Given the Canadian Securities Adminstrators’ (CSA) sweeping proposals in Consultation Paper 33-404 – Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients, there’s an opportunity to address the ongoing regulatory challenges concerning the provision of financial advice for the benefit of clients and the financial services sector as a whole.

However, there are several inherent flaws still need to be rectified in the establishment of a “best interest standard.” These include:

1. Duty of care and loyalty must be put in plain language
The introduction of new standard of care and loyalty must not be an exercise in legal jargon or simply for the courts to administer. Clients, financial advisors and firms must all be able to understand and interpret what is meant by “best interest” in the same way and in a manner that will make a real positive difference in the relationship between clients and advisors.

The CSA has gone a long way in setting out what it means by “best interest”:

A regulatory best interest standard would require that a registered dealer or registered adviser shall deal fairly, honestly and in good faith with its clients and act in its clients’ best interests, and that a representative of a registered dealer or registered adviser shall deal fairly, honestly and in good faith with his or her clients and act in his or her clients’ best interests. The conduct expected of a registrant in meeting her, his or its standard of care would be that of a prudent and unbiased firm or representative (as applicable), acting reasonably. In complying with the standard of care, registrants would be guided by the following principles:

  1. Act in the best interests of the client
  2. Avoid or control conflicts of interest in a manner that prioritizes the client’s best interests
  3. Provide full, clear, meaningful and timely disclosure
  4. Interpret law and agreements with clients in a manner favourable to the client’s interest where reasonably conflicting interpretations arise
  5. Act with care

Although this description effectively sets out the expectations of what constitutes a “best interest,” there are two notable exceptions: Using the term “best interest” in Principle 1 as part of the definition of what is meant by “best interest” is problematic; and Principle 5, which states “act with care,” is vague and open to interpretation.

2. It is unclear exactly what level of competence would be expected of the various licensed representatives, and how the “best interest” expectations would apply under a new standard.
The CSA has attempted to address competence by suggesting enhanced proficiency is needed, but it has left large gaps in interpretation concerning how to raise proficiency, who would be responsible for establishing what standards, and how far they should go.

Further exacerbating this issue, the CSA sets out enhanced expectations in the consultation paper related to the know-your-client (KYC) process and general knowledge of the client, which includes:

  • “Ensure that the KYC process results in a thorough understanding of the client”; and
  • Advisors must gather more client-centred information, including “the amount and nature of all assets and debts, employment status, basic tax position, and spousal and dependents’ status and need.”

Although these statements make sense in the context of financial planning, how this would translate to knowledge and proficiency expectations when applying a best interest standard for every advisor remains to be seen. Unless all advisors have uniform foundational financial planning proficiency, there would remain gaps in expectations between an advisor and the client in determining the “reasonably prudent person” in the application of the best interest standard.

3. Use of titles that don’t describe appropriate expectations
The CSA has taken bold steps in setting out a series of possible titles to better marry expectations between advisors and their clients. For example, the CSA has considered various combinations of the terms “securities,” “advisor” and “representative.” This is a step in the right direction, but it’s of little use if specific titles are not matched with clear underlying expectations of competence. Clients must be able to distinguish clearly among the various and sundry types of “advisors,” “salespersons” or “representatives,” and they must be set out through clear, unambiguous competency expectations for each.

4. A splintered regulatory system not based on professional advice
Although there are more than 20 financial services regulators across the country, none regulate professional service and advice, which forms the very basis of a “best interest” standard.
As the CSA has stated, a best interest model lends itself more to “principles” rather than “rules” and is predicated on advisors having the appropriate knowledge, skills and abilities to perform competently. But the existing securities regulatory system is not built on a model based on professional standards.

Furthermore, the CSA’s proposals cannot alone address the broader regulatory scheme. The system must be redesigned so that consumers do not have to rely on their own understanding of the complex Canadian regulatory system.

The solution lies in creating a quasi co-regulatory model in which insurance, mutual fund, securities, and other financial regulators recognize the important role professional bodies must play in establishing and overseeing professional expectations of their members, and all agree to mandating common professional standards and qualifications based on the titles used to describe the nature of the services offered.