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Successful rule implementation requires industry collaboration

The delivery of policy shouldn’t be a last step

By Paul Bourque

When it comes to regulatory proposals, discussions between regulators and the investment industry have typically focused on content. In most cases, the regulatory objective of a rule is clear and rarely the subject of debate. Implementation of the rule, however, is a different matter. Focus has increasingly shifted from the “what” to the “how” and “how fast,” and implementation issues are increasingly the subject of regulatory consultations.

Early collaboration between regulators and the industry prior to launching consultations and establishing timelines would help address this shift and enhance the ultimate outcome of proposed rules.

Rule implementation is an extremely complex undertaking, often requiring complicated technology builds to comply. The investment industry is increasingly reliant on remote online access, digital applications, artificial intelligence and big data, accelerated by the pandemic. These new technologies are deployed across the enterprise, from front-of-house client-facing services to mid- and back-office product development, control, supervision and compliance.

Two good examples of this trend are the implementation of the ban on mutual funds that pay trailer fees on the order-execution-only (OEO) platform or discount channel and the implementation of total cost reporting. There is little disagreement with the objectives of these proposals. Ending the payment for advice on a channel where the discount broker is prohibited from giving advice and providing investors with more complete fee information concerning the funds they hold are worthy objectives. But to successfully deliver the value of these policies into the hands of investors requires a high level of IT project planning, development and execution.

Specifically, both projects require the creation of new communications networks connecting investment fund managers, dealers, industry utilities and investment industry service providers. It is also necessary to build new data elements and data fields to populate the electronic systems that control supervision, compliance, and internal and external reporting.

The OEO trailer fee ban, after receipt of the final rule on Sept. 17, 2020, was implemented successfully by the investment industry on June 1, 2022. A joint committee of the Investment Funds Institute of Canada (IFIC) and the Investment Industry Association of Canada met weekly, with Fundserv participation and regular reporting to the Canadian Securities Administrators (CSA). The goal was to find solutions that accommodated the different operations and technology systems of the investment fund companies and the large and small OEO dealers while achieving a positive investor experience.

The joint committee prepared a roadmap for managers and dealers to transition and align their businesses to comply with the OEO trailer ban. The roadmap allocated major tasks of managers, dealers and Fundserv, including deadlines.

The CSA provided regulatory relief and simplified some elements of the rule to ensure the project could be achieved on time with minimal client disruption.

The final rule for total cost reporting has not been provided. However, the CSA has announced its expectation that the rule will be implemented 18 months after the final rule is approved sometime in Q2 2023.

Working with industry utilities, IFIC has estimated a best-case scenario that will require a 30-month implementation period. Like the OEO trailer ban, this proposal will require a large, complex IT development and build involving close collaboration with investment fund managers, dealers, Fundserv and third-party service providers. Similar to the OEO trailer ban, this work can start only when the final requirements are known and a roadmap is developed that assesses constraints such as the availability of industry, third-party and CSA resources, and competing priorities from other regulatory initiatives.

These are not ideological issues over which regulators and the industry may agree to disagree. These are nonpartisan technical questions that require careful analysis by industry and CSA operations and IT experts.

The CSA should reconsider its practice of publicly announcing an expected implementation date well before a final rule is approved. This practice puts at risk the successful implementation of important policy, often many years — sometimes decades — in development, for the sake of an additional six or 12 months.

IFIC recommends that significant rule changes that require technical and operational expertise be managed in advance by a committee of the investment industry and the CSA with necessary internal or external experts. The committee would also expeditiously review the final rule, the technology constraints and barriers to implementation and develop a realistic implementation timeline. Ultimately, this is a CSA decision, but one that would gain industry support and result in lower risk and faster implementation.

The OEO trailer ban implementation demonstrated that the industry can work collaboratively and in good faith with CSA staff to implement complex technical changes. Earlier consultation on implementation timelines should be standard operating procedure for the CSA to ensure rule changes are implemented as soon as possible, through a well-executed critical technology path that keeps the interests of the investor uppermost.

Paul Bourque is president and CEO of the Investment Funds Institute of Canada.

Source: Investment Executive