Has regulation gone too far?

Lessons from Portus Let’s take the Portus situation for example. This product was offered by some allegedly less-than-scrupulous people in an environment that is under-regulated and advisors were left with the task of delivering it to the public. Representatives and dealers are sales driven — that’s how they earn a living. And, of course, they […]

By Stephanie McManus | October 20, 2006 | Last updated on October 20, 2006
6 min read
  • Having to reimburse all referral fees/commissions earned
  • Having to “know their product” like a mantra they need to recite in their sleep without any guidance from the regulators on what that means in practical terms
  • Being subjected to far more rigorous and onerous record keeping and process requirements to prevent this from happening in the future?

These representatives are, after all, still members of the public; people with everyday challenges, mouths to feed and bills to pay, trying to earn a living by selling financial products.

What about the manufactures who created the product in the first place? Yes, there are studies underway of the Limited Market Dealer, Capital Raising Exemption activity and ICPM registration categories to determine what ought and ought not be done. And it must be acknowledged that the individuals who work in the regulatory bodies are doing their best to produce positive change. But the bureaucratic machine moves slowly and it will be a long, long time before there are measures in place that adequately address the shortcomings of regulation in these areas.

What about John Q. Public, that well-educated and well-to-do investor who was given the same material to read as the representative was and who has a responsibility to exert a bit of caveat emptor on his own behalf? How has it come to be that investors are allowed to claim ignorance down the road when they were given mounds of written information to read and had access to those self-same global communication tools to make assessments on their own?

At last look, the law still requires the buyer in any transaction to take some responsibility with their transactions. And what about the regulators, whose hindsight is always 20/20 and who never fail to slap the hand of the intermediary for failing to prevent something that even they did not see coming?

In Canada, for example, we have, the “Client Relationship Model” being developed by regulators, an approach to dealing with investors that is intended to enhance public protection. However, from the perspective of the intermediaries, it requires often unnecessary and very costly kid-glove treatment to all investors and pushes regulatory cost and responsibility to almost unimaginable levels.

The unfortunate effect of this regulatory “overburden” is to drive away the good and conscientious professionals who recognize that they are only human beings after all and cannot possibly meet the demands being imposed on them from all fronts.

Compliance professionals in particular, affectionately referred to as “the wide receivers on the javelin team,” are leaving the business in droves because they simply can’t keep up and can’t sleep at night with the growing liability they are facing. The cost of keeping up with compliance is also having the effect of squeezing out independent dealers and advisors and making compliance affordable only to bank-owned financial service providers. Is that what policy makers have been trying to achieve?

The answer is of course, no. Regulators are pursuing the laudable end of trying to protect the public from the occasional dishonest advisor or poorly run dealer. But should thought not to be given to realigning policy so that it stops trying to protect investors from themselves? That’s the duty of investors and it should be legislated squarely into their laps. And it behooves the regulators to get down into the trenches and learn how business is run in a proactive and anticipatory way to provide more guidance at the front end and less after-the-fact punishment to intermediaries.

The NASD in the U.S. has recently at least acknowledged the unintended effects of the trends: it has decided that adjudicators should consider a firm’s size and available resources when imposing monetary sanctions. The Investment Dealers Association also just released its Task Force’s Report “Canada Steps Up” which addresses a number of issues but clearly promotes the notions that the public needs to be better educated and the regulator needs to be better informed before enacting regulations and driving up regulatory costs.

Both are positive steps. But their underlying concepts require buy-in by Canadian regulators and a more agile and responsive realignment of resources in the right direction.

A healthy financial services market needs willing, rewarded individuals to make it work and it needs to ensure that independents can provide rational, sustainable competition to the bank-owned firms. Properly apportioning responsibility among all players would surely benefit everyone, including the public.

Stephanie McManus, LL.B. provides legal and compliance consulting to the mutual fund and investment industries through her firm, Compliance Support Services. She has worked for the IDA and was the MFDA’s first director of enforcement.

(11/20/06)

Stephanie McManus

Lessons from Portus

Let’s take the Portus situation for example. This product was offered by some allegedly less-than-scrupulous people in an environment that is under-regulated and advisors were left with the task of delivering it to the public. Representatives and dealers are sales driven — that’s how they earn a living. And, of course, they share some of the responsibility for ensuring that what is being sold is on the up and up. They owe a duty to the public too. But how is it that only when the product takes a turn for the worse and fingers point to a defective product, that the regulator steps in and says “this is not on!”

And how is it that registered representatives (who may have dropped their own corner of the ball but still are only partly to blame) end up:

  • Having to reimburse all referral fees/commissions earned
  • Having to “know their product” like a mantra they need to recite in their sleep without any guidance from the regulators on what that means in practical terms
  • Being subjected to far more rigorous and onerous record keeping and process requirements to prevent this from happening in the future?

These representatives are, after all, still members of the public; people with everyday challenges, mouths to feed and bills to pay, trying to earn a living by selling financial products.

What about the manufactures who created the product in the first place? Yes, there are studies underway of the Limited Market Dealer, Capital Raising Exemption activity and ICPM registration categories to determine what ought and ought not be done. And it must be acknowledged that the individuals who work in the regulatory bodies are doing their best to produce positive change. But the bureaucratic machine moves slowly and it will be a long, long time before there are measures in place that adequately address the shortcomings of regulation in these areas.

What about John Q. Public, that well-educated and well-to-do investor who was given the same material to read as the representative was and who has a responsibility to exert a bit of caveat emptor on his own behalf? How has it come to be that investors are allowed to claim ignorance down the road when they were given mounds of written information to read and had access to those self-same global communication tools to make assessments on their own?

At last look, the law still requires the buyer in any transaction to take some responsibility with their transactions. And what about the regulators, whose hindsight is always 20/20 and who never fail to slap the hand of the intermediary for failing to prevent something that even they did not see coming?

In Canada, for example, we have, the “Client Relationship Model” being developed by regulators, an approach to dealing with investors that is intended to enhance public protection. However, from the perspective of the intermediaries, it requires often unnecessary and very costly kid-glove treatment to all investors and pushes regulatory cost and responsibility to almost unimaginable levels.

The unfortunate effect of this regulatory “overburden” is to drive away the good and conscientious professionals who recognize that they are only human beings after all and cannot possibly meet the demands being imposed on them from all fronts.

Compliance professionals in particular, affectionately referred to as “the wide receivers on the javelin team,” are leaving the business in droves because they simply can’t keep up and can’t sleep at night with the growing liability they are facing. The cost of keeping up with compliance is also having the effect of squeezing out independent dealers and advisors and making compliance affordable only to bank-owned financial service providers. Is that what policy makers have been trying to achieve?

The answer is of course, no. Regulators are pursuing the laudable end of trying to protect the public from the occasional dishonest advisor or poorly run dealer. But should thought not to be given to realigning policy so that it stops trying to protect investors from themselves? That’s the duty of investors and it should be legislated squarely into their laps. And it behooves the regulators to get down into the trenches and learn how business is run in a proactive and anticipatory way to provide more guidance at the front end and less after-the-fact punishment to intermediaries.

The NASD in the U.S. has recently at least acknowledged the unintended effects of the trends: it has decided that adjudicators should consider a firm’s size and available resources when imposing monetary sanctions. The Investment Dealers Association also just released its Task Force’s Report “Canada Steps Up” which addresses a number of issues but clearly promotes the notions that the public needs to be better educated and the regulator needs to be better informed before enacting regulations and driving up regulatory costs.

Both are positive steps. But their underlying concepts require buy-in by Canadian regulators and a more agile and responsive realignment of resources in the right direction.

A healthy financial services market needs willing, rewarded individuals to make it work and it needs to ensure that independents can provide rational, sustainable competition to the bank-owned firms. Properly apportioning responsibility among all players would surely benefit everyone, including the public.

Stephanie McManus, LL.B. provides legal and compliance consulting to the mutual fund and investment industries through her firm, Compliance Support Services. She has worked for the IDA and was the MFDA’s first director of enforcement.

(11/20/06)