Financial advisors who sell deposit products are facing new regulatory oversight. And although the change may involve benefits for brokers and firms alike, not all industry participants are on board.

The Registered Deposit Brokers Association, formerly the Federation of Canadian Independent Deposit Brokers, has acted as a professional standards association for the deposit-products sector since 1987, but recently adopted a new mandate. Late last year, a majority of the Barrie, Ont.-based organization’s 30-plus financial services institution members voted to assign the RDBA the role of a self-regulatory organization. Some deposit brokers, however, have balked at the prospect of new fees and compliance requirements on what is a relatively low-margin part of their business. And others question whether the RDBA even has the authority to assign itself SRO status.

The purpose of the RDBA’s new mandate is to impose a higher standard of regulation on a sector of the securities industry that currently lacks formal oversight. Although deposit brokers are subject to “know your client” and product-disclosure best practices, anti-money laundering legislation and other rules, no single entity has previously existed to ensure compliance. Instead, financial services institutions have been individually responsible for supervising the brokers who sell guaranteed investment certificates and other deposit instruments on their behalf.

“There was this gap,” says Mary Rygiel, the RDBA’s chairwoman and a partner in Toronto-based Conservative Investors’ Services. “We wanted to create the self-regulating body for the deposit broker [sector] in order to bring continuity, standards and procedures to our [business].”

Many sector participants agree that stronger regulation of the deposit broker channel is an important step that will improve investor protection. New oversight in this area was inevitable, says Jim Schweitzer, director of the financial agent services unit at Toronto-based Bank of Nova Scotia and a member of the RDBA’s board of directors.

“It’s virtually the last unregulated facet of financial services,” Schweitzer says. “We’ve always felt that if we didn’t regulate [ourselves], someone will.”

In its new capacity, the RDBA will assume the task of compliance oversight for the sector, which will save each firm from individually supervising as many as hundreds of deposit brokers. This new oversight will also result in a single compliance process for deposit brokers, in place of the current system that requires brokers to undergo individual compliance procedures at each financial institution with which they deal.

This change is beneficial for both firms and brokers, according to Schweitzer: “The [compliance] requirements that we all would have individually are kind of onerous. If we have one central body that’s able to do that once, and then allow the financial institutions to share in that compliance effort, then it significantly cuts costs for the FIs; and for the brokers, because their time is not all tied up in compliance.”

The RDBA’s institutional members include all of the main players in the deposit-broker channel, Rygiel says. The RDBA’s new mandate means these institutions must now require each person soliciting deposits from consumers to be registered with the RDBA, unlike the voluntary membership system that had existed previously.

This new registration requirement is generating some backlash in the industry. Only about 1,200 deposit brokers and affiliates are currently RDBA members, leaving an estimated 1,000 to 2,000 practising brokers and affiliates who have yet to come on board despite mandatory registration requirements having kicked in earlier this year. The RDBA had set March 31 as the registration deadline, after which financial institutions would no longer accept deposits from non-member brokers. Some financial institutions have enforced this deadline but others have not, forcing the RDBA to extend the registration deadline. The RDBA now hopes to complete registration of all persons soliciting deposits by yearend.

“It’s moving along a little more slowly than we had anticipated,” says Rygiel. “There have been objections to having to register with some individuals, or some firms, who don’t really understand the benefits of being a member.”

One of these objections is the annual membership fee of $650. Some consider the fee high, given that the business of deposits is low-margin by nature, according to Schweitzer.

The fees are of particular concern to advisors for whom deposits represent a small portion of their business. Toronto-based Advocis expects that some of its members may exit the deposit side of the business if forced to join the RDBA.

@page_break@“If they’re required to register and they receive very little compensation for these types of arrangements,” says Peter Tzanetakis, vice president of regulatory affairs with Advocis, “then they may not necessarily provide that additional service to their clients.”

Some industry organizations are also skeptical about an added layer of regulation in the securities industry. For instance, some members of the Mutual Fund Dealers Association of Canada are concerned that the RDBA’s new role will overlap with oversight to which industry players are already subject, as the MFDA regulates the sale of deposit instruments.

“Our concern is that it might be an unnecessary duplication of regulation,” says Karen McGuinness, vice president of compliance with the MFDA. But, she adds, the two groups could likely work together to harmonize the applicable rules.

Advocis members fear that the emergence of another self-regulatory organization will further fragment the existing patchwork of regulation in their industry.

“Advisors are very heavily regulated right now, along all sorts of lines of business,” Tzanetakis says. “We’re seeing less consistency, more fragmentation; and we want it to go in the other direction.”

But the RDBA is equally keen on achieving regulatory consistency across the country. Currently, Saskatchewan is the only province that regulates deposit brokers, which results in different rules for brokers in that province from those in other provinces.

“What we want to do is avoid having each province and territory do the same thing, and [possibly] make it different for everybody across Canada,” says Rygiel. “We want to establish the rules and regulations within our own industry.”

Still, the RDBA continues to face resistance. Some industry members question the legal authority of the RDBA to enforce mandatory membership. Unlike the MFDA and the Investment Industry Regulatory Organization of Canada, which have clear statutory authority to regulate their members, the RDBA’s SRO mandate is the result of a membership vote.

Advocis argues that it is unfair for financial institutions to suddenly refuse to accept deposits from non-member brokers with whom they’ve dealt with in the past, without regard to their proficiency or regulatory status.

Advocis has received complaints from its members over the new requirement, according to Tzanetakis: “The requirement to be registered with the RDBA has no legal or regulatory basis, and is based solely on the financial institutions’ agreement with the RDBA.”

Furthermore, the RDBA’s lack of a clear legal mandate could hamper its authority, in terms of enforcement, the MFDA says. McGuinness admits that the establishment of the SRO status is important in providing investors an area for redress, but she fears that the RDBA’s enforcement powers will fall short of those held by the MFDA and IIROC.

“My concern is whether it has the same authority and powers,” she says, “and if holding itself out as an SRO might be misleading to the public if it doesn’t.”

In the meantime, the RDBA is fine-tuning its rules and regulations, which were released for public comment until July 31. Set to be finalized by the end of the summer, the new rules will not result in any major changes for deposit brokers, Rygiel says, aside from the mandatory membership rule. IE