Investment space’s self-regulators urged to merge

Report draws attention to dilemma with ‘too many ... cooks in the kitchen’

TORONTO There are “too many regulatory cooks in the kitchen” when it comes to financial advice and there is a strong argument for merging two of the biggest self-regulatory bodies, a new C.D. Howe Institute report argues.

The report, released Thursday, notes Canadians are increasingly opting to invest their savings in securities over deposits. However, the ensuing demand for investment advice has prompted restructuring and consolidation in the industry, which has led to firms dealing with multiple regulators.

Two self-regulators — the Mutual Fund Dealers Association of Canada and the Investment Industry Regulatory Organization of Canada

(IIROC)— held “serious” merger talks in 2011, the report notes, but the discussions fell apart over concern for smaller mutual-fund firms.

Now, however, the multiple regulatory model has become “stale,” according to report author Joanne De Laurentiis, a senior fellow at the think-tank and a board member of the Financial Services Regulatory Authority of Ontario.

“The conditions to create a merger are there,” De Laurentiis told the Financial Post. “The industry has been consolidating. The regulators have been harmonizing the rules. The consumers are looking for more holistic advice; they want their adviser to be able to move along the regulatory structure to give them whatever they may need.”

In 1994, Canadians held 53 per cent of their wealth in deposits and just 16 per cent in investment funds, the report notes. But in 2014, it says funds overtook deposits, and that by 2024, the fund-to-deposit ratio is projected to be 38 per cent to 25 per cent. Meantime, it’s estimated that 42 per cent of Canadians are turning to a financial adviser for help with investment decisions.

The shift sparked the advent of a separate class of advisers who sell only mutual funds and are overseen by a separate self-regulator, the MFDA. This created overlap as mutual fund dealers and advisers sought to expand their offerings into territory overseen by IIROC.

While increasing regulatory costs are typically the argument for reform, the report says a better measuring stick would be to check whether the regulatory framework is structured properly for an industry and clientele that have evolved.

“The organizations that oversee investment advice have become overly structured and complex with overlapping roles applying differing standards when enforcing compliance,” it states.

According to the report, the MFDA and IIROC boards could decide to merge without having to seek approval from securities regulators.

The new agency could also address the previous concerns for smaller mutual-fund firms with “fit-for-purpose” rules.

“Such an initiative would remove operational complexity and costs for dealers; streamline and bring greater efficiency to the regulatory oversight process; and give advisers the flexibility to grow and expand to respond to their clients’ financial service needs as they move through their life-stages,” the report says.