Over the past few years, regulators, investor advocates and the investment industry have been engaged in a reform effort, with much to show for it. But you would hardly know that from the annual report from the Ontario Securities Commission's Investor Advisory Panel (IAP), released in mid-March. The report misses a forest of reforms by focusing intently on a few trees.
Progress has been nothing short of remarkable, given the complexities of securities regulation and the need for careful consultation and regulatory co-ordination. More needs to be done - and will be - but statistics show that investor protection is at a much higher level than ever.
In the IAP's view: "The fundamental flaws in the investor protection regime ... remain unaddressed." Are they forgetting about the comprehensive and far-reaching client relationship model (CRM), Phase 1, that includes disclosure of the investing process, disclosure and management of conflicts of interest, and enhanced suitability requirements; as well as the ongoing implementation of CRM2 rules, to be fully in place by yearend 2016, dealing with disclosure of fees and advisor compensation, and a common standard for portfolio performance reporting?
What else does the IAP seem to be missing? Some big initiatives. For example, the regulators streamlined disclosure document for mutual funds - Fund Facts - and the new rules for the timing of disclosure. The Ombudsman for Banking Services and Investments (OBSI) has almost completed its objective of cutting in half the time between a complaint being filed and resolved from a year to 180 days.
To be sure, several key issues are not yet addressed: should embedded commissions be disclosed or prohibited? Regulators are right to commission two studies to understand the consequences of prohibition better. Consideration of a "client best interest standard" is required, but would best be examined once CRM2 is fully in place. A binding mediation system for OBSI settlements? The industry is working with the regulators and OBSI to find an acceptable binding mediation process as an alternative to "name and shame."
Some of the panel's recommendations are puzzling. For example, the report endorses avoiding, rather than disclosing and managing, activities that give rise to conflicts. But be careful what you ask for. The IAP's approach risks eliminating transactions that could benefit investors. For example, fees earned on RRSP accounts present an obvious conflict; but is it not better to allow it, with proper disclosure, than face fee-based RRSP accounts with infrequent transactions? The sale of bond positions and new issues to clients out of firm inventories represent a conflict; should investor access to such products be limited?
The IAP report refers to investor concerns about the difficult balance entailed in limited disclosure for private placements between lower investor costs (and improving access to equity capital for small businesses) and heightened risk. The IAP is right to be worried about solutions such as crowdfunding.
But it is surprising that the IAP has not joined the Investment Industry Association of Canada in urging that only advisors registered with the Investment Industry Regulatory Organization of Canada - with its higher proficiency standards, the CRM rule framework and self-regulatory oversight - be permitted to sell private placements to non-accredited investors.
Other IAP suggestions? That investor education should not be a priority for regulators, with efforts singularly focused on rule-making and compliance. But that creates a problem for financial advisors, who need to maintain a deep, ongoing relationship with their clients: that, in turn requires that clients have the knowledge to work with their advisor in making decisions about a client's financial objectives, risk tolerance and investment choices.
The IAP asks why investors should have knowledge of financial markets when consumers of legal and medical services are not expected to have knowledge of legal or medical matters. But a patient never actually picks up a scalpel. In self-directed and traditional advisory brokerage accounts, a client had better know what he or she is doing.
The IAP has made valid points on the treatment of conflicts of interest through regulation, the risks from investing in speculative securities and relevance of investor education. But the report fails to reflect how much progress on reform has been made, and how much more will be made over the next year. Looking at a cup that is brimming with reforms, the IAP somehow sees it as half-empty.
Ian Russell is president and CEO of the Investment Industry Association of Canada and chairman of the International Council of Securities Associations.
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