During the past few weeks, we’ve seen announcements of several new policy initiatives with noteworthy investor-focused qualities. Although they may not be the most pivotal items on regulators’ agendas, each one of these initiatives deserves positive recognition from investors nonetheless:
Buying exchange-traded funds (ETFs) through mutual fund dealers. Thanks to the Canadian ETF Association (CETFA), the Federation of Mutual Fund Dealers (FMFD) and the Mutual Fund Dealers Association (MFDA), an open non-proprietary platform now exists at last allowing many mutual fund dealers to sell ETFs. This innovation should herald increased adoption of low-cost ETFs in Canada — and sales percentages of ETFs should rise to levels already achieved in the U.S. and Europe.
However, the success of this platform will depend on advisors recommending ETFs and informing clients about the available cost advantages and net performance relative to mutual funds. To see if this happens, growth of ETF sales must be tracked once the new platform becomes fully operational. Hopefully, CETFA and the MFDA plan to do exactly that. And, correspondingly, let’s hope they’ll make the results available to everyone.
Fixed-income market review. The Ontario Securities Commission (OSC) deserves credit for issuing OSC Staff Notice 21-708 and an accompanying report aimed at tackling longstanding questions about the lack of transparency and efficiency in Canada’s fixed-income market. Although many commentators feel reform in this area is badly overdue, there are legitimate issues — such as the way liquidity currently works in Canada’s bond market — that need to be studied carefully.
It will be interesting to see whether the OSC’s initiative moves Canada toward a comprehensive system such as the U.S. Trade Reporting and Compliance Engine (TRACE) or, better still, the upcoming European model designed to report in real time. Either one would be a significant improvement over our slow and limited CanPX system. The primary beneficiaries of enhancements here would be Canadian small investors who currently face trading disadvantages due to information asymmetry that greatly favours large institutional players and dealers.
It’s not clear whether the OSC intends this review to also address small investors’ access to government bonds, particularly through direct channels; but if this is what’s being contemplated, an examination of the U.S. TreasuryDirect online trading framework would be useful. It allows Americans to buy and redeem all types of retail Treasury securities simply and without middleman involvement.
Tri-province proposed exemption based on suitability advice. Securities regulators in British Columbia, New Brunswick and Saskatchewan have unveiled Multilateral CSA Notice 45-315, a proposal that would let listed Canadian reporting issuers raise money without providing an offering document to subscribers who’ve received advice from an investment dealer about the investment’s suitability.
The basic idea here is to give non-accredited investors access to “the more favourable terms generally offered through private placements” while, at the same time, providing those investors with the same level of protection currently available when they buy securities on the secondary market.
This doesn’t mean the protection will be robust. Suitability is a standard that leaves much to be desired in advisory situations — especially ones involving unsophisticated investors highly dependent on their advisors. The tri-provincial proposal would be better served by requiring advice that the purchase is in the investor’s best interests.
However, at least this proposed exemption — unlike some others being pushed these days — isn’t designed primarily to permit sales of illiquid and extremely high-risk securities to just about anyone under the pretext of investor “choice.” In that sense, it’s a hopeful sign that regulators remain mindful of many investors’ vulnerabilities, and aren’t drinking all the laissez-faire Kool-Aid being poured by promoters.
ORPP legislation passes. The Ontario Retirement Pension Plan (ORPP) took a major step closer to becoming reality a few days ago with passage of the plan’s enabling legislation. The ORPP offers more than just the prospect of source-deducted savings discipline and low-cost investment management. By providing greater retirement security, it also will help ease investors’ fears that they need to achieve extraordinary returns from their other investments in order to avoid a bleak future. This should translate into fewer urges to take uncomfortable and inappropriate financial risks – and perhaps better resistance to unscrupulous advice that such risks must be taken.
Expert panel to examine regulation of financial planners. Lastly, four highly qualified experts have been appointed to review the regulation of financial planners and financial advisors in Ontario. That’s very good news. The project is essential and, frankly, needs to be undertaken everywhere in Canada outside Quebec, where financial planners already are regulated.
The experts on this panel can expect to be implored heavily by a tangled mass of competing accreditation organizations. Any set of recommendations is bound to risk igniting a turf war there; but the panel must remain steadfast, keeping uppermost the needs of the investing public, not the wishes of planners or their lobbying groups.
Moreover, the panel should be loath to import the fractured state of financial planning into our regulatory system. If anything, we need less regulatory fragmentation. It would be wise, therefore, to let these experts consult closely and collaboratively with another panel examining the future role of the Financial Services Commission of Ontario (FSCO) so that an integrated design can be crafted.