Profits Decline Under Compliance Costs

By Andrew Rickard | October 02 2015 09:28AM

In his most recent industry letter, Investment Industry Association of Canada president and CEO Ian Russell warns that there could be some difficult days ahead for retail investment brokerage firms.

Although revenue and profits for the investment industry as a whole improved in 2014, up by 15% and 29% year-over-year respectively, Russell notes that firms have struggled to deal with increasing operating costs which were on average about 6% higher than in the previous year. As companies prepare to meet the requirements of the second phase of the Client Relationship Model (CRM2), they have had to incur additional expenses, hiring compliance consultants and adding both new staff and new technology.

"While spending has, on average, increased 15% in the past three years to be ready for CRM1 and FATCA [Foreign Account Tax Compliance Act] reporting, expenditures are expected to accelerate this year, most likely related to the heavy requirements of CRM2 rules that become fully operational in mid-2016," he says.

As a result, while operating revenue at retail firms is expected to be the highest in nearly a decade, Russell suggests that their operating profits may drop by 23% this year. What's more, should stock market conditions worsen and scare away more investors, performance could deteriorate further, although Russell notes that this drop would be offset to some extent by the growing share of fee income they receive as they shift from the traditional commission model to fee-based accounts. Things could be more difficult for self-clearing retail boutiques; even if they are able to keep revenue and profits steady, operating profits are projected to drop about 30%.

"The outlook for the investment industry over the next year or so will certainly not be robust, but positive business factors leave room for optimism," concludes Russell. "Moreover, the industry has borne a steadily increasing regulatory burden throughout, leaving the hope that the pace of rulemaking will slow."

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