Investment dealers who sell both mutual funds and securities could see industry savings of nearly half a billion dollars over a decade if Canada’s self-regulatory organizations were merged into a single entity.
A review by Deloitte LLP to be published on Tuesday analyzes the potential benefits to the financial services industry of a merger between the Investment Industry Regulatory Organization of Canada (IIROC), the member-funded group that oversees investment dealers across Canada; and the Mutual Fund Dealers Association of Canada (MFDA), the industry group that oversees mutual fund distributors.
The report – which was commissioned by IIROC – estimates that investment firms that run both a mutual fund business and an investment securities dealer could, together, reduce operating costs between $380-million and $490-million over the next decade.
“Firms have been telling us for years that the No. 1 barrier to innovation is regulatory fragmentation,” said Irene Winel, IIROC’s senior vice-president of member regulation and strategy.
“Eliminating duplicative and overlapping regulation will generate significant savings for reinvestment, as well as simplify and improve the overall client service experience.”
The MFDA and IIROC are industry-funded self-regulatory organizations that can sanction and fine delinquent member companies 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 their overlapping oversight as more wealth managers serve customers who buy both mutual funds and individual securities, requiring some to be licensed by both regulators.
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 organizations. The review prompted the MFDA and IIROC to publish their own proposals.
IIROC suggested a merger in which the two organizations would operate as a single entity, without changes to their existing regulatory rules, business models or fee structures. Earlier this year, the MFDA released a report that recommended building a new organization from scratch.
The Deloitte report comes one month after the CSA published its review asking for more public input before it makes a decision.
“One regulator means the [investment dealer] can take a holistic view of the client’s needs and goals over their financial life-cycle,” said Bill Packham, chief executive officer of Aviso Wealth, a dual-licensed investment company. “The client can have one adviser, one [sign-up procedure], one statement, and gain access to a full suite of investment solutions on one platform.”
The Deloitte report does not examine whether a merger would increase or reduce the membership fees, but does suggest the combination would eliminate several administrative costs for operating systems and technology, legal expenses, staffing and other expenses – such as compliance – that are related to overlapping regulation.
Companies would also be able to combine training programs, accounting and audit groups and work under one set of regulatory rules, the report says.
New firms could enter the market more easily because they would not have to decide which regulator to operate under, the report said. Investors would have greater access to investment products under one roof, and it would be clearer where to make complaints with a regulator.
Christopher Enright, president of Aligned Capital Partners Inc., said while reducing costs is definitely an important part of the consolidation proposal, it is secondary to improving investor outcomes.
“We need to eliminate a lot of the investor confusion that continues to be out there today,” he said. “The industry has already invested so much around transparency and investor protection, but we need to do more to provide investors the access to all the products and services they need.”
Desjardin Group’s chief compliance officer, Sylvain Perreault, said if the financial services industry can adapt to the new technology that is rapidly emerging, the overall cost savings will eventually pass on to clients.
“This is an evolution of the client’s needs, which over the past 20 years has shifted from being products-driven to advice-driven,” says Mr. Perreault, who oversees both the company’s mutual fund dealer and investment brokerage.
“A [regulatory organization] based on one product no longer makes sense, as clients are looking for an entire bouquet of services, including estate planning, fiscal planning and family offices.”
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Clare O’Hara