Self-regulation and compliance enforcement practices by the Investment Dealers Association in Canada

Abstract

Purpose This paper aims to examine the enforcement practices of the Investment Dealers Association of Canada (IDA) and argue that self-regulation simply does not work in the financial sector, as the sanctions available are neither applied with sufficient severity nor are the responsibilities for enforcement adequately divided between self-regulation, provincial securities commissions and the police. Design/methodology/approach The core compliance data for the study came from the IDA’s tribunal cases that were heard between 1984 and June 2008. The theoretical approach involves the invocation of classic articles by the likes of Stigler, Posner and Becker, the essence of whose conclusions is that institutions will act in their own best interests and cannot be expected to act in the public interest. Findings The findings show that over the period from 1984 to 2008, the severity of the sanctions increased consistently over the period. When penalty ceilings were increased, penalties increased. When in the latter phase of the period, public members (i.e. non-members of the industry) chaired the tribunals, penalties also increased. Research limitations/implications Researchers can use the data to write a paper which asks “Why did the IDA tribunal penalties increase so consistently with time?” Future research could canvass various possible explanations, including the one presented in this paper, to focus sustained attention on the issue of self-regulation. Originality/value This study is the first to systematically examine the enforcement performance of the IDA.

Regulatory Capture of Regulators: The Case of the Investment Dealers Association of Canada

“…It could also be that in order to stave off direct government intervention, the IDA had to be stricter with its regulatory response to quasi-criminal offences (Lokanan, 2017). This claim is in alignment with the wider literature on self-regulation, where SROs attempt to ward off mandatory government regulation through stricter enforcement of offences that appeal to the public interest (Brown & Davis, 2009;Croley, 2008;DeMarzo et al, 2005;Leight, 2010;Potter et al, 2014).…”

“…This is particularly important in the investment industry where issues are often perceived to be complex by non-industry groups (DeMarzo et al, 2005;Lokanan, 2017). As such, it would seem somewhat obvious that, on paper, a self-regulatory system would impose lax penalties rather than a more coercive state-led enforcement system might (at least based on raw data).…”

“…As mentioned earlier, the theoretical justification for self-regulation is to protect the public interest (Carpenter, 2014;Lokanan, 2017;Novak, 2014). However, the central question is whether the public interest can be effectively protected by SROs without any accountability mechanisms in place to negate the benefits associated with self-regulation.…”

“…Of course, these sanctions are not used alone and can escalate in severity for serious infractions and non-compliance with SROs' rules (Novak, 2014;Raine & Dunstan, 2011). However, these sorts of regulatory responses to rule violations often expose the SROs to harsh criticisms surrounding their public interest justification (Carpenter, 2014;Croley, 2008;Leight, 2010;Lokanan, 2017;Potter et al, 2014).…”

“…Self-regulation works best within a certain regulatory framework and is more useful when the concept is formally recognized within that framework (Braithwaite, 2013;Lokanan, 2017). Self-regulation in particular, has been accused of serving the interests of industry above those of the public, for example, circumventing rules regulating financial markets, inconsistencies in sanctions and lacking accountability as in government regulation (Lokanan, 2015;Raine & Dunstan, 2011;Potter et al, 2014).…”