August 23rd, 2016

Will foreign rules impact future Canadian regulations?

We’re living and working in an era of regulatory change in the global investment industry. When looking at the big picture, it’s important to note that Canada’s regulatory environment has some unique features.

The Investment Funds Institute of Canada (IFIC) recently published a report, Will Rules in Other Countries Lead to New Regulations in Canada?, which explores the potential impact of foreign rules on the Canadian investment industry. Here are a few highlights.

Foreign regulatory approaches The Canadian context
Impetus for changes The U.K., Australia and the Netherlands banned embedded fees as a result of mis-selling and corporate corruption scandals. Canada has not experienced these market failures.
Regulatory scope Most foreign regulators that have imposed stringent reforms on financial advice have broad mandates that include insurance, investment, mortgage and other commission-driven financial products. When measures are applied to all financial products, there is equitable treatment among products. Most Canadian securities regulators have no jurisdiction over non-securities investment products.
Market conduct oversight Jurisdictions outside of Canada don’t have dedicated market oversight agencies – an important contributing factor to the mis-selling and corruption that triggered fee bans. Canada’s robust regulatory framework includes self-regulatory organizations (IIROC, MFDA and CSF).
Advice options The U.K., for example, banned embedded fees, and the options for receiving advice narrowed significantly, as higher costs made advice unaffordable for smaller accounts. Canada has a wide range of distribution and compensation models available to investors. The most common model – embedded fees – delivers access to advice for investors of all levels.
Transparency and disclosure The U.K. and Australia are only now turning their attention to improving the quality and amount of cost disclosure. Canada is leading the world in providing meaningful disclosure to investors through the development and delivery of Fund Facts and CRM2.

In recent years, Canadian regulators have introduced a broad disclosure regime, including CRM1, CRM2, Funds Facts and ETF Facts. These initiatives put Canada at the forefront of the world when it comes to investor disclosure.

The Canadian Securities Administrators (CSA) is studying whether additional steps, such as banning embedded fees and imposing a best interest standard, would benefit investors. It’s important for regulators to first assess how well Fund Facts and CRM2 improve investor engagement and understanding before making further regulatory changes.

Here’s the full report, Will Rules in Other Countries Lead to New Regulations in Canada?