CRM 2: Preparing for July

The CSA’s aims, at their simplest, are to enhance investor protection by improving clients’ understanding of what it costs to invest, what their dealers are paid and how their portfolios are performing.

“If Canadians have the right tools to understand better the costs and performance of their investments,” notes Bill Rice, chairman of the CSA and chairman and CEO of the Alberta Securities Commission, “they will be able to make more informed investment decisions.”

The new rules include requirements for firms to: detail the product and service costs clients can expect when they open their account; disclose transaction costs, including any deferred costs, when a trade takes place; and provide clients with annual reports that detail, in dollars and cents, what the clients were charged during the year, including any fees paid to the firm, such as trailing commissions and commissions on bond trades.

The new annual investment-performance report to clients must include: positions’ cost and market value; deposits and withdrawals during the year and since account opening; and percentage returns over one-, three-, five- and 10-year periods, as well as since inception. The new rules also require certain enhancements to existing account statements.

But it’s the new annual reports detailing the costs of investing and portfolio performance that represent the biggest change. The investment sector had lobbied hard against these measures when the rules were being discussed, arguing that they will be costly to produce and may not be as helpful for clients as the regulators hope.

Nevertheless, the CSA is plowing ahead. In a nod to industry concerns, the CSA has granted what it is calling “unusually long” implementation periods. This should give firms time to develop the systems necessary to generate these reports, the CSA says, and the opportunity to explain the changes to clients.

In addition, the self-regulatory organizations (SROs) – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – will have to come up with their own versions of these new rules for their member firms.

The first wave of the CSA’s CRM reform, which encompassed new “relationship disclosure” requirements along with other measures, were finalized in 2009. But it was 2010 before corresponding MFDA rules were complete, and IIROC introduced similar requirements only in March 2012.

When the initial phase of CRM reform was under development, the SROs proposed their own cost- and performance-reporting rules, but the implementation of those aspects of their proposals were suspended when the CSA decided to come up with its own set of more extensive reporting requirements – essentially turning CRM into a two-phase exercise. Now, with the CSA’s reforms finalized, the SROs have to revise their proposals to conform with the CSA requirements.

IIROC indicates that it is already in the process of making the necessary changes to its previously published proposals.

Lucy Becker, IIROC’s vice president, public affairs, reports that the SRO will be issuing a notice “in the next few weeks,” which will discuss the harmonization work IIROC has done to date, the SRO’s plans to complete this work and plans to implement its own account-performance reporting, as well as cost- and compensation-reporting requirements.

The MFDA is in a similar position, says Karen McGuinness, the MFDA’s vice president, compliance. That SRO is in the process of working out the timing for its own amendments.

But MFDA firms shouldn’t expect that they are going to see these requirements delayed further, says McGuinness: “Members can expect [the] MFDA rules to more or less mimic [the] CSA’s requirements with the same timelines.”

She notes that there may be some slight differences in the requirements, given that MFDA rules will be tailored specifically for mutual fund dealers, but that the SRO’s requirements will be harmonized with the CSA rules.

“With such a detailed and extensive policy instrument, we do anticipate implementation challenges,” she notes, which is why the CSA has granted such long implementation periods.

Beyond the costs of implementation, one of the securities sector’s major objections to the CSA’s reforms has been that competing financial products won’t be subject to the same level of disclosure as securities under these new rules.

That’s a complaint that the CSA certainly has some sympathy for, although the regulator maintains that this “is not a reason to reduce the level of disclosure that we think is necessary for those who invest in securities.”

Securities regulators are reaching out and encouraging regulators in the banking and insurance sectors to consider similar reforms for firms under their purview.

Speaking on background only, a representative of the Ontario Securities Commission (OSC) indicates that OSC staff have had discussions with their federal and provincial counterparts that oversee the banking and insurance sectors – including the Office of the Superintendent of Financial Institutions (OSFI), the Financial Consumer Agency of Canada (FCAC), the Department of Finance Canada and the Financial Services Commission of Ontario (FSCO) – to make them aware of the CSA’s new cost-disclosure and performance-reporting requirements. Other CSA members apparently have made similar overtures to their local financial services regulators.

Says the OSC rep: “It is our hope that where comparable requirements are not already in place for investment products that are not securities, they can be developed.”

This would benefit investors when they buy competing products, such as segregated funds and guaranteed investment certificates, adds the rep, while also dealing with securities-sector concerns about a level playing field.

It doesn’t appear that authorities in either the insurance or banking sectors are preparing to follow the CSA’s lead.

Says Kristen Rose, senior communications officer with FSCO: “[We are] always interested in what other financial services regulators are doing and, when appropriate, we consider whether similar work may be beneficial to the sectors we regulate.”

On the banking side, OSFI declines to comment on any talks it has had with the CSA, noting that OSFI staff regularly speak with other regulators but don’t comment publicly on those discussions.

The FCAC, for its part, indicates that its mandate is just to enforce the rules set down by Finance Canada; the FCAC does not create policy on its own.

A rep from Finance Canada notes that the ministry believes effective consumer protection is based on disclosure, consumer choice and competition, stressing that federal regulations already require that disclosure by federally regulated financial services institutions must be “clear, simple and not misleading.”

The main question is whether this heightened disclosure will be enough to satisfy securities regulators. They now are considering other, more fundamental measures to address the large information and power imbalance that still exists between the investment sector and its clients.

The CSA published two discussion papers last year – one dealing with a statutory duty for advisors to act in their clients’ best interests; the other contemplating fundamental reforms to mutual fund fee structures (such as unbundling or eliminating trailer commissions). Both papers question whether disclosure can ever be sufficient to ensure adequate investor protection.

For more coverage of what the new CRM-2 rules will mean for you, please visit our special feature, Navigating CRM 2.

© 2013 Investment Executive. All rights reserved.