A collaborative approach with realistic timelines would help reduce strain on firms
The securities industry, especially investment fund distribution and management businesses, has been the subject of an unprecedented number of new rule proposals and implementations in recent years. Industry and regulatory veterans alike share this observation. Simply listing current rule proposals in consultation and implementation would take more space than this column allows.
The current portfolio of significant regulatory projects includes the order-execution-only trailing commission ban, the ban on the deferred sales charge, total cost disclosure, client-focused reforms and the Capital Markets Act (Ontario), to name a few.
Regulation is a necessary element of the financial markets. Regulators must be capable of identifying, articulating and responding swiftly to instances of market failure. If education, compliance and enforcement are insufficient to address the failure, new rules are sometimes required.
However, because policy development is the slowest and most expensive tool in the regulatory toolbox, a new rule should be used only as a last resort.
Good regulatory practice also suffers when we try to do too much at once.
For example, rigorous cost-benefit analysis can determine whether new rules are the optimal regulatory solution. Unfortunately, the avalanche of rulemaking has left little time for this critical process. With some exceptions, cost-benefit analysis by the Canadian Securities Administrators (CSA) is typically not much more than an assertion that the benefits of the rule self-evidently outweigh the costs.
Post-implementation impact analysis is an important way to allocate scarce resources by focusing on regulatory solutions that work. However, with the notable exception of the client relationship model’s cost and performance reports, the CSA has shown little interest in assessing whether a new rule has effectively addressed a regulatory problem.
Stakeholder input can improve the scope and effectiveness of a proposal. Allowing 90 days for investors and registrants to provide comments through advisory panels, associations and advocates is adequate and certainly not excessive when compared to the years of regulatory development that precede the call for comment.
Ninety days becomes completely inadequate, however, if stakeholders are trying to respond to multiple requests for comment on a variety of rule proposals simultaneously. When ever-increasing regulatory data surveys are added to the total, the industry’s ability to respond constructively and thoughtfully is compromised.
The shortcomings and costs don’t end there.
Constant change to the regulatory framework results in lost opportunities to innovate and improve client experience. Most investment fund managers and dealers don’t have dedicated staff to respond to regulatory proposals. Inevitably, the opportunity to develop new products, increase choice and reduce costs must give way to the regulatory priority.
How could regulators and industry work collaboratively to reduce strain on firm and CSA staff resources created by the continuous treadmill of new rulemaking?
One way is to take a collaborative approach to providing realistic estimates of the time required to implement new rules. Most regulatory staff haven’t worked in the investment funds industry and aren’t familiar with the nuts and bolts of implementing dealer and manager regulatory changes. Educating and communicating with clients, managing systems changes, obtaining regulatory relief, and coordinating with Fundserv implementation schedules are just a few of the factors that have to be considered to ensure adequate time to implement rules in a timely and effective manner.
This is a small step, but realistic estimates of the time needed to implement rules would reduce the strain on regulatory and industry resources and result in more effective and timely rule making.
Source: Investment Executive