Navigating regulatory financial compliance demands foresight, a deep understanding of its impacts on the organization’s people, processes, and technology, and a well-coordinated plan to manage its complexity and ensure seamless implementation.

In 2023, Canadian Financial Regulators announced the third phase of the Consumer Relationship Model (CRM3), also known as Total Cost Reporting. The introduction of CRM3 represents a step forward in enhancing information transparency and furthering the investor-advisor relationship in Canada. The primary differences lie in the increased depth and breadth of cost reporting under CRM3, extending beyond CRM2’s annual disclosure of trailer fees by disclosing all direct and indirect costs and demonstrating the actual impact of these costs on investment returns. This provides investors with a comprehensive view of all costs associated with their investments and a better understanding of overall portfolio performance, empowering them to make more informed decisions that would potentially lead to better investment outcomes.

This new regulation is poised to enhance the client experience but introduces challenges that Canadian financial institutions must address head-on. They may encounter hurdles that require careful consideration and stratgic planning to adapt to the changes. By gaining a clear understanding of CRM3 and its impacts, financial institutions can streamline their transition. Adopting a proactive approach to planning and implementation will be the key to effectively supporting compliance efforts.

Understanding CRM3: What Is It and Why Does It Matter?

To ensure compliance, we must first understand what CRM3 means in practical terms. CRM3 introduces three core components that financial institutions must incorporate in their annual statements to investors:

Fund Expense Ratio Reporting

Fund Expense Ratio (FER) reporting involves disclosing the costs associated with managing an investment fund, including the Management Expense Ratios (MERs) and Total Expense Ratios (TERs), as well as other portfolio transaction costs incurred by an investment fund to its average net asset value, expressed as a percentage. This allows investors to understand the portion of their returns that will be used to cover these expenses, enabling them to compare different funds on a like-for-like basis. By having access to FER information, investors can make more informed decisions regarding their investments, knowing the exact costs involved.

Fund Expense Dollar Value

The Fund Expense Dollar Value represents the actual amount in dollars that investors pay in fund-related expenses over a specified period. Typically calculated by applying the fund’s expense ratio to the average account balance, this disclosure offers a transparent snapshot of the costs attributed to fund management and operations. For clients, this transparency is invaluable. It demystifies the often-opaque area of fund expenses, enabling investors to see exactly how much they are paying and how these costs impact their investment returns.

By comparing the Fund Expense Dollar Values across different funds, clients can make more informed decisions, potentially opting for investments that offer a more favorable balance between costs and performance. This level of clarity not only enhances client understanding and confidence but also encourages a more competitive and client-focused investment funds industry.

Direct Investment Changes

Direct Investment Charges encompass all the fees directly incurred by investors during their transactions, such as commissions, sales charges, or other transaction-related expenses. By requiring the disclosure of these charges, CRM3 ensures that investors have a clear understanding of what they are paying for each transaction. This level of detail helps investors to see how these direct charges affect their overall investment costs and performance.

The ability to view and compare these charges across different transactions or investment services empowers clients to make more cost-effective investment choices. Overall, this transparency fosters a better relationship between investors and their advisors, promotes cost awareness, and drives a more client-centric approach in the financial services industry.

Implementation Milestones for CRM3

To prepare for the new regulation and ensure compliance, financial institutions must track the following industry milestones:

Data Collection and Validation – January 2026

The first critical milestone is the initiation of comprehensive data collection and validation processes by January 2026. Financial institutions need to ensure that all cost components, encompassing direct and indirect fees, are meticulously recorded and verified. This stage serves as the foundation for accurate and transparent reporting, necessitating robust data governance frameworks and advanced analytical tools to manage and scrutinize financial data effectively.

Statement Preparation – January 2027

By January 2027, financial institutions are required to have transitioned to producing CRM3-compliant statements. These statements will embody the total cost reporting requirements, furnishing investors with detailed insights into all associated investment costs. This includes the Fund Expense Ratio, Fund Expense Detail, and Direct Investment Changes components, all aimed at fostering an elevated level of transparency and investor understanding. The accurate preparation and distribution of these statements will be instrumental in aligning with the CRM3 regulatory expectations and enhancing investor trust.

Implications and Anticipated Challenges of CRM3

CRM3 presents several challenges that financial institutions must address as they execute on the new regulatory requirements, including those related to data collection and reporting, data quality, development and infrastructure changes, and more. To ensure the timely implementation of CRM3 and avoid major roadblocks and pitfalls, organizations need to plan for and address the following areas:

Data Collection and Reporting

The rigorous data collection and reporting requirements mandated by CRM3 represent a substantial challenge. Financial institutions must meticulously gather comprehensive cost data across all investment products, including those that do not typically flow through standard platforms like Fundserv. This effort creates the need for sophisticated data collection mechanisms to capture essential cost information for bespoke and niche investment products, including a central repository to house and aggregate data from Investment Fund Managers and provide to dealers to ensure standardization and consistency.

Data Quality and Integrity

Ensuring the quality and integrity of collected data is paramount under CRM3. The enhanced transparency and detailed cost reporting necessitate that all data points are accurate, consistent, and reliable. Institutions will need to implement robust data validation and governance frameworks to prevent discrepancies and ensure the trustworthiness of the reported information. Without such measures, the integrity of financial statements could be compromised, risking non-compliance and loss of investor confidence.

Integration and Infrastructure Changes

The transition to CRM3 will require several modifications to existing IT infrastructure and systems. Financial institutions may have to upgrade their technological capabilities to support the new reporting requirements. This involves integrating a myriad of data sources, automating data collection processes, and upgrading analytical tools to handle the increased volume and complexity of data.

Software Development

Adhering to CRM3 guidelines will necessitate time and effort to develop or modify existing platforms to cater to the new regulatory requirements. This involves not only the creation of new reporting modules and dashboards but also ensuring that these tools are scalable and flexible enough to adapt to future regulatory changes.

Handling for Foreign Funds

Managing the reporting requirements for foreign funds adds another layer of complexity to CRM3 compliance. Institutions must account for differences in cost structures, regulatory standards, and reporting formats across various jurisdictions. For example, obtaining data from US and other offshore mutual funds will be challenging as these funds do not funnel data through Fundserv, thus requiring a manual workaround or another solution to support data collection efforts. Achieving consistency in reporting these funds requires a nuanced understanding of international markets and the capability to standardize data across different regulatory environments.

CRM3 represents further complexity and challenges than CRM2 that organizations need to account for, as they look to operationalize these requirements in advance of the CRM3 implementation date.

Planning and Implementation Strategies for Financial Institutions

To ensure a seamless transition to CRM3 compliance and to help overcome major hurdles, financial institutions should adopt a strategic and proactive approach to support planning and implementation efforts. Below are key steps that institutions can take to jumpstart this initiative:

1. Current State Assessment and Requirements Gathering

The first step involves conducting a thorough current state assessment of existing cost reporting processes in place, data inputs and outputs, and the technology and infrastructure required to implement the CRM3 requirements. The assessment would involve identifying and analyzing gaps to better understand the specific changes that need to be made, to ensure full compliance with regulatory requirements.

As part of the assessment, a comprehensive evaluation of the current technology stack is necessary to identify areas that need enhancement to accommodate for CRM3 requirements. Financial institutions should explore software solutions that facilitate more efficient and complete cost reporting and regulatory compliance, as well as more advanced analytical tools that improve data management capabilities.

2. Stakeholder Engagement

Engaging key stakeholders early in the process is crucial. From an internal standpoint, senior management, compliance officers, IT teams, and representatives from each business unit should be engaged to ensure a holistic and mutual understanding of the CRM3 requirements and its implications on business operations. External stakeholders, such as Fundserv and Broadridge, also need to be engaged to align on the required changes under CRM3 and to identify any synergies that can be leveraged to ensure a smooth implementation. Additionally, consulting with legal and regulatory experts is essential to navigating the complexities of CRM3 and ensuring full compliance.

3. Industry Collaboration

Active participation in industry discussions and working groups can offer significant benefits. By sharing insights, challenges, and best practices, financial institutions can stay informed of industry trends and regulatory updates. Leveraging collective knowledge and experiences can facilitate smoother implementation and compliance processes.

4. Data Readiness

Data readiness is critical for successful CRM3 implementation. Financial institutions should start collecting and validating data on investment costs as soon as possible. This involves reviewing current data collection processes in place and ensuring data accuracy and consistency across all platforms. Employing data integration solutions can help streamline the reporting process, making it easier to gather and analyze cost information. Robust data governance frameworks must be established to prevent discrepancies and maintain data integrity.

5. Process Design

Internal cost reporting processes and workflows need to be redesigned to incorporate CRM3 requirements, ensuring that all cost-related activities are captured and reported accurately. Where possible, process controls for regular data validation and reconciliation should be implemented to maintain high data quality and ensure that any data errors or gaps are rectified accordingly.

6. Testing

Allocating ample time and resourcing for testing new systems and processes is vital to ensure that reporting data is flowing along the end-to-end process and that cost reports generated are accurate and comply with CRM3 requirements. This should include validating the quality, completeness and consistency of data inputs and outputs, ensuring the integrity of the cost data being reported to investors.

An operational readiness assessment should also be performed to ensure that key business units are ready and able to operationalize the CRM3 requirements prior to January 2027.

7. Change Management and Communications

Effective change management practices must be adopted to foster smooth transitions to the CRM3 reporting standards. First, investment funds will need to clearly communicate the changes to cost reporting under CRM3 to their clients. Communications should focus on the key details of the change and the enhancement from previous reporting, the expected benefits of the new CRM3 model (i.e., improved transparency), and how it contributes to better investment outcomes.

Staff will also need to be trained on new reporting standards and changes to internal processes and systems that will be used to generate cost reports. Additionally, front-line staff should have a strong understanding of CRM3 requirements, so they can explain the reporting changes to clients and the expected benefits and be able to answer any questions that they may receive.

A Final Thought

Navigating CRM3 changes demands careful analysis and planning, enhancements to data and technology, and effective collaboration with project team members, internal partners, and external vendors and peers. By adopting these proactive and adaptable measures, financial institutions can ensure a smoother and more efficient transition to the new regulatory guidelines.

We recommend that financial institutions initiate their CRM3 compliance efforts now by engaging their teams, seeking expert advice, and investing in the right tools and processes. This initiative is more than just implementing another regulation; when executed properly, these changes can enhance the client experience and advisor relationship by promoting transparency, increasing visibility, and enabling better decision-making.

Optimus SBR’s Financial Services Practice

Optimus SBR is an independently owned management consulting firm that works with organizations across North America to get done what isn’t. Our Financial Services Group provides strategic advisory services, process improvement services, risk management services, and project management support to leading Financial Institutions, insurers, asset managers, and pension funds.

Learn how Optimus SBR can help streamline your organization’s transition to CRM3.

Contact us for more information.

Carolyn Kingaby, Practice Leader, Financial Services
Carolyn.Kingaby@optimussbr.com

Luca Congi, Principal, Financial Services Practice
Luca.Congi@optimussbr.com