The Investment Industry Association of Canada’s (IIAC) president and CEO Ian Russell says regulators need to stop and conduct a cost-benefit analysis before create an unnecessary burden for advisors and dealers.
While Canada's securities regulators are obliged to provide a description of the costs and benefits of any rules they propose, Russell argues they typically do not offer more than a cursory analysis. As a result, rules are put into place which create a "significant and unnecessary burden" for the investment industry. If new regulations actually improved investor protection that would be one thing, but the head of the IIAC suggests that some recent reforms have simply resulted in duplication.
Cost benefit analysis
"The reluctance of regulators to engage in formal cost benefit analysis may reflect several factors. First, quantitative cost-benefit analysis is a complex and difficult process. Aside from measuring industry-wide compliance costs, and the extent these costs are passed on to clients, it is also difficult to measure in quantitative terms the benefits of proposed rules, to markets and to the investing public," writes Russell in his letter to the industry. "While this argument cannot justify abandoning the rigors of cost-benefit analysis, it has sometimes been cited as a rationale. Second, regulators may fear triggering endless debate between regulators and market participants on the assessment of relative benefits and costs, leading to substantial delaying eventual rule formulation and implementation"
Russell says it would be helpful if regulators made their intentions more transparent and provided a detailed “walk-through” of the thinking behind rule formulation. For example, regulators should be able to answer questions such as: Is the regulatory gap an actual compliance problem or is it an anticipated concern? What are the broad trade-offs considered in bringing the rule forward? Why has the particular rule be chosen over alternatives, and have alternatives to the rule even been considered?
Difficult to be optimistic
He takes the Canadian Securities Administrator's recent consultation paper on advisor obligations as an example and asks what gap the best interest standard will actually address, particularly once the Client Relationship Model (CRM) rules that deal with compensation and conflicts of interest are in place.
"Based on recent experience it is difficult to be optimistic that the regulators will undertake full-blown quantitative cost-benefit analysis as part of the rule-making exercise, given apparent concerns over complexities of the exercise and fear of bogging down rule-making," concludes the letter.