Sunday, December 10, 2017

Retail Investors and the regulatory " consultation" process

For years we have pleaded with IIROC, OBSI and others to improve investor engagement processes. The answer back- we hold public consultations. The few investor inputs are lost in a blizzard of industry Comment letters. Rules and laws made without material Investor input are destined to be to the investors’ detriment.

We quote from this blog to explain the weakness of such an approach.

“...But who exactly are they consulting with?

Governments and regulators, of course, will say “the public”. The truth, however, is that the general public has little expertise in the highly complex matters under discussion while the financial industry has at their disposal a tightly knit group of institutional players that collectively possess immense technical expertise – far more than even the regulators on many of the issues under discussion in this post.

Tier 1 in the industry’s lobbying machinery are the formal industry trade associations. There are many such groups but the most important are: the Canadian Bankers Association (the lobbying arm for Canada’s large banks); the Canadian Life and Health Insurance Association (the lobby group for Canada’s life and health insurers); the Investment Funds Institute of Canada (the key lobby group for Canada’s mutual funds); the Investment Industry Association of Canada (IIAC – the securities dealers lobby group); the Insurance Bureau of Canada (the lobby group of Canada’s Property and Casualty Insurers) and the Financial Advisors Association of Canada (generally referred to as Advocis – the largest association of financial advisors and planners in Canada).

But the official lobby groups are only the tip of the financial industry lobbying iceberg. These formal lobby groups not only work closely with each other but also with their individual members’ internal government relations and legal departments. They and their members also retain many of the country’s elite government relations firms, blue-chip corporate law firms, and largest consulting firms (Deloitte, KPMG, etc.), to support their lobbying efforts. Finally, they are also strong supporters of corporate-oriented “think tanks” (eg. the C.D. Howe Institute) which often (although not always) publish papers consistent with the views of the financial services industry.

Also of importance in understanding the dynamics related to the various consultation initiatives is the role of industry self-regulating organizations (SRO’s): the two most important being the Mutual Fund Dealers Association of Canada (MFDA), the organization that provides oversight to dealers that distribute mutual funds and exempt fixed income products and the IIROC (Investment Industry Regulatory Organization), the self regulatory body for securities dealers. Canada’s securities regulators rely on the work of these two national self-regulatory organizations for many aspects of regulation of their member firms (securities dealers, etc.) and their individual employees. Accountability for securities regulation ultimately extends from the securities regulator to the Minister responsible for securities regulation (generally the Minister of Finance).

Finally, it must be remembered that the securities regulators (OSC, etc.) themselves are funded by “market participants” – not governments. Market participants include securities dealers, publicly traded companies, mutual funds and marketplaces (e.g. the Toronto Stock Exchange).

To be fair, the situation in Quebec is somewhat more favourable to financial consumers.

There are also small, underfunded groups such as FAIR Canada and the Public Interest Advocacy Centre (to name a few) who do heroic work on behalf of ordinary consumers/investors. But the excellent work of these small consumer groups simply does not carry the weight of the intense lobbying done by the financial industry trade groups, the self-regulating organizations, the corporate law firms, the large consulting firms and the government relations firms – who on issue after issue produce work (of course, much of it paid for by the financial services industry) aligned with the interests of Canada’s financial giants…..”

Some of the consultations are deficient. For example in the IIROC consultation on discount brokers, reference was made to research and meetings with Investor groups. When pressed to disclose the research and reveal the identity of the groups contacted, IIROC refused to provide the information. 

Some are rigged. Take the consultation run by the Federal Finance Dept. regarding external dispute resolution services for banks. All the consumer groups opposed the idea but the decision was to establish competition for OBSI. As a result , two of Canada’s largest banks. RBC and TD set up their own private “ ombudsman”. Now we have a for-profit entity paid for by each bank, a weakened OBSI and reduced consumer protection. 

The problem isn’t only that industry is powerful and has lots of money and that its lobby groups, funded think tanks, law firms etc. can participate in the public consultation process. While this is true, the fundamental problem is that the rule- making process is deliberately designed to exclude investors, they are given no meaningful opportunity to make their views known at any point in policy and rule making.

The industry is given a big role in actually developing the rules thru the industry consultative committees at the securities commissions, and the SROs. There are no investor reps on the SRO committees. There are only a few non- industry reps at the OSC consultative committees and only the OSC has an IAP. There is no room for the investor perspective, they are shut out of the rule and policy making process. This is essentially a behind the scenes, private process with no public accountability or public reporting as to what industry representatives have lobbied for before the regulators .

Investors have NO input in the first stages of rule and policy development (except for the OSC IAP) and are only able to comment on the proposed final version through the formal 90 or 120 day public comments process. This investor input is too late to do anything except propose changes on the margins.

As a result, rule and policy making in the Canadian securities is virtually devoid of investor input.

Changing or updating an existing rule or policy is nearly impossible unless the industry agrees. For example, three independent reviews of OBSI have recommended that the retail investor have a seat at the Board table and that decisions be binding but have been rebuffed each time. For at least three years attempts to correct IIROC Rule 2500B on Client Complaint Handling have gone nowhere. The classic example are the 1995 and 1998 Classic Stomberg reports recommending a ban on mutual fund embedded commissions – there have been many “ consultations’ but no decisive action despite the identified harm to investors.

We continue to press for entrenched Investor Advisory Panels and board of director representation on regulators boards —so far all our requests have fallen on deaf ears (OSC excepted). 

Until things change, we can expect weak regulations coupled with loose enforcement i.e. WEAK investor protection. This is not in the Public interest.

Additional references:

J. Black Involving consumers in Securities Regulation

Transpaify Think Tank Transparency in Canada Lagging Behind US and UK, Think Tank Transparency in Canada: Lagging behind the US and UK

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