The Investment Industry Regulatory Organization of Canada (IIROC) engaged Deloitte to assess the benefits and costs of consolidating the Mutual Fund Dealers Association of Canada (MFDA) and IIROC into a single regulatory framework on IIROC’s proposed consolidation (IIROC’s Consolidation Scenario).
Deloitte recently published their report, which suggests close to half a billion dollars’ worth of potential savings over a decade for Canada’s investment firms and their clients by utilizing IIROC’s Consolidation Scenario.
IIROC and MFDA have proposed separate paths to reform their regulatory frameworks so that the frameworks are more client-facing, more efficient and less burdened. Both organizations agree that consolidation is a great way of achieving these goals. However, the two organizations envision consolidation differently.
IIROC’s Consolidation Scenario would have MFDA and IIROC combine to form one organization, but still operate — at least initially — under their two respective frameworks. IIROC’s vision would allow for a gradual harmonization of rules and procedures. The cost of this approach is that it may take a while before advisors and investors can operate under a unified organization. The benefit of this approach is that operations under the consolidation could start immediately. On the other hand, MFDA’s vision would have the MFDA and IIROC remove their existing frameworks and start from scratch. They would build one organization from the ground up. Additionally, the MFDA would include market dealers that currently do not operate under either organization. Building from scratch would require considerable resources and time before advisers and investors can operate under the new framework. The benefit of this approach is that rules and procedures would be re-created to accommodate the demands and goals of both organizations.
In June 2020, the Canadian Securities Administrators (CSA) sought public consultation as part of their ongoing review of the framework of self-regulatory organizations. The purpose of this review is to identify ways of making these regulatory frameworks efficient, client-focused and less burdened. The CSA’s review covers IIROC and MFDA.
IIROC commissioned Deloitte to assess their vision of consolidation. Deloitte conducted interviews with small to large-sized firms across Canada. Deloitte also used their own research and third-party data. Deloitte’s report assesses the benefits and costs of IIROC’s Consolidation Scenario.
DELOITTE’S REPORT FINDINGS
1. Less Regulatory Fragmentation and Burden
IIROC’s Consolidation Scenario could create more efficient regulatory oversight and investor protection.
Consolidation would allow dual-platform firms to opt into a single regulatory platform. A single regulatory platform potentially increases efficiencies in multiple ways. For example, firms would maintain one regulatory relationship. Further, firms would be subject to one set of policies, procedures and rules, and one set of corresponding guidance and interpretation. Finally, firms would engage in one training program. Investors could also benefit. For example, harmonized regulatory oversight could make the complaint process easier. The transition from two regulatory platforms to one could save firms and investors time, energy and financial resources.
2. Broader and More Flexible Investment Advice
IIROC’s Consolidation Scenario could increase an adviser’s ability to provide broader and more flexible investment solutions for their clients.
For example, MFDA and IIROC dealers would have greater access to each other’s investment resources. Consequently, investors could access more investment solutions without having to move from one type of dealer to another. Additionally, the more dealers that can offer a wider range of investment advice, the more competition may exist. Greater competition could potentially benefit investors. Further, consolidation would facilitate the move for dealers who want to transition to less restricted licences. Consolidation could also allow MFDA advisors to offer exchange-traded fund (ETF) options more easily. Lastly, registration under a single regulatory framework would make services more flexible by increasing the pool of dealers who could act as backup advisers on portfolios.
3. Innovation and Enhanced Opportunities for New Firm Entry
IIROC’s Consolidation Scenario could foster innovation and attract more entrants into the market.
For example, advisers working with a single regulatory platform could reduce their operating costs. Firms could redirect these savings to innovations, such as technological advancement. New firms currently must choose between two regulators and two types of markets. Consolidation could reduce these barriers and thereby make Canada more attractive for new entrants. Finally, the resources that currently go into harmonizing rules between the two regulators could be redirected to enhance regulatory innovation. These benefits could attract new entrants into the market. This consequently increases competition and ultimately benefits investors.
4. Lower Operating Costs
IIROC’s Consolidation Scenario could save dual-platform firms between C$380-million and C$490-million over a decade.
One potential source of savings includes lower technology and systems costs. Firms currently have separate regulatory, accounting and client management systems for each platform. Under a single operating framework, these systems and the corresponding technology could more easily apply to both platforms at once. Another potential source of savings is lower staffing costs. Consolidation may allow dual-platform firms to better centralize staffing needs such as accounting, supervision and compliance. Consolidation could also potentially reduce marketing and communications costs. Finally, dual-platform firms could lower their corporate administration costs. For example, the proposed consolidation may allow for single audits, a single board of directors and less tax filing.
5. Transition Costs
IIROC’s Consolidation Scenario would likely result in one-time transition costs for firms. Firms have raised concerns about these costs. However, IIROC’s Consolidation Scenario would address some of these concerns.
Firms may need to invest considerable resources to merge client holdings into a single book. Firms are also concerned about the potential cost of repapering clients. However, IIROC’s approach would not require repapering to happen immediately. Additionally, firms would repaper under the same requirements as before. Finally, firms are concerned that re-registering client names to nominee names may be costly. IIROC’s Consolidation Scenario would not require this re-registration.
The CSA’s consultation period ends in October 2020. A decision may soon follow. IIROC’s study shows potential savings of hundreds of millions of dollars over the next 10 years. Although they have not commissioned their own study, MFDA’s proposal also has the potential of saving both investors and firms considerable money. Whatever the CSA decides, the industry will welcome a solution that can streamline these two important organizations and encourage innovation for a better future.