The importance of regulation in a time of crisis

The need for financial regulation is rarely more evident than during a crisis. This maxim has held true during COVID-19. 

While COVID-19 is primarily a public health crisis, its consequences are proving to be far-reaching. In recent months, there have been significant negative impacts on the economy that have exerted extreme pressure on our government and personal coffers. Sound regulatory frameworks and oversight can help alleviate some of this pressure by stabilizing the financial system and protecting consumers from the consequences of the crisis.

Canadians have not experienced such uncertainty in their financial security since the last financial crisis (i.e., the market crash of 2008).  According to a Sun Life survey, nearly 50% of Canadians feel less financially secure since COVID-19 began¹. As we settle into the second wave of the pandemic, which many health officials predicted would be worse than the first, it is unlikely that sentiment regarding current and future financial stability will improve anytime soon. The wealth advisory space is facing an uphill battle, both in terms of rebuilding client wealth over the long term and, perhaps more importantly, helping to quell client anxieties in the near term.  While this period represents a significant opportunity for the advisory space—to enhance interactions with and product offerings to clients—it also represents a period of increased vulnerability.

Credible and trustworthy advice for clients is critical to fostering stability in the broader market and bolstering investor confidence. Before COVID-19, Canadian regulators were addressing matters of conduct and consumer protection; however, the pandemic’s impact on Canadians’ financial well-being has accelerated the need for enhanced supervision to ensure advisors can manage the imminent challenges their clients face and respond to the broader market’s increasing pace of change. This sentiment is shared by our neighbours to the south, with the Securities and Exchange Commission  noting in its August 2020 risk alert that “market volatility related to COVID-19 may have heightened the risks of misconduct in various areas that the staff believe merit additional attention.”²

Unfortunately, the pace and volume of change also increase pressure on regulators to manage emerging and competing priorities, while the impacts of COVID-19 also strain their organizations and resources.

As such, regulators need to prioritize their efforts, particularly where they will most likely enhance trust and stability in the market and improve protections for Canadians. We suggest regulators consider the following:

1. Focus supervisory efforts on the most vulnerable: The financial impacts of COVID-19 are increasing the volume and velocity of risks to vulnerable investors and potentially expanding the definition of ‘vulnerable.’  In addition, some investor advocates are concerned that COVID-19 relief measures, introduced by the Canadians Securities Administrators, may exacerbate the risks to vulnerable investors³.  We will not address that issue here, but it serves to highlight that regulators should be paying attention to investor protection now more than ever as the industry and investors strive to recover.  Now is not the time for regulators to make sweeping changes or introduce new measures.  Rather, regulators should keep a watchful eye on interactions between advisors and vulnerable Canadians, particularly where planned enhancements to the consumer protection framework are not yet implemented (e.g., Client Focused Reforms). 
2. Facilitate innovation: For the foreseeable future, investors and their clients will continue to interact virtually. As such, “client-facing technology has become an integral client-engagement tool for advisors.”⁴ Where there is new technology, there is inevitably the potential for increased risks.  Regulators will have to grapple with the need to quickly approve new technologies to meet the needs of clients while limiting the potential risks to individuals and the financial market posed by these solutions. Canadian regulators tend to lag our global peers in implementing solutions to these competing objectives. Most notably, the UK Financial Conduct Authority has been operating its ‘regulatory sandbox’ since 2016, the benefits of which have included enhanced regulatory engagement with fintechs and the identification of opportunities to simplify regulation⁵.  We see evidence that at least one Canadian regulator (i.e., OSC LaunchPad) will adopt a similar approach. As the demand for innovative solutions to serve clients virtually will likely continue, all regulators in this space should consider solutions adopted by their international peers to ensure their regulatory frameworks enable them to keep pace.
3. Reinforce the need for a strong control environment: Many business leaders believe working from home may be our new reality. In response, efforts to enhance the use of automation and technology have hastened. While these changes are an opportunity to provide better and faster service to clients, they may increase the risk of non-compliance where internal control environments are not aligned.  For regulators, this will mean ensuring that operational monitoring, controls, and compliance are keeping pace with operating model changes.

These objectives will not be new to most regulators, but the pace they must deliver at is. Fortunately, Canadian regulators proved to be responsive and adaptive during previous crises. While this crisis differs significantly from the last, the fundamental importance of regulation remains the same.  As investors and their clients weather this storm, they will look to regulators to provide transparent guidance and consistent messaging around expectations. Considerate and targeted measures will assist regulators in meeting these demands, provide market stability, and protect Canadian wealth during these challenging times.

Acknowledgments

Heather Kay
Senior Manager, Risk Advisory
Tel: 416-202-2878

References

1. Sun Life, “A recent Sun Life survey indicates that nearly half of all Canadians (45%) feel less financially secure since COVID-19 began”, September 8, 2020. - https://www.sunlife.ca/en/about-us/newsroom/news-releases/announcement/nearly-half-of-all-canadians-feel-less-financially-secure-due-to-covid-19/123452/
2. Office of Compliance Inspections and Examinations, “Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers,” August 12, 2020, https://www.sec.gov/files/Risk%20Alert%20-%20COVID-19%20Compliance.pdf.
3. James Langton, “Enhanced investor protection needed: Investor advocates are concerned about unsuitable DSC fund sales,” Investment Executive, May 1, 2020, https://www.investmentexecutive.com/newspaper_/news-newspaper/enhanced-investor-protection-needed/.
4. Deloitte, Wealth management and advice in the time of coronavirus – A Deloitte perspective on the industry impact of COVID-19 (Deloitte LPP, 2020), p.g. 3. - https://www2.deloitte.com/ca/en/pages/financial-services/articles/wealth-management-and-advice.html
5. Deloitte Centre for Regulatory Strategy, A journey through the FCA regulatory sandbox: The benefits, challenges, and next steps (London: Deloitte LPP, 2008), pg.2, https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-fca-regulatory-sandbox-project-innovate-finance-journey.pdf.