From the Regulators

The regulatory roundtable discussion revealed the deep divisions within the investment industry concerning the prospect of the CSA introducing this standard

By James Langton |

The investment industry must decide whether it's going to embrace the "best interest" standard that clients already believe exists or try and cling to current standards and curb clients' expectations, according to a regulatory roundtable discussion that took place at the Ontario Securities Commission's (OSC) offices in Toronto on Tuesday.

The discussion was part of the second phase of a long-running regulatory consultation that's now underway concerning reforms to client/financial advisor relationships, with regulators holding a series of public roundtables to examine the issues surrounding the possible introduction of a best interest standard, among other reform proposals.

The B.C. Securities Commission (BCSC) kicked off the slate of consultations last week that are being held across the country to consider a paper the Canadian Securities Administrators (CSA) issued in April. The BCSC is not considering the introduction of a best interest standard, however, so its session only focused on the so-called "targeted reforms" that were also proposed in the paper.

The OSC's roundtable was the first to consider the prospect of introducing an overarching best interest standard alongside the targeted reform proposals. During the session, Lorie Haber, a former executive with National Bank Financial Ltd. and DundeeWealth Inc., suggested that the "genie is out of the bottle" and that the industry should embrace the path to genuine professionalism.

The alternative, he noted, is for the industry to maintain its existing conduct standards, but to lower client expectations to reflect the reality of those standards. Yet, by resisting higher standards, Haber said that the industry risks "needlessly alienating clients".

Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC), rejected the proposition that the industry must choose between adopting a best interest standard or lowering client expectations. Russell suggested that both regulators and the industry want the best outcomes for clients, and while he noted that this may require reforms to the existing regulatory regime, he maintains that the best interest standard proposed in the CSA paper is not necessary.

Rather, Russell pointed to the Autorité des marchés financiers' (AMF) principles for fair treatment of consumers as a possible model and stressed the importance of clear regulatory standards. Russell said advisors need to know clearly what's expected of them so that they can have a "safe harbour" in knowing what they must do to meet regulators' standards and so that both firms and clients are in a position to ensure that advisors meet those expectations.

Yet, others in the industry support the OSC's call for a comprehensive best interest standard. Randy Cass, founder and CEO of Toronto-based robo-advisor Nest Wealth Asset Management Inc., sided with Haber in favouring the introduction of the proposed best interest standard. He warned that the industry's instinct to resist such a standard would "come back to haunt us" and said that it's time for the industry to live up to its responsibilities to clients.

Cass also rejected the argument against higher standards for fear that they will create an "advice gap" that may prevent clients from accessing advice. Although such a gap may have existed five or 10 years ago, Cass said that's not the case any longer. Instead, he suggested that there may be a decline in demand for advice as investors come to understand the true costs of investing through heightened transparency, and decide the value isn't there, but that there's no shortage in the supply of advice, nor would there be with a best interest standard.

Although certain industry representatives expressed concern about the costs of compliance under a higher standard, Haber suggested that it would lead to lower compliance costs in the long run if regulators embrace principles-based standards and back off from more prescriptive requirements. He also said that some of the concerns from the industry are overstated and overwrought and that, in any case, it's not the regulators' job to protect existing business models. The industry will innovate and adapt to whatever investor protection standards that regulators deem necessary, he said.

Finally, Cass pointed out that if doctors can get by with "do no harm" as a guiding ethical principle, then surely the investment industry can adhere to a basic principle that requires advisors to act in clients' best interests.

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