Regulation: Building stronger relationships

More than 10 years in the making, the so-called “client relationship model” for investment dealers has finally been given the green light by the Canadian Securities Administrators. In late March, the CSA granted approval for the Investment Industry Regulatory Organization of Canada‘s version of the CRM rules, which will be implemented over the next couple of years. (The mutual fund dealer version was approved in December 2010.)

The CRM initiative, which has its roots in the development of the fair-dealing model of the Ontario Securities Commission (a pro cess that began in 2000 when the OSC created a committee to study the issue), aims to change the terms of the relationship between clients and their advisors in four basic ways. It prescribes new, up-front disclosure requirements setting out the terms of the relationship between the client and the advisor; establishes new rules for dealing with – and disclosing – conflicts of interest; imposes enhanced suitability and account-supervision requirements; and will entail new performance reporting requirements.

Some of its requirements take effect immediately – such as the provisions requiring dealers to identify and manage conflicts. The new suitability requirements, however, must be adopted in the next six months.

Other elements of the CRM will be rolled out over the next two years. For example, firms will have a year (to March 26, 2013) to implement the relationship disclosure requirements for new clients; and firms will get another year to do so for their existing clients.

The performance-reporting part of the initiative is somewhat in limbo, as the CSA is now developing its own rules on that issue. And regulators don’t want to require firms to make two sets of changes to their systems – once to implement the new requirements from the self-regulatory organizations, then again when the CSA requirements are finalized. So, implementation of those elements of the CRM is on hold, pending harmonization with the new CSA requirements.

In the meantime, IIROC hopes that implementing the other major elements of the CRM will help better protect investors and encourage a more client-centric culture at dealers.

“It’s all about strengthening the client/advisor relationship,” says Susan Wolburgh Jenah, president and CEO of IIROC.

The objective of the CRM, she says, is to enhance that relationship at various points throughout the process – when clients open an account, when they trade and when they examine their portfolio’s performance.

Although the CRM is some distance from the original vision of the OSC’s FDM, Wolburgh Jenah says, she thinks it represents the best elements of the previous model and reflects its basic objectives.

Whether that’s good enough in an environment in which investor advocates are actively pushing regulators to impose a fiduciary duty on advisors remains to be seen.

For now, Wolburgh Jenah says, “I’m confident that [CRM] is a step toward that objective [of ensuring client’s interests come first].”

The key will be in the implementation of the new rules. Although finally getting CSA approval for IIROC’s rules is a milestone of sorts in this long-running saga, Wolburgh Jenah says she sees this step as the end of the beginning, rather than the beginning of the end. Now, IIROC will turn its attention to the proper implementation of the CRM’s principles, which will be a technical and educational trial for firms.

IIROC is working with the Investment Industry Association of Canada to develop a joint symposium on the CRM, which it will take across the country later this year to examine the challenges and opportunities the new requirements may present.

Details are still being worked out, Wolburgh Jenah says, but IIROC is aiming to hold sessions in Vancouver, Calgary, Montreal and Toronto in late May or early June.

Wolburgh Jenah indicates that she wants firms to understand that the CRM shouldn’t just be about providing new documents to clients; it should be about promoting a dialogue about what’s in those documents.

Often, regulatory requirements are treated as a necessary evil. But Wolburgh Jenah hopes firms and advisors will see these new rules as something that fundamentally enhances their business rather than impeding it.

“It’s about the culture within the firms,” she says. “It’s about them taking these principles and saying, ‘What’s this going to mean for us? How can with embrace these and make them mean something?'”

Wolburgh Jenah believes there is nothing in the CRM that firms should not want to do in order to keep their clients happy over the long term. She points to the financial crisis as proof of the business value of stronger client relationships.

Advisors who were communicating with their clients and offering support when the markets were in chaos came through the crisis much better than advisors who did not, she says, even though advisors couldn’t change the underlying reality that portfolios were decimated by the crisis.

“It’s not about writing rules,” Wolburgh Jenah says. “Rules are a means to an end, and the end is to instil a culture of compliance, to set the standards and to enhance the professionalism within the industry. Which, in turn, enhances confidence in the industry and in the capital markets.

“It’s a process,” she continues.”It’s a journey. We’re not going to change things overnight.”

© 2012 Investment Executive. All rights reserved.