Regulation of Financial Advice The Game Has Shifted

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Regulation of Financial AdviceThe Game Has
Shifted

• Peter Tzanetakis
• Vice President, Regulatory Affairs
• November 19, 2009

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Objectives

• What is different today?
• How are advisors directly at risk?
• Update on key regulatory issues
• Where have we made positive inroads
• Why do we need to step up to the challenges
  ahead?
• The Game Has Shifted!

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Vital statistics

• Threefold
• 53
• 30 million
• lt 1/30th

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What is different today?

• Global financial crisis
• Consumer reaction
• Fraud exposed
• Government response
• Sweeping reforms in US and UK
• Canada

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US regulatory reforms

• Investor Protection Act of 2009
• SEC to ban registered representatives of
  broker-dealers from receiving commissions on
  variable insurance products or other securities
  products
• Exposes investment advisors to increased
  liability for being compensated for providing
  personalized investment advice

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US regulatory reforms

• FINRA seeking to be SRO for investment advisors
• FINRA actively lobbying to expand regulatory
  scope
• Need for enhanced regulatory consistency between
  brokers and advisors with respect to licensing,
  advertising, sales practices and disclosure

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US regulatory reforms

• Regulation of financial planning
• Financial Planning Coalition
• FPA, CFP Board, NAPFA
• Captures investment advisors, brokers and
  insurance agents engaged in some aspect of
  planning
• Creates an SRO for all financial planners
• Limits designations to acceptable ones only
• Establishes a fiduciary standard for financial
  planners
• Removal of all conflicts of interest
• Re-structures compensation model

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UK regulatory reforms

• FSA Retail Distribution Review
• Consumer clarity on products and services
• More consumers to have needs addressed
• Standard of professionalism that inspires
  confidence
• Viable industry over long term
• Regulatory framework that doesnt stifle
  innovation
• Remuneration that works in favour of consumers

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UK regulatory reforms

• Remuneration
• Advisor charging an end to commissions
• Charging structure to be presented to client
• Menu of options, but no hidden costs /
  commissions
• Payment to include cost of
• Advice
• Product
• Ongoing servicing

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Canada National Securities Regulator

• Closer to reality than ever before
• Transition Office established
• Draft Act March 2010
• Implementation strategy July 2010
• 80 of Advocis member will be captured by new
  entity
• Advocis is at the table
• Principles-based regulation
• Business structures that work for small business
  advisor
• Regulation that is not skewed towards big players
• Review of SROs MFDA IIROC
• Advisor Panel
• Provincial input and accountability

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Canada - Pension reform

• Government priority
• Response to financial crisis
• Advocis Pension Task Force
• Advocis study on pension reform

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Key regulatory drivers

• Issue complexity
• Stakeholder considerations / alliances
• Jurisdictions
• Business models
• Political landscape

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Client Relationship Model

• CSA National Instrument 31-103
• Conduct rules
• Adopts principles
• SROs MFDA and IIROC
• Beginning to recognize Advocis in the policy
  process

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MFDA Rules

• Rule 1, Sec. 25.4
• Making bulletins, policies and other instruments
  binding and enforceable
• Tantamount to more rules
• Suitability rules
• Changing of investor risk profiles

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Regulation of segregated funds

• Ten year process
• Joint Forum Intermediary Regulation Committee
• Minimize conflicts or undue burden
• Between segregated funds and mutual funds
• Promoting equivalent consumer protection
• Regulation of MGAs

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IIROC Financial Planning Regulation

• Dealer oversight of all aspects of financial
  planning
• Favours employer-employee relationship
• Independence of client-advisor relationship at
  risk
• Conflict of interest
• Non-investment aspects of financial planning
• MFDA next?

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IIROC Financial Planning Regulation

• Advocis action
• Approached CSA directly
• Meeting with securities regulators
• Raising policy development process with
  politicians
• Formed coalition
• Financial Planning Industry Task Force
• Establish alternative industry proposal
• IIROC not proceeding at this stage
• Other regulators appear disinterested

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Electronic Commerce Protection Act

• Bill C-27 problematic for all legitimate
  businesses
• Advocis position
• Need to balance legitimate business practices
  with need to reduce unwanted communications and
  fraud
• One of the stated objectives of the Bill is to
  facilitate e-commerce
• This objective seriously at risk under current
  draft of the bill
• Bill has gone through Committee and is now in 3rd
  reading

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Electronic Commerce Protection Act

• Opt-in regime
• Need express consent
• Implied consent
• Existing business relationship (2 years from
  termination point)
• Non-business relationship
• Referrals not exempt
• B2B not exempt
• Conspicuous publication
• Publicize your email or provide your email to
  person
• Sale of book of business is exempt
• Can kill the DNCL
• 3 year transition period to obtain consent
• 3 year statutory review
• Penalties
• 1 million maximum offense (non-compliance)
  penalty
• 10 million for a corporation

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Bank Act Review

• In-branch insurance retailing up for review
• Two years earlier than scheduled
• New regulations anticipated before end of year

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Regulatory Landscape

• Companies (Insurers, funds, banks)
• Federal Dept. of Finance
• OSFI
• Provincial Superintendents of Financial Services

• Dealers / MGAs
• MFDA
• IIROC (IDA)
• Superintendents of Insurance

• Federal policy
• Bank Act
• Anti-money laundering
• Privacy
• Do-not-call list

• Evolution of complex financial products
• Regulation of hedge funds, PPNs
• Know your product

• Provincial Regulators
• Provincial Securities Insurance Acts
• Financial Commission Insurance Council rules
• Securities Commission rules

Financial Advisor

• Designations
• Highest practice standards
• Meaningful continuing education
• Priority of the clients interest

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Regulatory Pressure Points

• Federal regulators
• FINTRAC
• CRTC

• Federal departments
• Finance
• Industry Canada

• National Umbrella Regulators
• Joint Forum
• CCIR / CISRO
• CSA

• Recognized SROs
• MFDA
• IIROC (IDA)

• Provincial regulators
• 13 Financial Commissions / Insurance Councils
• 13 Securities Commissions

• 13 Provincial / Territorial Ministries
• Finance
• Government Services
• Financial Services Superintendents

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Regulatory pressure points

• Financial advisors are on equal footing with
  companies and dealers in the eyes of regulators
• Little interest in differentiation when
  developing regulation
• Serious repercussions for compliance costs on
  small advisor

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Small business professional financial advisors at
risk

• Compliance costs continue to rise sharply
• Consumer access to financial products, services
  and advice diminishing
• Barriers to entry for new advisors significant

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On the horizon

• Ontario Quebec Free Trade Agreement
• Financial Services Chapter
• Implications for
• Licensing
• Financial planning standards
• Distribution
• Disclosure
• 24 Month transition period

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KEYS TO SUCCESS!
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Protecting advisors

• Advocis at the table
• However, regulators have the resources and time
  on their side
• Other stakeholders have deep pockets
• Political engagement a core competency of Advocis

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Ontario PAC

• Focus on government relations strategy
• Chapter engagement necessary
• Political activism / contact network
• Legislature days

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Political activity scorecard

• 2009 Queens Park Day
• Ministerial meetings
• Several follow up meetings with MPPs throughout
  the year
• Key relationships strengthening

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Stay Informed

• Advisor Voice
• A must read to stay on top of things
• Mailed out
• Advocacy update in FORUM magazine
• Advocacy updates at Chapter meetings
• Visit www.advocis.ca/regulatoryaffairs regularly
• Advocacy page includes regulatory submissions,
  letters to government, tools templates, etc.
• Send us an email at regulatoryaffairs_at_advocis.ca

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