A merger of the two regulatory organizations that oversee Canada’s investment industry could save hundreds of millions of dollars in regulatory fees over the next decade, according to a new report from Canada’s brokerage industry regulator.
In a blueprint published on Tuesday, the Investment Industry Regulatory Organization of Canada (IIROC) recommends both itself and the Mutual Fund Dealers Association of Canada (MFDA) consolidate as a single self-regulatory organization.
“The current self-regulatory model denies many Canadians robust access to the advice, products and services they deserve," IIROC said in the proposal. "This needs to change.”
Both the MFDA and IIROC are industry-funded self-regulatory organizations (SROs) that can sanction and fine delinquent member firms and individual advisers. The MFDA oversees about 90 mutual fund distributors, while IIROC is responsible for the supervision of 170 investment dealers.
The two organizations have faced criticism for having overlapping areas of oversight as more wealth managers serve customers who buy both mutual funds and individual securities. In late 2019, the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities commissions, announced it was reviewing the “regulatory framework” that governs both SROs. The review prompted both the MFDA and IIROC to publish their own proposals for the future.
IIROC’s model outlined on Tuesday featured significant differences to an earlier proposal made by the MFDA in February.
While the MFDA recommended building a new organization from scratch, IIROC’s model would see both organizations continue to operate without changes to their existing regulatory rules, business models or regulatory fee structures.
IIROC chief executive Andrew Kriegler says while the MFDA’s idea of building a new SRO with a “clean sheet of paper” is attractive, a complete overhaul is not feasible.
“It has been shown time and time again in the regulatory system in Canada that it is extremely hard to get those big ideas to actually be delivered,” Mr. Kriegler said in an interview. “There is a lot of very effective regulation happening in Canada and our proposal builds on what is working and what can be delivered in a short period of time.”
IIROC’s proposal says the merger would take three months to complete, and allow wealth managers to see a significant reduction in overlapping regulatory costs, especially those that are dual-licensed and members of both SROs.
The merged organization would also allow mutual fund dealers to more easily gain access to a securities platform to purchase new products – such as exchange traded funds – that have been growing in popularity but are mostly limited to IIROC distribution. Investment dealers would also no longer have to pay for duplicate licenses to sell both securities and mutual funds.
Blake Goldring, a 33-year industry veteran and executive chair of asset manager AGF Management Ltd., says it made sense at the time of inception for the two SROs to run as separate organizations, but the investment landscape has significantly evolved. The elimination of duplicate regulation would offer cost savings that could be reinvested into technology upgrades.
“There is a real need in this post-COVID era to take a look at the overall costs in the industry,” Mr. Goldring said in an interview. “Many companies have accelerated technology plans by several years so it’s a great time to think about how to cut red tape.”
MFDA CEO Mark Gordon says the industry “has to do better for Canadian investors” and that the IIROC model “is meant to benefit only industry, not investors or the public.”
“We are looking for a model that is a significant improvement of the current systems and a model that will stand the test of time,” Mr. Gordon said in an interview. “Only by designing a net new SRO – that addresses the interests of all stakeholders in a fair and balanced manner – can we create a system which delivers lasting benefit for Canada.”
In February, the MFDA outlined its own proposal to develop a new regulatory body that would combine oversight of the mutual fund sector with oversight of IIROC investment dealers – as well as take over regulation of exempt market dealers, scholarship plan dealers and portfolio managers, which are currently regulated by the provincial securities commissions.
At the same time, the MFDA recommended stock market surveillance and regulation of trading should no longer be the responsibility of IIROC, but rather be assumed by securities regulators.
Bill Packham, CEO of Aviso Wealth Inc., a financial services company that has both a mutual fund and securities dealer, says while both approaches have merits, IIROC’s proposed merger is “more responsive to industry needs.”
“Simplifying the regulatory environment, and making it easier to navigate, will improve the investor experience while reducing the burden on industry participants,” Mr. Packham said. “… [IIROC’s proposal] would be more straightforward and less disruptive to implement because there would be synergies in leveraging existing structures, without introducing additional complexity.”
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