The release of a Canadian Securities Administrators (CSA) consultation paper on Thursday that calls for sweeping changes to the regulation of client/advisor relationships reveals a clear divide among regulators, investor advocates and the investment industry.
Specifically, the CSA's consultation paper calling for a series of so-called "targeted reforms" — including changes to existing rules regarding conflicts of interest, suitability, know your client, proficiency and business titles — and, with the exception of the B.C. Securities Commission, also proposes the adoption of a possible "best interest" standard for consultation.
The CSA paper indicates that the regulators in Ontario and New Brunswick are most in favour of a best interest standard while the rest of the CSA's members have reservations about the idea to varying degrees
The Ontario Securities Commission (OSC) believes that investors deserve "nothing less" than a best interest standard, says Maureen Jensen, the OSC's chairwoman. She points out that the research and consultations that regulators have carried out during the past four years have revealed that clients believe there already is a best interest standard and that the investment industry tells clients that it acts in their best interests. "It's time for the standard to match," she says.
Although the targeted reforms the CSA is proposing aim to address the known regulatory concerns, regulators will never be able to anticipate every issue, Jensen says. So, she believes that it's important to have an overarching "aspirational principle" that makes it clear that investors' best interests must, in fact, come first.
Conversely, the BCSC says a best interest standard is "not workable" and that it could exacerbate existing regulatory concerns, particularly concerns about investors placing undue reliance on advisors.
At this point, the investment industry is aligning itself with the BCSC. In response to the CSA's consultation paper, the Investment Industry Association of Canada (IIAC) says that, overall, it supports the targeted reforms and does not believe that a "best interest" standard is necessary.
The IIAC argues that targeted reforms, along with the implementation of the second phase of the client relationship model (CRM2) reforms and investment fund point-of-sale disclosure requirements, "will deliver a high standard of advisor conduct, and enable advisors to comply effectively with obligations to deal honestly, fairly and in good faith with their clients, and to act in the best interests of their clients. This will boost investor confidence and strengthen investor protection."
The IIAC warns that an actual best interest standard, however, "would lead to confusion on the part of advisors and clients"; a reduction in the availability of products and services; and higher legal costs.
Conversely, investor advocacy group, the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) argues that Canada's investment industry should deliver the highest standards of advisor conduct and that the introduction of a best interest standard is essential to that.
Although Neil Gross, executive director of FAIR Canada, notes that it will have to study the paper in depth before commenting in detail, "What we can say at this point is that many Canadians need financial advice, and they need that advice to be provided at the highest level of proficiency and professionalism. It's hard to imagine how that level of true professionalism can be achieved without an obligation to act in the client's best interests and an obligation to avoid conflicts of interest. Would imposing those obligations require significant changes to the existing business models? Yes. But significant change is exactly what's needed."
The Investment Funds Institute of Canada (IFIC) also indicates that it supports the targeted reforms "in principle" as well as the CSA's pledge to involve the self-regulatory organizations in the reform efforts, "as they will bring the practical knowledge and understanding needed for the development of workable rules."
"Canada already has a robust regulatory framework that serves investors well, but there will always be room for improvement," said Joanne De Laurentiis, president and CEO of IFIC, in a statement. "This paper helps us more fully understand regulators' perspectives on what is needed to achieve those goals and puts the industry in a better position to provide constructive suggestions to further strengthen the framework."
Meanwhile, the IIAC says that its member securities firms are looking forward to the consultations that will be carried out on the paper: "The key objective will be to find the right balance between additional clarity and simplicity in the rules and limiting detailed requirements resulting in a ‘box-ticking' exercise reducing flexibility."
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