IIROC publishes advisor survey results in support of single SRO

The Investment Industry Regulatory Organization of Canada (IIROC) released two studies Nov. 5, which suggest that regulatory burden and silos create unnecessary challenges for mutual fund advisors and dealers alike.

The two reports are based on interviews with 10 English-speaking Mutual Fund Dealers Association of Canada (MFDA) advisors, four French-speaking MFDA advisors from Quebec, five online focus groups which surveyed 36 MFDA-licensed advisors, and 18 interviews with executives from 10 MFDA only firms and eight dually-regulated dealers.

Increased pressures to innovate

“Sentiment from dealers and advisors suggests the current regulatory system does not serve the modern investor as effectively as it could,” IIROC writes in a statement announcing the results. “There are increased pressures for the industry to innovate and meet client needs.” More, they say “the research shows that many of the regulatory challenges faced by the industry could be effectively addressed through the near-term consolidation of IIROC and the MFDA.”

The regulator’s MFDA-focused report makes observations about the MFDA advisor’s client base, discusses the perceptions advisors have about various industry changes, including regulatory challenges, technology, the impact of COVID-19, and competition-related issues. It also probes advisor awareness about the Canadian Securities Administrators (CSA) review of the regulatory framework governing IIROC and the MFDA.

Potential benefits and drawbacks of consolidating

“For many, the research consultations seemed to be the first time advisors had been asked to reflect and comment on the potential benefits and drawbacks of consolidating the two regulators,” they write. “Without knowing the specific details or content of the proposals, most advisors expressed support in principle for the move to a single, self-regulatory organization (SRO).” The report says in June most advisors had not heard of the CSA review. By September, most knew of it, but admitted to being unfamiliar with it.

“MFDA advisors are not familiar with IIROC and they don’t feel they can make informed comparisons between the two regulators,” they add. “Most assume that IIROC operates in the same way as the MFDA. In fact, many are under the impression that IIROC-licensed advisors are held to even greater scrutiny and higher regulatory standards. Advisors seemed to understand that heightened regulation is needed when it comes to the sale of individual securities. Still, a few express concern that a single SRO will result in increased regulation of those selling only mutual funds.”

In the report summarizing the findings of surveys conducted with dually-regulated dealers, IIROC admits that dual-platform dealers could save significant costs with a single SRO, but adds that there is little information about the cost impact of a single SRO on those operating solely on the MFDA platform. “With concerns raised about how smaller dealers are responding to increasing regulatory burden in costs, this issue is of particular interest,” they write.

The report on dual-platform dealers’ perceptions also examines evolving investor technology needs, and client expectations. It includes a discussion about exchange-traded funds (ETFs), the challenges associated with servicing small book clients, the lack of regulatory harmonization and associated costs, product arbitrage and the impressions dealers have about the CSA review.

Acute frustration about the lack of harmonization

“The current regulatory structure is perceived by many to inhibit advisors from providing clients with an integrated product and service offering,” they write, adding that acute frustration was also expressed by most of the dealers about the lack of harmonization across the regulator regimes. This, they say, can result in inconsistent client experiences, investor confusion when seeking dispute resolution, categories of risk being assessed differently, advisors potentially being penalized for some activities under one regulatory regime but not under another, and inconsistencies in how products can be marketed and described.

IIROC says it found there is universal support for the SRO model in general. They add that most believe a single SRO will benefit the investment industry as it is expected to reduce operational and technology silos, eliminate duplicative audits, reduce product arbitrage and harmonize proficiency requirements.