Special to the Financial Post
Published November 20, 2013

By Tom Bradley

By 2016, mutual fund firms and investment dealers will be required to tell their clients what they’re paying and how they’re doing. Our country’s provincial regulators have also initiated discussions as to whether investment advisors should be held to a higher standard of fiduciary duty, rather than the current “best interests.” These and other changes are good news for Canadian investors, but ones the wealth management industry is desperately fighting.

This resistance to regulatory change has taken many forms – surveys, expert papers and intense lobbying. One of the most thoughtful protest pieces was written by Edward Waitzer, a senior partner at Stikeman Elliott LLP, and Ian Russell, the President of the Investment Industry Association of Canada (IIAC), published in the Financial Post last week. It suggests that regulators need to slow down – that the ‘blizzard’ of new regulations from the Canadian Securities Regulators (CSA) have resulted in increasingly complex rules. Such complexity will breed ‘literal compliance” but do little to bring about the shift in institutional values needed to achieve the regulators’ goal of “best interest of the client” practices.

Certainly, I have sympathy for the pace and blizzard arguments. The rate of change has picked up, and the layers of regulation, some of which are redundant, are smothering. At our firm, we feel the pain every time we’re required to make process and system changes to comply with new rules.

But this debate needs some context. The industry has shown no leadership on any of these important issues. Senior regulators are begging for someone, or some firm, to step up and push the clients’ interests forward. Instead, industry groups fight vigorously to protect the status quo.

Discussions around a Fair Dealing Model have been going on for 15 years, and yet the industry has taken no initiative to improve the situation. The fact that it fought so hard against increased disclosure of investment returns and fees was revealing – it’s putting the interests of its shareholders decisively ahead of those of its fund holders. It’s absolutely absurd that Canadian investors are still waiting for clear and informative account statements at a time when the big institutions earn 40% return on equity in their wealth management divisions.

Ironically, one of the arguments Waitzer and Russell make is, “Regulators need to be more sensitive to the risks of complexity displacing simplicity …” It’s a good point and one the industry should take to heart. Product manufacturers and dealers have become the masters of complexity. It’s not clear how regulators can be a picture of simplicity when some of the structured products they regulate are so complicated that neither clients nor their advisors understand them.

Waitzer and other regulatory experts know a lot more about regulation than I ever will. But I know a lot more about the client experience than they do, or IIAC does, or the structured products manufacturers do. And I can tell you, it’s not good down there on the street. Investors are generally poor consumers of investment services and as a result, have not done as well as they should have and are paying too much for what they get. As I told a group of investment executives last month, the fund industry is “in denial” and as a result, has ceded leadership on client-friendly initiatives to the regulators.

I don’t want to see the CSA take its foot off the gas, even if it means a proliferation of new regulations. With the pension challenges our country faces, improvements are needed now. This shouldn’t be a smooth transition for the industry. It should be jolting, expensive and soul searching. The industry needs to be shaken up.