On the back of CSA’s proposed client-focused reforms, expect more industry consolidation as business practices change and advisor compensation is affected, says IIAC president and CEO Ian Russell in his latest industry letter.
It remains to be seen how the reforms will look in final form, but Russell says they’ll have “a transformative impact on the retail business in the investment industry, particularly driving further structural change and forcing greater reliance on financial technology.”
Last month, the CSA announced plans to institute several client-focused reforms and ban deferred sales charges (DSC), but keep other types of embedded commissions. CSA said more information will come in September.
Russell looks at the potential business impact of the proposed reforms, in four parts: how they’ll tighten operating margins, lower the price of mutual fund products, increase documentation, and impact robo-investing.
The likely client shift to hybrid advisor-robo models will help both advisors and investors—due to reduced compliance costs and risks for firms, and lower fees for clients “with assets below the $250,000 threshold,” he wrote. But he suggests that further expanding the disclosure of investment product costs should happen after CSA reviews the impact of CRM2.
The increase in client documentation will further change the industry, Russell argues. He points to “expanded KYC and KYP requirements, expanded suitability and detailed conflict of interest rules […].”
“The greater focus on documentation will interfere with increased efforts at client relationship-building and meeting the demands for financial services, such as financial and tax planning,” he writes. “Demand will grow for more desktop technology to improve advisory productivity.”
Overall, one-time costs for firms as a result of building out and adjusting their compliance systems “will be significant,” he says. Further, “ongoing variable costs will increase, placing a proportionately heavier burden on small retail firms.”
Advisor fees and charges will also be under pressure from ongoing CRM2 requirements and increased availability of lower commission-paying products, and he forecasts more firms will look at “amalgamation and merger, or in certain cases, a decision to close operations.”
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What works and what doesn’t
CSA achieved two milestones with its proposals, says Russell.
First, the regulator “deserves much credit for bridging the differences in regulatory approach to achieve a uniform set of regulations across securities jurisdictions in the country,” he says.
Second, it also managed to introduce potential reforms that are “detailed and sweeping, covering all major aspects of the wealth business.”
But the proposals will benefit from “a bright-line test for market participants, and for regulators responsible for monitoring compliance with the rules,” Russell writes. Currently, all that’s clear is they will leverage existing rules as well as impose additional requirements related to “a best interest/client-first standard.”
More detail is needed, he argues, because “the new rules depart significantly from the existing stringent SRO rules and because the rules will apply to other registrants without similar experience of rigorous conduct compliance.” Those registrants include exempt market dealers, IIAC told Advisor.ca.
Further, the new rules should extend to the insurance space as that industry approaches “the anticipated rule-making effort of the Financial Services Regulatory Authority (FSRA) in Ontario,” Russell says.
Expected industry response
To meet current professional standards, IIROC-registered firms have already “invested substantial effort to comply fully with the SRO rule framework and […] to meet the securities regulatory principle of duty of care,” which requires that firms deal “fairly, honestly and in good faith,” says Russell. So there will be pushback in comment letters, which are being collected until Oct. 19.
“The proposed rules and guidelines will be judged in terms of material improvement to best interest conduct and practicality,” he writes, noting alternative approaches will likely be proposed.
Russell suggests that CSA’s final client-focused reforms be put to a cost-benefit test. This would help “mitigate unnecessary costs and avoid unintended consequences for investors and intermediaries in the marketplace, given the wide-ranging impact of these reforms,” he says.