Regulations, resource markets squeeze B.C. firms

Smaller investment companies hurt most by red tape, industry association says

B.C. investment firms have been hit hard by tightening regulations and the resource-sector downturn | Sergey Nivens/Shutterstock

The long-term weakness of the resource market and an increase in industry regulation are the two biggest concerns facing investment firms in British Columbia, according to the Investment Industry Association of Canada (IIAC).

Less activity and a poor rate of return on the price of various resources has had a significant impact on smaller issuers in particular. The same issuers are also more likely to struggle to comply with new investment industry regulations that are costly for smaller players to adopt.

“The regulatory burden disproportionally hits the smaller firms,” said Susan Copland, the IIAC’s Vancouver-based managing director. “We’ve seen a number of smaller brokerage firms in the west, particularly in Vancouver, disappear.”

In Vancouver, those include independent firms Wolverton Securities Ltd. and Global Securities Corp., which were acquired by PI Financial Corp. earlier this year. Salman Partners Inc., which specialized in the resource sector, closed in 2015, as did Woodstone Capital Inc. – which was acquired by Salman Partners before it closed – and Jordan Capital Markets, which was bought by Mackie Research.

Copland says such changes are cause for concern, as they ultimately reduce the number of financial advisory and product options available to investors.

“Instead of having 20 firms who do that type of work, you’ll have five. Investors won’t have the choice, they won’t have the support, the range of deals that can get done will be reduced,” she said, adding that if the resource market heats up, companies and investors will also be faced with fewer brokerages, dealers and issuers to choose from.

According to a recent report issued by IIAC president and CEO Ian Russell, 28 institutional firms across Canada have exited the investment industry in the four years since 2012, and integrated firms – the investment arms of Canada’s banks or major independent dealers – have collectively increased their market share to hold 70% of total investment banking revenue.

“The eventual consolidation in the investment industry will have consequences for underlying business trends,” noted Russell in the report, also adding that structural change remains endemic across the country’s financial sector.

Canada’s investment industry had a 13% year-over-year decline in operating profit in 2015; a drop affected by a 14% year-over-year reduction in investment banking revenue across the board.

The same factors affecting B.C.-based firms, along with general weak economic conditions, are responsible for thwarting the industry’s attempt to return to 2007 operating profits.

Before the 2008 financial crisis, annual operating profits for Canada’s investment industry sat at nearly $6.4 billion. They were down to just over $4.2 billion last year: a 34% decline since 2007.

In part as a response to economic uncertainty, and with a desire to diversify and mitigate exposure in a cost-effective manner, a rising number of investors have embraced balanced mutual funds over the last several years, according to Russell.

The funds held $633 billion in net assets last year, up from $575 billion in 2014 and $480 billion in 2013.

Investment revenue in the first quarter of 2016 jumped up 22% over the fourth quarter of 2015, attributable in part to an increase in M&A activity. Canadian companies made 151 acquisitions of foreign targets valued at $62 billion at the start of this year, compared to 165 transactions valued at half that – $30 billion – in the first quarter of 2015.

Russell points out that small dealers are continuing to face cost and competition pressure, while managed fund dealers continue to establish themselves as mid-sized and large players through consolidation.

Rising fixed costs relating to technology and regulatory compliance demands will also continue to weaken the business conditions of the investment industry as a whole, in particular for smaller dealers, as well as independent institutional and retail firms.