Time to level the regulatory playing field for mutual fund companies and fintechs

By Susan Yellin | January 24 2018 07:00AM

Photo: Freepik

Ongoing competition, consolidation, an aging advisor network and never-ending changes to technology are future trends for mutual funds – all of which have the potential to stall the growth of some companies on the operational side, said a panel of experts.

When it comes to competition, everything from fintech to robo-advisors and even Amazon, the powerhouse in online shopping, are seen as vying for the investor’s time and money, said the panel at an Operations Day forum put on by the Investment Funds Institute of Canada (IFIC) in November.

To change the situation for the better, companies need to create a culture in their organization where everyone works well together and can bypass any hiccups caused by competition, said Mark Salvarinas, manager, operations at World Financial Group.

One of the key advantages new fintech companies have over mutual fund companies is more relaxed regulations, said Salvarinas. They start from scratch and don’t have to accommodate legacy databases and products or use the stricter regulations the traditional industry must follow.

Perhaps, said Salvarinas, it’s time to meet with regulators about the long-standing rules to see if there are ways mutual fund companies can compete more effectively with fintechs.

Call to action

“This is a call to action for us to start lobbying our regulators and say maybe it’s time – not to break rules – but to talk about those rules and see if they are up to date,” he said. “Maybe it’s time to revisit these rules and start making a case and say …it’s not fair that some organizations, because they’re categorized as a tech firm don’t have to play by the same rules as the rest of the industry.”

The CSA Regulatory Sandbox helps fintech start-ups or established firms looking to offer new products, services and applications register and/or receive exemptive relief from securities laws requirements and move through a faster process than a standard application to test their products in Canada on a time-limited basis.

New technology is springing up almost as fast as new products come to market. Technology and artificial intelligence help keep up with efficiencies, and all companies will be increasing the amount of money they spend on technology to provide these savings, said Casey Greenwood, vice president of product management at Broadridge.

Costly venture

But Greenwood said this will be a costly venture for smaller companies. “That’s a trend we’re watching and that we’re involved with. This trend is becoming increasingly difficult as a smaller firm to deal with all this regulatory change to deal with the operational cost that is being passed down to the dealer and the increased pressure that clients are putting on firms to provide that value service for less money.”

As well, fewer advisors are entering the market and expectations from a technology point of view will shift, said Greenwood. Newer advisors will not be able to survive with only 120 clients or so in their book and will have to work with everyone from modest means to high net worth clients.

Technology, he said, is the answer to helping both of these groups of clients. “It’s not just a demographic shift, it’s a shift in the data and how many accounts are serviced by individuals and that will require change.”

Salvarinas said that three years ago, his company was struggling to get its advisors onto a digital platform, garnering only a 20 to 30 per cent uptake. Now, however, he said, the majority of advisors welcome digital with open arms.

The problem now is how to dovetail digital with legacy systems, a situation many long-time firms are dealing with.

Another major issue that Operations experts are grappling with is electronic signatures, or e-signatures, that an increasing number of younger advisors and investors expect to be the norm in this day and age.

The paperless method is also expected to decrease costs and increase contract speed.

IFIC has put together a working group that has compiled a list of features members believe should represent the best practices for e-signatures going forward.

Harry Gundy, who at the time of the forum was director, head of product at FundSERV Inc., told the forum that the industry needs a centralized agreement in order to work efficiently.

Some of the features the group has agreed on when talking about e-signatures include, that:

  • The document signature security be tamper proof
  • Once the e-signature is changed it invalidates a document, so no cutting and pasting
  • The e-signature needs to be embedded within the document and or stored separately
  • The signature has to be able to be authenticated independently
  • The e-signature must be able to travel through email and a firm’s storage system without being compromised
  • There needs to be a notice that the document has been delivered.

A recent report by The Insurance and Investment Journal found that many Canadian insurance companies are increasing security to ensure the validity of electronic signatures.

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