The watchdog for Canada’s mutual fund dealers is searching for ways to be less burdensome on its members, as increased regulation and changing investor demands reshape a maturing business.
In the 11 years since the Mutual Fund Dealers Association of Canada (MFDA) opened its doors to regulate fund sellers, its membership has fallen by nearly half, from 220 firms to just 115 today. Most of those firms are small; 84 of them have less than $1-billion in assets under administration.
Much of the decline is due to mergers of companies that say the high cost of MFDA compliance and regulation makes it inefficient to run a small fund dealer. While the MFDA’s remaining members have grown over the past decade, mutual funds have also grown significantly outside of the regulator’s purview.
The association’s job is to ensure that individual advisers and firms are following the rules when they sell or trade mutual funds, and to bring action when they’re not. The MFDA now oversees companies that handle about $360-billion, or nearly 40 per cent, of Canada’s mutual fund assets, a reduction from 56 per cent in 2002. Brokerage firms and portfolio managers – which are regulated by other bodies – have expanded their investment fund operations and captured a bigger share of the market.
The result has been soul-searching within the MFDA about how to become more efficient to attract and retain members.
MFDA president Mark Gordon, who took over the top job at the regulator in October, 2012, says he is concerned that investment firm mergers are being spurred by the cost of the association’s regulation. MFDA rules require firms to monitor daily trading and client interactions, which has forced funds to greatly increase their compliance staff and introduce new computer technology to track transactions.
“When our members resign, we ask them why you are resigning, and the majority say, ‘The cost is too great to run my own dealer – I’d rather become a branch and focus on my book [of client business] and let somebody else worry about compliance infrastructure,’” Mr. Gordon says.
The trend has prompted the MFDA to revamp its processes to make its regular compliance reviews less onerous. One key change, Mr. Gordon says, is that it has decided to start doing compliance reviews of low-risk firms every four years instead of three, while higher-risk firms will be reviewed every two years.
The regulator is also trying to do quicker reviews of targeted issues rather than “a full review that takes two weeks when you’ve only got one high risk area you want to look at,” Mr. Gordon said.
The MFDA is also working with firms to start fixing issues as soon as it notices them during compliance reviews. The result has been far fewer cited deficiencies when final reports are completed.
“We need to strike that balance between investor protection and regulatory burden and find that right balance, because there are consequences to the burden,” he said.
Joanne De Laurentiis, chief executive officer of the Investment Funds Institute of Canada, a trade association for mutual fund companies, says the rule book for MFDA members has grown enormously in the past decade. The cost of hiring highly-trained compliance officers has made smaller firms less viable.
“The need to hire fairly expensive professional individuals, who are now adding to the expense side of the ledger, pretty much forced a reassessment of what size of dealer model made economic sense,” she said. “And so you saw consolidation.”
Member firms have given the MFDA “an earful” about the costs of undergoing four full regulatory audits in 12 years, Mr. De Laurentiis said, but she believes they now believe the regulator is responding to their concerns.
The pace of industry mergers and the cost of regulation have also fuelled a low rumble of discussion about whether the MFDA should pursue a merger of its own with its larger regulatory cousin, the Investment Industry Regulatory Organization of Canada (IIROC), which oversees brokerage firms.
The MFDA rejected proposals to merge with IIROC in 2005 when talks were under way for a merger between IIROC (then called the Investment Dealers Association of Canada, or IDA) and a third organization, known as Market Regulation Services Inc. (RS), which regulated trading on stock exchanges in Canada.
While the IDA and RS ended up merging in 2008, the MFDA stayed out of the talks.
Ian Russell, chief executive officer of the Investment Industry Association of Canada, an industry association for brokerage firms, says he is in favour of a merger between the MFDA and IIROC because there should be efficiencies for regulatory organizations that combine back office tasks like human resources, administration and IT.
However, Mr. Russell also worries that a merger could be costly and time consuming at a time when the industry is already facing many changes. “The experience with mergers hasn’t been a good one in Canada,” he said.
Mr. Gordon says the MFDA has not pursued any merger talks because two polls of its members in 2006 and 2011 found “no clear direction” for or against mergers.
He said the organization decided to drop the matter until the fate of a possible new national securities regulator is decided, because it is not clear how self-regulatory organizations like the MFDA or IIROC would fit into a new system.
“I think it’s fair to say that members would want a business case made for it. How is it going to impact their operations, are they going to save money, how is it going to impact them,” he said. “Our focus, given the lack of clear direction right now, is to just stick with our day jobs.”
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