Ripe for Reform: Modernizing the Regulation of Financial Advice

Abstract

Over the last 25 years the investment advisory industry has evolved and expanded its services to meet the needs of a more demanding and active investing public. Canadians have increasingly shifted their preferences away from putting their money into deposit accounts and moved it into market securities, which has led to a significant increase in the demand for the services of investment advisers. To meet the growing demand for advice and serve a broader range of customers efficiently, many traditional investment dealers have consolidated, merged with larger financial institutions, or restructured into single, multidisciplinary firms. Adding to the pace of change, advisory firms have responded to increased consumer demand by creating new service models, including digital forms, to provide their clients with new offerings and more convenient access. Many dealer firms support advisers that are registered with a range of regulators including the Mutual Fund Dealers Association (MFDA), the Investment Industry Regulatory Organization of Canada (IIROC) or the l’Autorite des marches financiers (AMF) in Quebec, where the MFDA is not recognized. As they combine the management and operations components of previously separate regulated firms, dealers must respond to, and manage multiple regulators, meaning overlapping and sometimes competing requirements. And as their advisers increasingly seek greater flexibility outside the narrow rules they must operate under, a blurring of lines is developing across regulatory bodies. As a result, the industry and its Self Regulatory Organizations (SROs) are somewhat out of sync and no longer a good fit for each other. A merging of SROs would create a more finely tailored, fit-for-purpose oversight regime. Such a merger is relatively simple to accomplish. The Boards of the MFDA and IIROC could decide to merge without having to seek regulatory permission to do so. 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. This would help dealers and advisers deliver a more affordable, responsive and coordinated service to their investor clients and reduce the overall regulatory burden on the industry. In fact, a longer-term assessment of regulatory effectiveness could measure how accessible and affordable regulated advisory services are for the individual consumer and how successful those services are in getting consumers to develop good financial habits and build wealth. This paper does not provide an exhaustive assessment of all the changes that would lead to a thoroughly modernized framework. A full effort can only be mounted with resources from all of the regulatory bodies concerned and all of its industry players, which must manage the multiple regulatory relationships. It also requires the full political support of the government ministers to whom these bodies report and who have a strong interest in improving the efficiency and productivity of the agencies they regulate.