The regulatory conundrum

Not only would the proposed CCMR bring together several provincial securities commissions – including Ontario and British Columbia, which are two of the four major players – it also would introduce a federal component into a field that historically lies within the purview of the provinces – turf that the provinces have guarded fiercely.

The proposed regulator has been crafted to adhere to the Supreme Court of Canada’s (SCC) landmark decision made in 2011, which ruled that securities regulation is largely a matter for the provinces, but that there could also be a part for the federal government to play in certain areas, such as monitoring systemic risk. This spring, the SCC will hear arguments on this issue yet again, when it considers an appeal of a lower court decision made last year in Quebec, which found that the CCMR model, as currently constructed, is unconstitutional.

Just when the SCC will rule on this latest case has not been determined, but there’s no question that the decision will be crucial to the CCMR project’s fate. However, even if the SCC sides with the feds and the provincial proponents of the CCMR by declaring the CCMR is constitutional, that doesn’t mean the new regulator will launch in 2018 as originally planned.

The various participants in the proposed regime still have to finalize, and pass, the required legislation. The proposed rules that would accompany that legislation remain works in progress. And public support for the initiative has waned over the past year, with investor advocates warning that the new regulatory structure could represent a step backward for investor protection. Other skeptics suggest that the benefits of following through with the project may be few. Without strong support from interested players, policy-makers may lack the political will to push this project past the finish line – even if the SCC gives its blessing.

The question of whether the CCMR goes ahead isn’t just an academic or bureaucratic issue. The shape of the regulatory structure is likely to have an impact on the content of the regulations. For example, if the CCMR does materialize, it would bring together two of the provinces with some of the most divergent policy opinions – that is, Ontario and B.C.

For example, the Ontario Securities Commission (OSC) has emerged as the leading champion of investor-friendly reforms, such as the adoption of a “best interest” standard for financial advisors, while the B.C. Securities Commission (BCSC) leads the opposition to these reforms. When the rest of the Canadian Securities Administrators (CSA) published a consultation paper on best interest, several provinces expressed reservations about the idea, but only the BCSC declined to seek consultation on the issue.

Under the current financial regulatory system, provincial regulators can go their own way on a particular policy issue if they have strongly held convictions – even if the result is divergent rules from province to province. But if the CCMR goes ahead, taking opposing positions on a critical issue such as a best interest standard will be much tougher for Ontario and B.C. to do.

Indeed, the possible impact on regulatory policy is one of the central reasons why investor advocates have turned against the CCMR.

Yet, whether the CCMR project proceeds or not in 2018, there’s no assurance that a best interest standard will gain traction. Ontario’s government has avoided explicit support of a best interest standard despite both the OSC and an expert panel report favouring the idea. Without strong political support to press ahead with an idea that most of the other provincial regulators – and the investment industry – are rejecting, garnering more support becomes that much tougher for the OSC.

Moreover, Ontario is due to have an election in 2018, which raises even more policy uncertainty for the year ahead. Even without the prospect of a possible change in government, there’s no assurance that some of the other major reforms that Ontario’s current government is endorsing – such as introducing greater regulation of both financial planning and financial planners – will move ahead quickly.

Regulatory issues such as these rarely rank high on the legislative agenda. And the forthcoming electoral uncertainty is one more large obstacle to fundamental reform.

Quebec, like Ontario, is going to the polls in 2018. Quebec’s legislature is considering a proposed bill tabled by the government last autumn, which would bring sweeping reform to the province’s financial services sector. Among many other things, the proposed legislation would do away with self-regulation for financial planners in the province and bring them under direct oversight of the Autorité des marchés financiers.

Given the significance of the changes being suggested, the massive Bill 141 is undergoing a series of special consultations to consider its impact on the sector, the province’s regulatory structure and consumers. (The next sessions were slated for Jan. 17 and 18, after Investment Executive went to press). The content of the bill may yet change as a result of these consultations. And the prospect of electoral uncertainty is a possible hurdle to major reforms materializing in 2018.

Although certain regulatory issues are likely to be affected by events such as court decisions and elections, other issues are more directly in the hands of the regulators. For example, the set of so-called “targeted reforms” to securities rules that the CSA put forward will continue to form a big part of that regulatory body’s agenda.

But, again, there’s a long way to go before any of the changes contemplated in those proposals – such as reforms to “know your client” requirements, suitability rules and advisor titles – are implemented. There have been consultations on the regulators’ ideas, but detailed rules have yet to be proposed – a process that rarely happens quickly.

The changes that are likely to materialize in the coming year most likely will be incremental. For example, regulators could provide added guidance that aims to enhance the disclosure required under the second phase of the client relationship model (CRM2) as the next phase of the CRM2 project. That’s certainly more realistic than some of the more dramatic changes that could be afoot.