Regulation: Constructing rules for planners

The deadline for replies in that consultation was late September. As Investment Executive went to press in early October, the government had yet to release publicly all of the submissions that the committee received.

However, a review of the numerous submissions that have been released publicly by industry trade groups, regulators, investor advocates and others reveals a wide range of views on these issues – from those that don’t see the need for much reform at all to those that would blow up the current system and start fresh with a new approach to regulation in the financial planning industry.

There is little consensus on just how the government should approach this thorny issue. The one thing that most groups do seem to agree on is that the current system is not adequate and some sort of reform is necessary. The status quo is not an option that anyone seems to favour.

The problem, on its face, is quite simple: there is nothing to prevent anyone from calling him- or herself a financial planner and then offering financial planning services to the public – and there are no minimum standards for those who do.

Many so-called financial planners do come under the oversight of an existing regulator as a result of holding a mutual fund, securities or insurance licence. But financial planning itself is not regulated by any of these authorities, and people without one of these licences can call themselves financial planners without meeting any proficiency standards or facing any oversight or conduct obligations.

Although none of this is news to the industry, it’s a problem that has proven particularly difficult to address.

Previous efforts, such as the Ontario Securities Commission’s (OSC) failed bid to introduce a proficiency standard for financial planners in the late 1990s, fell victim to political pressure from the financial services sector. In that case, large financial services firms lobbied the government successfully to reject the OSC’s proposed rules after the regulator had gone all the way through the policy development process and finalized its policy.

Since then, there has been little in the way of reform. The investment industry’s self-regulatory organizations (SROs) – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – both have taken swipes at the issue.

IIROC proposed a rule to regulate financial planning carried out by its dealers, an effort that ultimately was abandoned. And the MFDA recently proposed to establish proficiency requirements for reps under its jurisdiction who call themselves financial planners.

However, neither of the SROs’ proposals would bring comprehensive oversight to all financial planners. That’s the problem that the government committee is looking to address, and it is receiving a wide range of views on how to do it.

At the least intrusive end, industry trade groups such as the Investment Industry Association of Canada (IIAC), the Investment Funds Institute of Canada (IFIC) and the Independent Financial Brokers of Canada (IFB) suggest that the focus should be on individuals who call themselves financial planners, but who aren’t subject to regulatory oversight from an existing regulator.

In a rare joint submission, the IIAC and IFIC recommend that the government consider establishing a new oversight body to supervise these individuals. Their submission recommends that a new government authority for financial planning, which they call the Financial Planning Authority, be established to oversee financial planners who fall outside the existing regulatory regime.

This approach is backed by the IFB, the submission from which says that although the IFB doesn’t see the need for any added regulation for financial planners who are already under the supervision of an SRO, the trade group would support the creation of a body that has regulatory oversight over individuals that are “not otherwise licensed and, therefore, pose a potential gap in consumer protection.”

A couple of other industry groups – the Financial Planning Standards Council (FPSC) and Financial Advisors Association of Canada (a.k.a. Advocis) – have their own new regulatory models in mind.

The FPSC, along with the other members of the Financial Planning Coalition (which also includes the Canadian Institute of Financial Planners, the Institute of Advanced Financial Planners and the Institut Québécois de planification financière) calls upon the Ontario government to adopt its standards for financial planners, to restrict the use of the “financial planner” title to those who meet those standards and to make all financial planners subject to the coalition’s oversight.

“Such a model would remain self-funded by professional financial planners and would establish no additional regulatory burden,” the FPSC notes in its submission to the committee.

The FPSC’s proposal is endorsed by the comment from Canadian Life and Health Insurance Association Inc., which says that the FPSC’s proposed approach should be adopted and implemented in Ontario.

Advocis’ comment calls for a similar, albeit more radical approach to create a new body to oversee the regulation of retail advice generally, not just financial planning.

Advocis’ comment also recommends that the Ontario government create a “delegated administrative authority” (DAA) as a new statutory body under the oversight of the provincial Ministry of Finance that would be directly accountable to the government: “A new DAA focused on financial advice and the relationship between the advisor and client will eliminate much of the duplication and confusion that currently exists under the product-oriented model.

“An industrywide DAA will eliminate less reported [but] equally problematic regulatory hazards, such as regulatory arbitrage and capture,” the submission from Advocis adds. “Excluding financial advisors – whether in title or in scope of practice, or both – from any such reform effort will virtually guarantee its failure.”

The OSC’s Investor Advisory Panel (IAP) has a similarly radical plan in mind. The panel also believes that the industry needs a single regulator that cuts across the entire spectrum of retail financial advice rather than fragmenting oversight along product lines – such as securities, mutual funds, and insurance – as is the case currently.

The IAP’s submission to the committee also recommends that the government break down the product silos that dictate the current regulatory structure and that a new authority be created to make sure that the same rules apply to comparable products: “To ensure consistent compliance and enforcement of the rules, a single independent regulatory organization is required.”

Ironically, this call for functional regulation – oversight that is based on the provision of advice rather than on products – is nothing new. It’s the sort of solution that Glorianne Stromberg, a securities lawyer now retired, called for more than 20 years ago in her seminal report on the mutual fund industry in 1995.

Although the IAP supports the view that a new regulatory structure is needed, the panel also believes that this structure must be accompanied by higher standards of conduct. The IAP has long called for a “best interests” standard in its other submissions to the OSC, and the panel’s submission to the financial planning committee echoes that view: “There is simply no room for conflicts of interest in the giving of financial advice or the execution of a financial plan. Caveat emptor has no place in a relationship as important to Canadians as their relationship with their financial advisor or planner. The standard should be the same as for doctors and lawyers, namely, a fiduciary standard that requires the advisor to always act in the client’s best interest.”

This call for a “best interests” standard is echoed in various other submissions, including the comments from the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), the Canadian Advocacy Council for Canadian CFA Institute Societies, the U.S.-based CFA Institute and even IIROC.

Although IIROC’s comment is careful to draw a distinction between financial planning and financial advice, the submission suggests that financial planning should be subject to a best interests standard: “We believe that the process of determining how clients can meet their goals through the management of financial resources should be subject to a best interests standard that is consistent across all of the applicable regulatory platforms.”

IIROC’s comment recommends that the tougher standard be applied without making any major changes to the regulatory structure itself. Rather, it suggests, existing regulators should adopt “clear rules to fully regulate financial planning” for financial planners that already fall under a regulator’s jurisdiction; and that those who don’t already belong to an existing regulator should be brought under the oversight of one.

Whether any of this consultation results in genuine, meaningful reform surely will come down to political will. The committee is expected to produce its recommendations in 2016. In addition to these public consultations, the committee also will be considering academic research and input from the Ministry of Finance.

But the big question will be whether the government is prepared to act upon the recommendations the committee produces. Previous promises of regulatory reform have vanished without a trace, and any major structural reforms at this point are complicated by the ongoing, parallel effort to create a co-operative national regulator.

Nevertheless, the belief that something must be done appears to be widely accepted.

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