Regulators faced a fundamental rethink in 2019, as policy-makers shifted from enhancing investor protection to reducing compliance costs. In the year ahead, an array of bigger-picture issues is on the horizon.
For the past few years, regulatory transformation on the national level appeared imminent, with the Capital Markets Regulatory Authority (CMRA) finally getting off the ground. That project remains in the works, but with little progress to show for it over the past year – beyond Nova Scotia joining the effort in 2019.
Looking through 2020, with the fate of the CMRA still up in the air, the Canadian Securities Administrators (CSA) plans to launch a review of the other big component of the regulatory architecture: the self-regulatory structure.
The CSA promises to publish a consultation paper in mid-2020 that will kick off a review of the current self-regulatory organization (SRO) framework. That paper will include the justification for the prevailing configuration, which divides oversight of the two main dealer categories between the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA).
The review also will consider the evolution of the investment industry since the current structure was put in place. More than 20 years have passed since the provincial regulators decided to launch a fund dealer SRO as a separate organization rather than giving that responsibility to IIROC’s predecessor, the Investment Dealers Association of Canada (IDA). The investment business has evolved and changed dramatically since then.
Throughout that period, there has been a good deal of consolidation, both among dealers and between fund companies and dealers. Other industry categories have grown significantly – particularly the exempt market. More recently, the emergence of fintech innovation has given rise to previously unimagined business models.
At the same time, the SRO landscape has evolved, with the IDA spinning off its trade association function and merging its dealer oversight arm with Market Regulation Services Inc. in 2008 to form IIROC. That’s a significant difference from the inherently conflicted SRO/lobby group that existed before.
The CSA’s forthcoming comprehensive review of the SRO environment will take place against this backdrop. Where that will lead is far from certain, but one possibility is an MFDA/IIROC merger; another is a redistribution of responsibilities. Alternatively, policy-makers may conclude that self- regulation should be scrapped altogether – as other jurisdictions have decided.
Given the significance of the issues, the review is not likely to be resolved this year, especially considering that the review won’t begin until mid-year. But the review will be a headline topic for the regulatory community in the year ahead.
At the same time, the Government of Ontario announced it will launch a task force to undertake a review of that province’s securities law. Reviews are supposed to be routinely carried out every five years, but in reality, only one has ever taken place, and that final report was handed down in 2003. So, a comprehensive review is long overdue. Again, while the heavy lifting will begin this year, the task force is not likely to be in a position to recommend reforms within the next 12 months.
At the same time as these two fundamental reviews are taking place, there’s critical policy work on the agenda.
Most notably, the CSA finalized its client-focused reforms (CFRs) in late 2019. And while the changes to an array of rules – including suitability, know-your-client, know-your-product, disclosure and conflict-of-interest rules – took effect at the end of 2019, the implementation of new requirements is scheduled to occur over the next two years, with all changes adopted by the end of 2021.
So, in the year ahead, there will be a good deal of work to be done in interpreting the rules and assimilating them into firms’ processes and practices. At the same time, IIROC and the MFDA will be developing their own amendments to conform with the new CSA requirements, ensuring that the SRO rules match the CSA rules and that SRO-member firms will have to comply with only one set of rules.
Yet, if the experience of implementing the client relationship model reforms – which followed a similar approach – serves as a guide, then implementing the CFRs could be a time- and resources-intensive chore for the SRO-member firms over the next couple of years.
In the meantime, the industry awaits key policy decisions from the regulators this year. For example, the Ontario Securities Commission (OSC) still is mulling what to do about mutual fund deferred sales charges after the CSA banned the charges in the rest of Canada.
There’s also the question of advisor title reform in Ontario, which is in the hands of the new provincial regulator, the Financial Services Regulatory Authority of Ontario. These two long-standing and historically contentious policy debates hopefully will reach some kind of conclusion in 2020.
The regulators’ other big project over the past year has been eradicating needless regulatory burdens. This issue will remain a focus for the year ahead too. The OSC’s Burden Reduction Task Force report, released in November 2019, features 107 recommendations for reform.
Those recommendations range from rule changes to reduce outdated or redundant requirements to commitments to improve the regulator’s service to the industry. According to the report, while some of its proposals require legislative changes or the involvement of other member organizations within the CSA, many proposals under the OSC’s exclusive control can be completed this year.
So, even as policy-makers begin turning their attention to big-picture issues, such as SRO structure and a legislative review, the work of burden reduction is sure to be an ongoing preoccupation this year.