A variety of barriers to innovation were raised in the Consultation; some related to the broad regulatory environment in Canada and the costs of regulation, and others related to the understanding and application of current IIROC requirements. We have summarized the key issues we heard in the following section.
Fragmented and duplicative regulatory ecosystem
The most consistent comment made in the Consultation concerned the significant challenges presented by the current regulatory regime in Canada. Dealers and other industry participants noted that they are subject to a number of different national, provincial and territorial regulatory regimes, and not just for securities and investments. This results in a fragmented, complicated, sometimes duplicative and costly framework for both incumbents and new entrants to navigate. Other countries with regulatory regimes that split financial services oversight share some of these challenges in the face of rapidly evolving service models.
The layers of regulation, according to many of the participants, also negatively impact the client experience, resulting, for example, in the duplication of account opening processes that include the collection of client information and reporting disclosures.
The broadening scope of advice is further stressing the Canadian regulatory regime, given the expanding number of regulatory bodies (insurance, banking, etc.) involved. This adds time, complexity and compliance costs due to the number of regulatory touchpoints, regulatory rule and requirement layering, specialist headcount and duplication of compliance control systems. Incumbents and newer entrants both underscored how significantly this challenges their ability to launch and scale new business models to meet evolving investor needs.
“The problem with regulations is really the compounding effect and not an issue with any specific regulation or regulator in isolation.”
– Consultation interviewee
Legacy technology issues are a contributing factor
Many firms acknowledged that transformation of any kind involves costs, not all of which are driven by regulation. Dependence on legacy technologies continues to constrain the speed at which transformative initiatives can be implemented, including the roll-out of new business models and the move away from account-based services. It also impacts firms’ abilities to respond to new regulations even when those regulations are designed to provide a more flexible regime.
Leading technology vendors from the US and abroad appear to continue to be reluctant to enter Canada. They struggle with the business case, weighing the costs to modify their platforms (dual-language and unique Canadian regulatory environment) with the size of the addressable market. This makes adopting leading technologies difficult, with firms often faced with the decision to fund the ‘localization’ of a platform at their own cost, or choose a commoditized technology solution.
Implementing new regulatory technology is also part of the solution to legacy issues and is a strategic priority for many executives. Accenture’s recently completed
2018 Compliance Risk Study, which surveyed executive-level compliance professionals from 150 financial services firms across 13 countries, showed the following key statistics for respondents related to regulatory technology:
- Within the next 12 months, 57 percent of compliance respondents rank compliance technology transformation as one of their top three strategic initiatives.
- In the next 12 months, nearly half of compliance executives surveyed are planning to leverage innovative technology such as surveillance tools as part of their compliance operating model, and move towards adopting artificial intelligence capabilities over the next three years.
Costs of implementing new regulation can delay innovation
Firms shared many examples of how investment in compliance-related technologies, processes, procedures and people, in order to comply with new regulations, can constrain or delay discretionary spending on innovation.
Dealer respondents to the survey part of this study highlighted account-opening and knowyour-client (KYC) processes as well as suitability compliance as the areas driving the most cost. Other key investment drivers mentioned were the build-out of effective cybersecurity programs and increasing headcounts in compliance driven by perceived increases in regulatory reviews (frequency and depth).
And, over the next two to five years, over 80% of survey respondents indicated they expect compliance-related investments will continue to rise, with almost 40% expecting a further significant increase. Some firms requested more transparency on how regulators evaluate the cost/benefit of new rules, and stressed the importance of striking the right balance between incremental benefits and the cost of implementation.
Source: IIROC & Accenture Industry Consultation Review, 2018
Uncertainty regarding rule interpretation causing challenges
During our Consultation, incumbents and new entrants alike highlighted uncertainty regarding the interpretation of rules. We heard this theme from two different perspectives.
The first relates to the uncertainty some Dealers have in applying principle-based rules and accompanying guidance to their existing business models. That uncertainty can lead to a more conservative application of a rule than intended by regulators, and potentially, higher compliance costs. Related to innovation, some firms shared that they were uncertain as to how IIROC would interpret rules, which can lead to delays in advancing new ideas and sub-optimal client experiences. Greater clarity on the treatment of new business models would be useful to avoid these issues.
The second relates to a debate over principlebased versus prescriptive requirements. Views on this topic were divided. A number of firms requested that regulators provide more and clearer direction on how to comply. In contrast, a smaller number of firms indicated their preference for a more flexible, principle-based approach.
“Compliance is not an area where we (firms) are trying to differentiate ourselves for competitive advantage. Compliance is an opportunity for all boats to float at the same level and move forward as an industry.”
– Consultation interviewee
We were also encouraged to clarify our expectations where we suspect rules are being interpreted inconsistently, at the expense of investors. A key example given was the practice of some firms accepting digital signatures to open new accounts, and yet requiring wet signatures to transfer accounts out to a different firm.
Regulatory regime perceived as too slow and reactive, and not sufficiently focused on the right things
Perhaps not surprisingly, we heard that the regulatory regime is often too slow and reactive, with greater focus needed on accommodating the industry’s drive to evolve. Responding faster to Dealer questions and industry issues would reduce delays and costs associated with uncertainty.
Many firms, for example, now focus on managing relationships across an increasingly complex continuum, with individual investment clients on the one side, and multi-generational households with holistic financial plans on the other. Yet much of the current regulatory regime focuses on specific account types and trades, rather than needs and goals at the relationship level.
There was universal support for our investor protection mandate and for our collective efforts and successes in raising the professionalism of the industry. However, we were encouraged to enhance our analysis of regulatory changes and programs from the standpoint of cost/ benefit or “return on investment” to ensure that we focus on addressing issues that will drive the greatest value for investors
For example, one interviewee observed that regulators are focused on ensuring that appropriate policies and processes are in place to protect seniors and vulnerable investors from being taken advantage of. Yet, the interviewee commented, as important as that is, lower income seniors in Canada who have little to no access to financial services or advice could be considered a much larger investor protection issue which does not appear to be getting the proper attention. As such, we need to collectively continue to assess if we are appropriately focused on the issues and solutions that will deliver the greatest value for Canadians.