Brokerage industry mulls ending monopoly on training

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Canada's brokerage industry regulator is pondering an overhaul of the course and exam requirements for people working in the financial sector, launching a review that could lead to a break up of the educational monopoly of the Canadian Securities Institute.

The Investment Industry Regulatory Organization of Canada (IIROC), which regulates brokerage and investment firms, has asked for public comments on whether it should consider changing how it conducts education and exams to license workers in the industry.

The review comes 18 months before IIROC's current 10-year contract with the Canadian Securities Institute (CSI) is set to expire. If changes are adopted, it would mark a historic break from decades of close ties with CSI, which IIROC's predecessor organization created 44 years ago in partnership with Canada's stock exchanges to provide training courses and administer tests for financial industry participants.

But IIROC no longer owns the training company, making the ties much less binding. In 2005, IIROC decided to sell CSI to Onex Corp.'s private equity fund ONCAP II LP for $57-million. As part of the ONCAP deal, IIROC agreed to give CSI the exclusive right to provide testing for IIROC registrants until the start of 2016. In 2010, Moody's Corp. acquired CSI from ONCAP, inheriting the contract with IIROC.

With that contract approaching expiry, IIROC is seizing the moment to review whether it should move closer to the U.S. or U.K. educational models, both of which are significantly different than the Canadian system.

In Canada, the CSI's courses prepare people to write a host of exams related to working in the financial sector, and the CSI also administers the exams. It provides its services to industry participants working at IIROC firms, but has broadened its courses to cover many others working in jobs outside of the IIROC realm.

Last year, for example, IIROC registrants accounted for 9,528 of 41,877 people who enrolled in CSI courses, or 23 per cent of the total. Excluding CSI training that is not connected to IIROC regulatory programs – such as customized corporate programs or public seminars – IIROC members accounted for 35 per cent of 20,086 course enrolments in IIROC regulatory programs.

In the U.S., the system is significantly different. The Financial Industry Regulatory Authority (FINRA), a national industry regulator, employs an in-house staff of about 50 people to oversee its industry exams, which are developed by a committee of industry volunteers.

The exams are only available to be written by people who are sponsored by an approved organization, such as a FINRA member firm. Significantly, the U.S. regulator does not offer educational courses to prepare for the exams. Many programs are offered by unregulated private companies, however, to help people prepare to write the tests.

In Britain, the Financial Conduct Authority regulates retail investment advisers, and has approved 54 organizations that can offer education and exams with content acceptable to the FCA. The FCA also imposes an ongoing competency requirement for all approved people working in the industry, which requires industry firms to be much more actively involved in employee training and assuring the proficiency of employees.

In Canada, the model could be adjusted to allow more companies offer preparation courses while IIROC administers the exams, or to allow more outside firms to take over broader training and examination functions. But any changes in Canada would have to weigh the reality of the size of the Canadian market.

If IIROC, for example, were to attempt to do exam development and administration in-house like FINRA, it would have to spread those administrative costs over a small number of fee-paying exam writers. Just over 7,000 IIROC members wrote exams last year, compared to 180,000 FINRA members. There are vastly better economies of scale for the U.S. regulator in that model.

It would be far more feasible to allow more companies to compete with CSI in offering training courses like in the U.S. or even exams as in Britain, although those companies would also have to find a way to be profitable in a smaller pool. Still, while the Canadian market may not be able to support as many approved organizations as Britain, there's lots of room for compromise between one recognized firm and 54.