Different regulators are covering the same turf

By James Langton | July 2016

The financial services sector in Canada is facing a battle over the standards for financial advice on two fronts. Securities regulators are pondering the introduction of a "best interest" standard, while a separate look at the future of financial planning in Ontario is covering some of the same turf. This duplication of effort is sparking concerns that the result could be messy.

In early April, the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives, which is examining financial planning regulation for the Government in Ontario, released a set of preliminary recommendations, including a call for a statutory best interest duty to be introduced both for firms and for advisors who sell financial products or provide advice or financial planning services.

Since then, the Canadian Securities Administrators (CSA) has published its own consultation paper, which proposes both a set of "targeted reforms" and a statutory best interest duty for financial advisors - at least, in some provinces. The CSA paper will be out for comment for much of the summer, with the comment period ending on Aug. 26. The expert committee's comment period wrapped up in mid-June following a series of public consultations in late May and early June.

As Investment Executive went to press, a handful of the submissions to the committee had been made public, revealing emerging concerns that the simultaneous consultations by the CSA and the expert committee may be sending Canada down a similar path to that taken in the U.S., in which policy-makers with distinct but overlapping agendas may lead to conflicting results.

The Financial Planning Standards Council's submission to the expert committee stated that the committee's deliberations about adopting a best interest standard should involve securities regulators, too.

The Investment Industry Association of Canada (IIAC) submission to the expert committee argues that it should put off reaching a policy recommendation on best interests until the CSA consultation wraps up. Otherwise, Canada could be facing its own version of the U.S. situation, in which the U.S. Department of Labor's (DOL) new fiduciary rule for certain types of financial advice is slated to take effect in April 2017 while the U.S. Securities and Exchange Commission (SEC) still is working on its own fiduciary standard for investment brokers. The result, the IIAC warns, is "continuous debate and division in the U.S. [which may result in] serious duplication and inefficiencies."

Canada's financial services sector now faces a similar situation, with securities regulators and a provincial government committee in Ontario both mulling new standards for financial advice.

The DOL's rules also face court challenges from the U.S. financial services sector. These court cases allege, among other things, that the DOL is infringing on the SEC's turf.

To avoid a similar fate in Canada, the IIAC comment argues, "The expert committee [must] delay any final recommendations with respect to a [statutory best interests duty] until the CSA has completed its work."

That may prove tricky, however, given that the expert committee's mandate calls for the committee's final recommendations to be delivered to the Ontario government by the end of the year, while the CSA reaching a policy decision that quickly appears unlikely. Moreover, the CSA is limited to prescribing rules for the securities industry, whereas the expert committee is addressing anyone involved with providing financial advice, planning or products, which includes insurance industry reps and planners who currently aren't regulated at all.

At the same time, other comments make the case that there already is a sort of best interest standard that's embedded in existing rules and guidance used in the investment industry. For example, the Investment Industry Regulatory Organization of Canada (IIROC) issued its own notice in April suggesting that its current rules already effectively require firms and reps to put clients' interests first.

IIROC's submission to the expert committee calls on the committee to consider the ongoing work of the existing regulators in this area: "The discussion with respect to a [statutory best interest duty] for financial planners should take place in the context of this greater discussion."

That discussion, IIROC's comment continues, should include considering whether adopting a best interest duty is better done through regulators' rule-making or by enshrining such a standard in the law.

There's also the added complication of dissent within the CSA over whether a best interest standard is warranted. Ontario and New Brunswick champion the idea; British Columbia flatly opposes it; and the other provinces lie somewhere in between.

In the meantime, familiar battle lines are being drawn in the expert committee consultations, with the industry opposing new standards and investors demanding them. The conflicting positions on this issue are not new; they will be familiar to anyone who has followed this discussion in Canada since the CSA first broached the idea of a fiduciary duty in late 2012.

Similar arguments have raged in the U.K. and Australia, as well as in the U.S., as these countries have undergone their own debates about industry standards.

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