Compliance: “A pain in the ass, but very good.”

Seeing the “value in compliance” goes to the heart of what the advisors are talking about, says John Hall, a partner and national co-ordinator of the investment management group in the Toronto office of law firm Borden Ladner Gervais: “They’re not seeing the value.”

It takes years to build up a firm’s reputation, he says. Compliance can’t be low on the priority list. The message must come from senior management right down through the organization that compliance is valued, and not just a necessary evil.

“It’s part of what reps have behind them when they go to make a sale,” Hall says.
Shawn Devlin, vice president of compliance at Assante Advisory Services Ltd. in Toronto, agrees. The industry has to acknowledge an increase in the level of regulation. The mandate for proper compliance, as per the rules of the new Mutual Fund Dealers Association, must come from a firm’s board of directors down through the organization. “Compliance is everybody’s job,” says Devlin.

According to Hall, the standards have been raised by the creation of the MFDA and stricter enforcement by the Investment Dealers Association of Canada and the provincial securities commissions. Increased regulatory requirements via the MFDA reflect the new reality for mutual fund sales. It’s a regulated industry now, adds Devlin, which means attention must be paid to compliance. The regulations have been established with client protection in mind, so firms should see compliance as part of client service.

An advisor who is willing to cut corners risks the news of “a Notice of Hearing being splashed across the papers,” says Hall. “The reputational risk is always worse than the regulatory risk,” he says. The cost of a ruined reputation will be far worse than a dealer getting fined and one of its reps losing his or her registration.

Devlin agrees. He points to the damage suffered by Arthur Andersen as a result of the Enron debacle, even though the jury is still out on the extent of the accounting firm’s involvement. Both he and Hall point to a number of high-profile cases in Canada, such as RT Capital and Fortune Financial.

The result, Hall says, is that no matter what the size of the firm, there is an increased need to have written policies that reflect the firm’s compliance practices.

Compliance will boost costs for smaller firms. Large firms can afford the technology needed to tape and store client phone calls, but the smaller firms will have to document everything. “We tell our clients not to just go out and hire someone to write a policy manual that is put on the shelf,” Hall says. Firms or branches don’t want to be caught in an inspection and asked: “Do you really do this?”

Instead, he suggests, firms look at what they actually do and assess whether their practices meet regulatory requirements. For example, with the launch of the MFDA, many firms will have advisors operating out of branch offices or even their homes. But they could be connected by a central computer system that would allow compliance departments to monitor firm activities easily. Investing in technology could save on human capital — the extra cost of gathering compliance documentation.

Hall is optimistic that the industry is beginning to see the value in compliance, partly because of high-profile discipline cases. “We’re starting to see people getting whacked over the head. It’s the best thing that the regulators could do. It makes a culture of compliance an easier sell.”
This is one of several indications of a shift in emphasis coming from regulators. He points to Ontario Securities Commission chairman David Brown’s concept of “fair dealing,” which illustrates the shift from front-end regulation to making firms responsible for screening and compliance and then taking action if they fail, he adds.

Does Devlin have any advice for advisors? “Listen to your compliance department,” he says. “They’re on your side. They’re trying to protect you and your clients.” IE