The latest version of the Canadian Securities Administrators’ registration reform proposals unveiled in mid-July will affect every firm and advisor in the financial services industry to some extent. But while a bigger deal for most clients is likely to be the self-regulatory organizations’ new regimes governing client relationships, those plans remain contentious with both the industry and investor advocates.

To be sure, the CSA’s registration reform will have far-reaching implications for the securities industry. However, the most significant impact is probably going to be felt by firms that will be swept into the registration regime as a result of the new rules — such as fund managers and exempt-market dealers — as they will face a slew of new requirements.

For the mainstream brokerage houses and mutual fund dealers that are already registered, the consequences of the reform will be fairly minimal. More important to these firms will be the implementation of the client relationship models their SROs, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, are proposing.

The CRM proposals are essentially the remnants of an effort to overhaul retail regulation, known as the fair-dealing model, that the Ontario Securities Commissionhad initiated. When it became clear that the FDM project would not be proceeding as an Ontario-only initiative, parts of it were rolled into an existing CSA registration-reform effort and parts were turned over to the SROs to implement with the fund dealers and investment dealers.

So, for the bulk of the retail investment industry, it’s these CRM rules that will alter their businesses most dramatically — by setting out new requirements governing the firm/advisor/client relationship, bolstering suitability obligations, improving conflict-of-interest disclosure and enhancing performance reporting.

The MFDA and IIROC published their latest versions of these proposed rules concurrently in late April, and the comment period for them closed at the end of July. The latest round of comments reveals that there remains a fair amount of opposition to the proposals from the financial services industry.

Many of the general complaints are familiar and could be applied to almost any new rule-making initiative. Among other things, commenters complain that:

> there is a lack of harmonization (in this case, both between the proposals from the two SROs, and between the SROs’ proposals and the CSA’s registration-reform initiative);

> the proposed new rules are too prescriptive and should be more principles-based;

> the changes will be too costly;

> the changes won’t benefit clients as the regulators hope.

The Investment Industry Association of Canada’s comment on the IIROC proposal acknowledges that the SROs have improved the degree of harmonization between their proposals. However, the IIAC notes, significant differences still exist: “Such discrepancies create a separate standard of investor protection and impose a heavier cost burden on IIROC-member firms.”

In fact, there is no clear consensus on which version of the CRM firms favour overall. Some of the commenters prefer IIROC’s approach, claiming that it is less prescriptive than the MFDA’s proposal. Others insist that the MFDA’s proposal is the less prescriptive of the two — at least, in terms of specific areas, such as the relationship disclosure and performance reporting requirements.

Toronto-based TD Waterhouse Canada Inc. points out in its comment to IIROC that not only are there differences between the SROs’ proposals, there are also inconsistencies between the SROs’ and the CSA’s initiatives in the areas of relationship disclosure, managing conflicts of interest and reporting on account costs, activity and performance.

“The inconsistent regulatory treatment diverges from the concept of the CRM,” the TD Waterhouse submission argues, “and will impose additional substantial costs on many firms that will ultimately be borne by their clients as well.”

In addition to these overarching worries about the continued lack of harmonization among the proposals, a number of commenters also express concern with specific aspects of the proposed rules, such as how the new proposals will change firms’ obligations when it comes to assessing suitability.

For example, the Investment Funds Institute of Canada’s comment to the MFDA objects to the requirement that an account automatically undergo a full suitability review when responsibility for the client is transferred from one rep to another. “We strongly disagree that a comprehensive, documented suitability review of every account that is reassigned is necessary,” the IFIC comment says, warning that this requirement will generate hundreds of thousands of unnecessary suitability reviews each year.

@page_break@Similarly, the IIAC notes in its comment to IIROC that it worries about the introduction of the notion that suitability reviews would have to be conducted based on prescribed triggers. “Our members believe this is also a significant change to the current suitability requirements and, as such, will result in substantial modification to the operations of member firms,” the IIAC comment says, noting that firms will have to design systems to monitor the occurrence of such triggers and to ensure that the required reviews are carried out.

Suitability is far from the only issue of concern for commenters; indeed, many of the proposals’ detailed requirements attracted some criticism. Much of the concern boils down to the question of cost, with many dissenters essentially arguing that the effect of the proposals will simply be to add to the regulatory burden without improving investor protection, and that this will just lead to higher costs for clients as well.

The Independent Financial Brokers of Canada’s comment to the MFDA suggests that not only is the prospect of higher regulatory costs likely to lead to higher client costs, but they may also mean that smaller clients can’t get investment advice at all.

Meanwhile, the IIAC comment states: “The implementation and ongoing costs associated with the CRM will be significant across the industry.” It adds that IIROC doesn’t seem to fully appreciate “these enormous burdens,” noting that planned transition periods won’t alleviate these concerns.

“These costs are coming at a very difficult time, when investors are coping with significant financial losses and trying to rebuild their savings,” the IIAC comment notes. “At the same time, firms, especially smaller ones, are dealing in an uncertain financial environment.”

However, various factions of the financial services industry aren’t the only ones professing a concern about clients. Investors now also have a credible defender in the Canadian Foundation for Advancement of Investor Rights, a recently created investor advocacy group. FAIR Canada has a decidedly different take on the regulators’ efforts, arguing that they don’t go far enough to protect investors.

FAIR Canada says in its comments to both IIROC and the MFDA that it is “generally supportive” of the SROs’ latest proposals. However, the advocacy group insists that what’s needed is a “complete overhaul of the relationship between the client and the advisor.”

FAIR Canada’s comment notes that these and other investor-focused initiatives (such as new complaint-handling rules, which are also in the works at both the MFDA and IIROC) are addressing some of the issues facing retail clients. But it laments that other issues “are not even on the radar screen.”

FAIR Canada’s comment points out that there has been minimal public discussion about bold new initiatives to improve retail regulation in other jurisdictions.

For example, regulators in Britain recently announced a move to outlaw sales commissions; and U.S. regulators are imposing a common fiduciary standard on brokers and advisors, as well as considering possible restrictions on compensation models.

FAIR Canada is calling on the Canadian regulators to study these emerging ideas to ensure that retail clients here are receiving similar levels of investor protection: “Canadian investors deserve a further-reaching shift in how financial services are sold and delivered in this country.”

Although FAIR Canada says that it supports the proposed disclosure improvements, the group’s comment adds: “Much more is needed, however, particularly regarding the question of fiduciary responsibility and the conflict of interest between the client, the advisor and the firm.”

The advocacy group also believes that the proposed performance-reporting requirements need to be beefed up and that firms should be required to deliver a personalized, benchmarked rate of return on client account statements.

FAIR Canada concedes that although there may be circumstances in which this is tricky, it also insists that such calculations would not be that difficult for the vast majority of retail accounts: “There is an entire industry devoted to performance measurement in the institutional world. Numerous systems are available to slice and dice investment performance by category, style and a host of other factors. It is hard to accept that providing such a service is too big an obstacle for [dealers].

“We suspect,” FAIR Canada’s comment continues, “that a certain element in the financial services industry does not particularly want its customers to have clear, easily comparable information that truly helps them understand how their investments have performed.”

Indeed, contrary to industry claims that tougher disclosure requirements simply add to the regulatory burden, some industry participants and watchers argue that improving disclosure can lead to lower costs for clients by improving price competition.

In a paper regarding the proposed creation of a Consumer Financial Protection Agency in the U.S., Adam Levitin, associate professor of law at the Georgetown University Law Center in Wash-ington, D.C., suggests: “Better disclosure should encourage commoditization and price competition, which should actually bring prices down.”

Moreover, Levitin’s paper argues that this could spur genuine product innovation in financial services: “To the extent that consumer financial products become more price-competitive, margins will fall for the financial services industry. The only way to break out of commoditization will be through innovation.”

Lower costs and greater innovation may well be more than Canada’s regulators are aiming to produce through their CRM proposals. They would happily settle for improved investor protection. IE