Canadian advice channel is transforming. The overall project was announced in April 2018, when the SRO also discussed plans to enhance its process for reviewing and approving changes in dealers’ business models.
Due in large part to demographics shifts that are leading to an influx of women and millennial clients as well as investors demanding more for their money, the SRO expects the need for “digital capability and tools” will grow from here.
This isn’t a surprise, IIROC suggests, but it does require continued exploration of new advice options and business models—even as some firms choose to instead focus on building up their traditional advisor teams and services. Those “who lag in the digital space may increasingly be viewed as dated and stale,” the report warns, noting that investors these days can choose from a wide range of options that include order-execution-only (OEO), fully digital services and dedicated human advisors who are finding ways to automate.
To remain relevant, investment industry watchdogs must also be vigilant.
The IIROC-Accenture report, called “Enabling the Evolution of Advice in Canada” and released this week, doesn’t answer all of dealer firms’ questions or offer a clear roadmap for the future, says IIROC president and CEO Andrew Kriegler in an interview with Investment Executive, but “it’s the first answer to what will be a series of questions that we have to ask ourselves. We were most interested in the barriers that the industry saw from regulation. What is it about the way in which the regulatory framework exists today that makes it harder to meet [the] investor needs that have been identified?”
One challenge the report highlights, and which Kriegler also sees, is that investors seek extremely flexible services that can be scaled up or down as they age or as their lives change, which can be tough to design durable rules around. Yet, that desire is “driving the development of new, à la carte and moment-in-time advisory services,” a new approach for Canada’s industry, the report says.
Around the globe, investment dealers “are increasingly creating ‘ask an advisor’ chatrooms, investment advisor call centres and partially dedicated investment advisor teams,” to best serve OEO and other digital-focused clients, the report adds. Further, flexible fee structures in the U.S. primarily are allowing investors to dynamically choose how they pay for services (e.g. subscription models and one-time fees).
However the industry, products and advisory services develop, an IIROC priority is to maintain accountability and investor protection standards, Kriegler says. “Some of the rule book was created in a world where things were more rigidly divided between different platforms, different products and different services, so we have to identify specifically what needs to change,” in a way that makes sense for all affected, he explains.
A related hurdle is Canada’s “fragmented and duplicative” regulatory landscape, the report says. Due to national, provincial and territorial regimes, executives surveyed cited a “costly framework” that hampers both legacy and new firms when it comes to considering innovation and upgrading technology. Also, with upcoming initiatives like the Canadian Securities Administrators’ (CSA) client-focused reforms, firms are already dealing with rising costs and process changes.
Further, while some firms want more guidance from regulators, others want to stick with principles-based rules. The risk of the latter, the report says, is firms may lean toward “a more conservative application of a rule than intended by regulators, and potentially, higher compliance costs,” when they’re unclear on how to interpret requirements. Related to e-signatures specifically, it adds, some firms accept those for opening accounts but not for closing or transferring them, and IIROC will clarify its expectations to facilitate streamlined approaches.
IIROC will also review “know your client” processes for online investors and accounts that include multiple family members with varying goals, and audit current suitability and supervision standards. Another initiative is the “rebuilding [of] our compliance risk models, which basically point us to where we should spend our compliance resources,” Kriegler says.
The report offers IIROC-specific findings, Kriegler adds, but he hopes other regulators and SROs such as CSA and the Mutual Fund Dealers’ Association of Canada use the learnings to “allow for efficiencies in the delivery of [advice] that will allow greater transparency and, therefore, greater accountability to the investor. We all can work even more closely together.”