The securities regulatory model is founded on the principle of disclosure – the more information an investor receives, the better equipped she will be in making investment decisions – or so the conventional thinking goes. Whether the current disclosure requirements are sufficient and effective for protecting investors remains the subject of active debate within the regulatory community. For example, the recent conference hosted by FAIR Canada and the Rotman School of Management’s Capital Markets Institute entitled “Does Disclosure Work” focussed on a number of key questions that are front of mind for securities regulators, including whether investors are able to adequately process, understand and use the disclosure that they receive, how behavioral economics can assist regulators to enhance the efficacy of disclosure, and what other tools regulators can rely on to improve investor protection, such as enhancing investor education and financial literacy and imposing higher proficiency standards on investment advisors.
Meanwhile, as securities regulators work to enhance the effectiveness of their standards, other regulators which have previously been regarded as less active are being pressured through regulatory competition to step up their games. As one recent report notes, the Financial Services Commission of Ontario (“FSCO”) is under increasing pressure from the Ontario Securities Commission (“OSC”), Investment Industry Regulatory Organization of Canada (“IIROC”) and Mutual Fund Dealers Association to more closely monitor the conduct of insurance agents who are also licensed to sell mutual funds and securities.
The enhanced pressure for harmonization and coordination is not surprising: given that investors may find it difficult to differentiate between similar investment savings products that they are offered (such as mutual funds, segregated funds and exchange traded funds), albeit by industry participants regulated by different regulators. The “point of sale” project for retail fund disclosure was a collaboration amongst securities and insurance regulators within the Joint Forum of Financial Markets Regulators which recognized that similar financial products are often regulated by different regulators in Canada.
The take-away for those in the investment financial advisor community is that it is necessary to take a broader perspective on the regulatory environment; insurance companies regulated by FSCO must have regard to the activities of the OSC and IIROC, as the standards imposed by the securities regulators might one-day become the standards imposed by FSCO and other financial regulators.
In many cases, the best strategy for managing risk is to consider the highest standards being imposed across the regulatory field and work to meet them.