Nervous investors shunning risky stocks continue to make it difficult for publicly traded venture companies to raise capital. But boutique investment brokers in B.C. and across the country fear growing regulatory burdens could devastate an already struggling industry.
According to Investment Industry Association of Canada (IIAC) data, retail investment brokerage firms in the country have continued to lose money. In 2012, their net loss was $99 million compared with net profits of $22 million in 2011 and $33 million in 2010. According to the latest data available, the challenges continued into 2013 as retail brokerage firms struggled to break even in the first half of the year.
By comparison, the largest integrated brokerage firms recorded net earnings of $1.98 billion in 2012 and $1.8 billion in 2011. These firms earned $829 million in 2013’s first six months.
Mark Redcliffe, CEO at Vancouver’s Jordan Capital Markets, said a more conservative investment sentiment in the market has reduced trading activity as fewer investors are willing to gamble on publicly traded venture companies.
“We are expanding our offering base, but we were designed to service our clients, which are transaction oriented, with a higher-risk tolerance and provide them with early-stage investment opportunities.”
Redcliffe noted that the regulatory burden for brokers has increased substantially over the past few years, which has added administrative costs at a time when revenue in the sector is lower.
He noted that in 2013, national and provincial regulatory organizations were looking to change 74 rules compared with only 28 proposed changes in 2007.
“You are seeing an erosion of transactional houses, and that’s not purely because the markets are tough,” said Redcliffe. “You have massive inefficiencies in the regulatory regime, on top of the fact that you have this slew of new rules, which, in effect, don’t protect clients any better than they used to.”
According to IIAC, operating costs for boutique retail brokerage houses have jumped 61% since 2007. Meanwhile, costs for integrated brokerage firms, like those owned by the Big Five banks, have risen only 18% in the same period of time.
That overhead increase for boutique firms is one reason why the number of B.C.-based firms has fallen to eight from 30 in the past decade.
“We have 55 employees. Eleven per cent of our labour force is dedicated to compliance,” said Redcliffe. “A lot of firms that left the industry didn’t have the bench strength like we do on the compliance side. The red tape is really what is bleeding us.”
He added that a “simple” solution to the challenges facing boutique firms is for regulators to focus their efforts on enforcement of existing rules and streamlining the regulatory regime by eliminating redundancies in the Securities Act, the Investment Industry Regulatory Organization of Canada (IIROC) rule book and regulations by the various provincial regulators.
“You need someone to sit down and go through that. The problem is that regulatory change takes at least three years. It’s very cumbersome. Once a rule is on the books, it takes forever to get it off the books.”
But change is urgently needed.
Redcliffe noted that the regulatory burden could eventually limit opportunities for venture companies to raise capital at a time when the market is already suffering.
“It will have a trickle-down effect on the products that are financed by IIROC member firms,” said Redcliffe. “You won’t see as many early-stage investments, which are higher-risk, obviously.”
According to data from the TMX Group, the total value of financing raised by TSX Venture companies in 2013 fell approximately 40% to $3.5 billion from nearly $6 billion in 2011. Junior mining exploration companies bore the brunt of the drop as investments in mining companies plummeted 60% last year.
Bill Whitehead, senior vice-president at PI Financial, noted at last year’s BC Securities Commission conference that “the independent brokerage houses need to make money. We are the liaison for the retail investor to public companies. Without us, there is no liaison. I don’t know if the venture market will survive if brokerage houses fail.” •
