Why regulators should provide cost-benefit analyses–and why they don’t

CSA’s proposed targeted reforms and best interest standard would do more than transform the industry; the changes may also come with a high price tag.

That’s why, in recent comment letters, industry stakeholders “have called for a formal cost-benefit analysis to be undertaken by the regulators before these reforms are implemented,” says Ian Russell, president and CEO of the IIAC in his latest industry commentary.

To avoid unecessary costs, says Russell, consultations with key stakeholders should include “rigorous analysis of the rule-making process” to “ensure sound feedback and vigorous debate.” Such analyses would also make sure the right rules are being implemented.

Says Russell, “Fundamental analysis behind proposed rules is the best assurance that they will be as cost-efficient as possible and that unintended consequences are limited to the extent possible.”

Russell notes that regulators have failed to carry out formal quantitative cost-benefit analysis since 2008 even though “extensive and fast-moving rule reform” has taken place over the last eight years.

10 questions to answer

When proposing new rules, regulators should be able to answer 10 questions, says Ian Russell, president and CEO of the IIAC in his latest industry letter. Those include:

• What are the reasons for proposing a new rule in the first place?
• What gap is the proposed rule intended to fill?
• Is the regulatory gap an actual compliance problem?
• What are the perceived shortcomings of the rule in terms of costs on intermediaries and investors, or, at least, broad concerns that worry regulators?

And, Russell adds, “while regulators are obligated to provide a description of the costs and benefits of proposed rules, this typically takes the form of a cursory analysis. This has raised the risk of inefficient rules, contributing to a significant and unnecessary burden placed on the investment industry and dealer firms.”

One example is “the emergence of multiple equity markets and order protection rules to ensure best execution, which had the unintended result of ratcheting up trade execution costs, marketplace access costs and market data costs,” says Russell.

The result has been “squeezed operating margins and weakened profitability at boutique firms,” which has contributed to “sweeping consolidation of small firms across the industry.”

There are many reasons regulators may be holding back on formal cost-benefit analyses–such as the complexity of the process.

But, at the very least, says Russell, regulators can be more transparent about whether they’ve considered the pros and cons of providing such analyses when consulting with the industry. Read his full letter.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.