The career arc of the so-called “fair-dealing model” shows why it’s so hard to carry out real reform within the regulatory system of the Canadian securities industry. Six years since the FDM’s conception — and stripped down from the original idea — the model has yet to win many fans.

What began as a bold effort by the Ontario Securities Commission to rethink the regulation of the retail investment industry was ultimately co-opted by the industry via its self-regulatory organizations. Rather than the OSC making rules to apply its ideas, much of the project was given over to the SROs.

That step appealed to the OSC because it was clear that the other provinces weren’t much interested in its initiative, so delivering some of the ideas through the SROs meant they would be adopted nationwide. And the step appealed to the industry because it would gain greater control over the effort, ensuring that truly revolutionary ideas — such as outlawing mutual funds’ embedded compensation — would never see the light of day. Instead, the project could be largely limited to tweaking the sorts of disclosure that clients receive.

On its face, the devolution of this project should have been considered yet another victory for the industry at the expense of investors. Except that the industry doesn’t seem too pleased with the outcome, either.

In late February, the Investment Dealers Association of Canada published the latest version of what is now called the “client relationship model” for public comment. Essentially, it focuses on improving transparency in several aspects of the client/advisor/dealer relationship, including the costs clients bear, the risks they face, the conflicts of interest that dealers and advisors must manage and the performance their accounts have achieved.

Through a collection of both new requirements and revisions to existing rules, the IDA proposes to establish minimum standards for disclosure and reporting in these various areas. The ostensible goal is to do a better job of telling clients what they are getting into, which, theoretically, better positions clients to assess whether or not they are getting acceptable service, thereby better equipping them to exercise the one bit of power they do have over the industry: the ability to take their business elsewhere if they aren’t satisfied.

“Clearly establishing the nature of the relationship at the outset, and narrowing any possible gap in expectations, is in the best interests of the client, his or her advi-sor and the firm,” explained Susan Wolburgh-Jenah, president and CEO of the IDA, in a recent speech.

In theory, an effort that aims to produce a more informed client shouldn’t be controversial; in reality, of course, it is.

“Many firms will embrace these principles,” Wolburgh-Jenah added. “Some have incorporated them into their way of doing business already. Others will resist any changes to the status quo.”

Although some firms may embrace the principles that are spelled out in the IDA’s proposal, the execution is still being strongly resisted by the industry.

Notably, the Investment In-dustry Association of Canada continues to campaign against the initiative. In a letter to Jean St-Gélais, chairman of both the Autorité des marchés financiers and the Canadian Securities Administrators, the IIAC spells out its basic concerns — essentially, that the introduction of a new regulatory model is not justified. The IIAC argues that there’s no genuine problem that the new model will fix and that there hasn’t been a comprehensive cost/benefit analysis to justify the change.

The IIAC says that the addition of new prescriptive rules, in the absence of a real regulatory problem, “goes against the mandate of enhancing the efficiency and competitiveness of the Canadian capital markets.”

Moreover, the IIAC insists that a cost/benefit analysis is essential to determine if the benefits to the public would exceed the compliance costs to firms: “It is our view that competitive pressures and market forces already require industry members to respond effectively to client needs and wants, but the cost/benefit analysis would bring investor concerns to light, once and for all.”

Additionally, apart from objections with the underlying premise of the new model, the IIAC also worries about its details. In general, the IIAC argues that the new disclosure document that would be required under the CRM would be too long and detailed to be much use to the average client; nor, the IIAC argues, should the CRM fundamentally change the sorts of regulatory obligations, or legal liability, owed by advisors to their clients.

@page_break@Instead, the IIAC proposes that regulators consider adopting a much shorter disclosure document.

The IIAC is proposing an alternative document that would be standardized industry-wide and apply to all account types, which follows principles rather than detailed requirements: “This alternative model is the optimal written disclosure document to accompany firm-specific documentation and supplement client/advisor discussions; one that is more meaningful to clients and more cost effective for the industry.”

In a more detailed comment letter that was provided to Investment Executive in draft form — but had yet to be approved for submission by the IIAC — the organization spells out its proposed alternative in greater detail.

The IIAC visualizes a document that would alert clients to the full range of disclosures they could receive if they choose to, but would not automatically provide them. The proposal would place more of an onus on clients to seek information from their advisors; and it would give firms flexibility to provide more extensive disclosure by adding components to the basic document, if that practice suits their particular business model.

Moreover, the IIAC model would follow the “access equals delivery” approach; and it would explicitly function as an information exercise. It would not create additional regulatory or contractual obligations for the advisor to the client.

In addition to detailing the IIAC’s proposed alternative model, the draft submission also enumerates a variety of other complaints with the CRM.

It points out that the version that would apply to firms that fall under the Mutual Fund Dealers Association of Canada has yet to be released. (MFDA president and CEO Larry Waite reports that its version of the CRM is scheduled to go to its board for approval on May 22, with publication expected soon after the board signs off on it.)

Among the other issues the IIAC has with the IDA’s proposals, the IIAC’s submission complains that: the industry’s input hasn’t been sufficiently incorporated into the CRM’s development; the proposed disclosure document still requires significant customization; it is still overly prescriptive; it’s unclear how often the document will have to be refreshed with clients; and it’s not clear whether it must be applied to all existing relationships as well as being used with new clients.

A number of these issues have been raised in previous rounds of consultation, and the IDA has responded to many of them in its current proposal. It argues, for example, that client surveys have shown that investors do want more disclosure. It also reveals that a cost/benefit analysis has not been carried out because various regulators, trade associations and dealers have failed to agree on the approach for such research.

Additionally, the IDA proposal indicates that the IDA has endeavoured to mitigate the compliance costs the CRM will impose; however, the IDA also insists that disclosure must be somewhat prescriptive, so that clients can compare the account offerings of different firms.

The draft IIAC submission, in turn, disputes many of these responses from the IDA.

Indeed, if nothing else, this exercise highlights the extent to which the separation of the IDA’s regulatory and trade association responsibilities has been achieved — the industry clearly now has a strong voice in its corner in the IIAC, whereas the SRO arm is advancing a proposal that it believes to be in the best interests of investors over vehement industry objections.

That’s not to say that investor advocates are counting the CRM as a victory over the industry, though. A comment letter from Toronto-based investor advocate Kenmar Associates has its own beefs with the initiative: “In our view, prevailing industry sales practices, marketing materials, fee disclosure and accounting, performance tracking and complaint resolution are in such a sorry state that a revolutionary cultural change needs to accompany any proposed rule changes.”

Kenmar echoes the IIAC’s complaint that past comments on the IDA’s proposals have seemingly had little impact on the latest version of the model. Moreover, Kenmar argues that these proposals should be implemented by the securities commissions, not by the SROs. Additionally, Kenmar’s comment calls for the adoption of mandatory investment policy statements by advisors, stressing the significance of enforcement in giving these sorts of rules some bite, and it emphasizes the importance of personalized rate-of-return information, product cost disclosure and what it calls “cost suitability.”

The fact that neither the industry nor investor advocates are pleased with the IDA’s initiative may suggest that it is striking the right balance. Yet, this fact also highlights how difficult it is to carry out reform within the Canadian regulatory system. IE