Reducing the burden, but fairly

The OSC first signalled its intention to look at easing the cost of regulation last autumn, announcing the creation of a task force to tackle the topic. In mid-January, the OSC launched a formal consultation seeking feedback on ways to eliminate unnecessary rules and processes in order to save time and money for issuers, industry firms and investors.

The OSC’s written consultation, which wraps up on March 1, will be followed by a roundtable discussion on March 27, which will allow for public input on some of the ideas that arise from the initial consultation.

At the same time, the FSRA, which will oversee the insurance, pension and credit union industries, launched its own consultation in mid-January regarding its initial priorities. The primary focus of that exercise will be on reducing regulatory costs by re-examining the existing requirements for the industries the FSRA will oversee. (The FSRA will replace the Financial Services Commission of Ontario and the Deposit Insurance Corp. of Ontario once in operation.)

While the pressure to cut regulation seems to be rooted largely in the political ideology of the Ontario government, the effort comes at a good time, from the securities industry’s perspective – just as the outlook for the industry grows darker, despite the latest data from the Investment Industry Association of Canada (IIAC).

According to the IIAC, securities industry profits rose sharply in 2018. Operating profits through the first nine months of the year rose by 28% compared with the corresponding period a year earlier; and earnings were on track to reach record levels, topping $7 billion for the full year – even with the market turmoil that hit in the fourth quarter.

Yet, those good times soon may come to an end.

The industry’s impressive profit figures are powered by strong revenue growth – particularly growth in fee-based revenue from the wealth-management business – which helps to paper over the fact that costs are rising fast as well.

According to the IIAC, operating expenses rose by almost 6% in 2018, outpacing the average annual increase of 3.5% over the previous three years – a trend that the IIAC attributes to both rising regulatory costs and spending on technology (the latter of which is driven by both compliance and competitive considerations).

“The ramp-up in operating costs in the past year relates to the relentless buildup in the regulatory burden carried by industry firms,” notes IIAC president and CEO Ian Russell in his Jan. 2019 letter to the industry. That letter points to recent regulatory initiatives, such as the client relationship model reforms and new tax-reporting obligations, as some of the chief reasons for the recent accelerating growth in industry expenses.

Looking ahead, the IIAC anticipates costs will continue rising as firms deal with other regulatory initiatives, such as the Canadian Securities Administrators’ (CSA) proposed client-focused reforms, along with the intensifying competitive pressure.

The IIAC also foresees revenue declining as economic growth slows and equities markets pull back. This combination of rising costs and declining revenue will squeeze profits – and, the IIAC predicts, this pressure is likely to lead to further consolidation within the financial services industry as small firms see their margins disappear.

For these small firms in particular, reducing regulatory costs would be a lifeline, Russell suggests: “The one factor on the horizon that could make a positive difference to the viability of the small dealer community is the recently announced Ontario government deregulation initiative.”

Rationalizing the regulatory system could help firms stem rising compliance costs and, ultimately, reduce their operating expenses, Russell adds.

For the industry’s small firms, then, there may be a great deal at stake in this consultation. Whether the initiative yields enough practical ideas to make a meaningful difference remains to be seen.

Given the typical speed of regulatory policy-making, rule changes are likely to take at least a year before they actually see the light of day. Modifying internal processes at the OSC presumably could happen sooner, but probably wouldn’t have a dramatic impact on firms’ costs. Truly significant reforms will require participation from the rest of the CSA, which inevitably means new initiatives are longer-term projects.

In fact, the CSA is working on a series of its own initiatives designed to reduce the regulatory burden on issuers, investment funds and, eventually, industry firms. Among other things, those efforts aim to eliminate duplication in regulatory filing requirements, reduce certain prospectus and disclosure requirements, and facilitate electronic communication.

While the OSC’s initiative is treading some of the same ground, that consultation makes clear that the OSC is seeking input on steps that it could take on its own to make life easier for securities market players, with an eye to harmonizing with the other provinces over the longer term. At the same time, the OSC is stressing that it isn’t prepared to gut investor protection in the name of cutting compliance costs.

Indeed, the OSC states its task force also will look at ways to improve investors’ experience with the regulatory system, particularly with the mandated disclosure that they receive. This effort could mean modernizing disclosure delivery requirements and more plain-language disclosure.

Still, investor advocates remain concerned that investor protection inevitably will be sacrificed in the name of cutting costs.

“I have no issue with eliminating duplicative, redundant, outdated or ineffective regulation,” states a submission to the OSC’s consultation from longtime investor advocate Ken Kivenko. “My concern is that needed investor protections might be rolled into the drive to reduce ‘regulatory burden.’

“If all we see emanating from this task force,” Kivenko’s submission adds, “is less disclosure, less frequent disclosure, more disclosure via electronic means and the delay of any new investor protection regulations, that would be a serious blow to investor protection in Ontario.”

CSA
For issuers: prospectus reform; streamline continuous disclosure requirements; develop alternative offering model; enhance electronic delivery

Status: Consultation complete (summer 2017); proposals pending in six policy areas

CSA
Investment funds: eliminate redundant disclosure; codify routine relief; minimize duplicative filings; rely more on web-based technology

Status: CSA staff review complete; proposals pending (aiming for March 2019)

OSC
In addition to ongoing CSA efforts: eliminate unnecessary rules, filing requirements, and regulatory processes; modernize disclosure to investors

Status: Consultation Jan. 14 to March 1; roundtable scheduled for March 27

source: investment executive Research ie chart