Speaking for the investment industry, IIAC President Ian Russell expands on the clamor for cost-benefit analysis in policy formulation
Noting a preponderance of requests for a formal cost-benefit analysis in response to recent proposed regulation by the CSA, IIAC President Ian Russell has drafted an industry letter calling on regulators to provide more transparency in the rulemaking process.
“While regulators are obligated to provide a description of the costs and benefits of proposed rules, this typically takes the form of a cursory analysis,” he said in the letter. “This has raised the risk of inefficient rules… it is likely that recent reforms have resulted in unnecessary and duplicative rules, and an unfair cost burden. They have also contributed to unintended outcomes.”
One example cited was an increase in trade execution, marketplace access, and market data costs brought about by multiple equity markets and trade protection rules. While these rules were intended to ensure best execution, they have instead resulted in squeezed operating margins and weakened profitability at boutique firms, which in turn has encouraged consolidation of small firms across the industry.
Another pain point was found in lower proficiency standards and patchy regulatory oversight in Exempt Market Dealer registration. These have given consolidated firms an edge in the competition over the growing area of non-brokered private placement financing in the small business sector. “Unless regulators level the regulatory playing field through SRO-regulatory oversight of EMDs or a reduced burden on specialized IIROC-registered small dealers, the future of the small IIROC-registered dealer is imperiled,” said Russell.
He considered two major factors behind regulators’ reluctance to engage in formal, transparent cost-benefit analysis. First is the complexity of quantitative cost-benefit analysis, which “cannot justify abandoning the rigors of cost-benefit analysis,” but has nonetheless been cited as a reason. Second is a possible fear of triggering a debate between regulators and market participants over the assessment of relative benefits of costs, opening up a can of worms that would further delay formulation and implementation of rules.
While Russell conceded that regulators already share some of their thinking when inviting comments on proposed rules, he didn’t let them completely off the hook. “[T]he detailed issues considered by the regulators are not often made comprehensive, systematic and transparent. The details of this rule-making process should be marshalled in a formal framework, and the information made transparent to market participants commenting on rule proposals,” he said.
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“While regulators are obligated to provide a description of the costs and benefits of proposed rules, this typically takes the form of a cursory analysis,” he said in the letter. “This has raised the risk of inefficient rules… it is likely that recent reforms have resulted in unnecessary and duplicative rules, and an unfair cost burden. They have also contributed to unintended outcomes.”
One example cited was an increase in trade execution, marketplace access, and market data costs brought about by multiple equity markets and trade protection rules. While these rules were intended to ensure best execution, they have instead resulted in squeezed operating margins and weakened profitability at boutique firms, which in turn has encouraged consolidation of small firms across the industry.
Another pain point was found in lower proficiency standards and patchy regulatory oversight in Exempt Market Dealer registration. These have given consolidated firms an edge in the competition over the growing area of non-brokered private placement financing in the small business sector. “Unless regulators level the regulatory playing field through SRO-regulatory oversight of EMDs or a reduced burden on specialized IIROC-registered small dealers, the future of the small IIROC-registered dealer is imperiled,” said Russell.
He considered two major factors behind regulators’ reluctance to engage in formal, transparent cost-benefit analysis. First is the complexity of quantitative cost-benefit analysis, which “cannot justify abandoning the rigors of cost-benefit analysis,” but has nonetheless been cited as a reason. Second is a possible fear of triggering a debate between regulators and market participants over the assessment of relative benefits of costs, opening up a can of worms that would further delay formulation and implementation of rules.
While Russell conceded that regulators already share some of their thinking when inviting comments on proposed rules, he didn’t let them completely off the hook. “[T]he detailed issues considered by the regulators are not often made comprehensive, systematic and transparent. The details of this rule-making process should be marshalled in a formal framework, and the information made transparent to market participants commenting on rule proposals,” he said.
Related stories:
What did an industry group have to say about industry reforms?
IFIC speaks out on regulatory reforms
