A “best interests” standard may shield senior investors

By James Langton | February 2015

The clamour for a "best interests" standard in the securities industry is growing ever louder. A new report suggests that regulators consider adopting a stricter conduct standard as a way to deal with the added challenges posed by the growing population of senior investors.

In mid-January, the Ontario Securities Commission (OSC) released a report in which it flags the introduction of a "best interests" standard as a possible solution to many of the concerns that senior investors face.

The conclusions of the report were based upon a roundtable event that the OSC hosted this past autumn in partnership with its independent investor advisory panel (IAP). The event included an assortment of government policy wonks, seniors groups and health-care professionals, along with the usual cast of regulators, and industry and investor advocates. The focus of the session was the peculiar challenges posed by senior investors.

The report and a previously unreleased consultation paper circulated during the session outline the growing importance of seniors' issues to the securities industry and to regulators.

The underlying demographic reality is well known: Canada's population is aging, which means that the ranks of senior investors is growing. And seniors are living longer, which means the demands of financing retirements also are growing.

Moreover, if the average retail investor is challenged to understand basic financial terms, industry product disclosure and concepts such as suitability, these challenges are intensified among seniors, who face the prospect of diminishing cognitive abilities as they age. The consultation paper reports that various academic studies have found that "investment performance declines significantly after age 70 as memory and reasoning ability diminishes."

Seniors more vulnerable

The paper also points out that research has found that while financial literacy and cognitive performance declines with age, seniors' confidence in their abilities does not: "The combination of sustained or increased confidence in financial decision-making [in combination] with reduced abilities raises concerns. Diminished capacity makes seniors more vulnerable to unsuitable investment advice, predatory practices, investment fraud and financial abuse."

When senior investors suffer losses - whether due to markets or malfeasance - they often have less ability to recover financially, given that they're likely to be retired from the workforce and have shorter time horizons than younger investors do.

The report indicates that adoption of a best interests standard of conduct for the industry would do a better job than the existing "suitability" standard to shield seniors in cognitive decline, preparing them for retirement and helping them to optimize their financial assets in retirement.

Of course, a best interests standard, which is under consideration by the Canadian Securities Administrators, would have effects well beyond just the senior investor population. And, as the report acknowledges, such a standard is unlikely to do much to protect seniors against fraud. Nevertheless, the growing challenge of protecting senior investors is one more factor in favour of a move to this standard.

At this point, though, regulators aren't committing to anything. The roundtable and the subsequent report simply are informing regulators' policy plans.

"We're reviewing the report as part of the ongoing discussions as we engage in our annual business planning process," says Rhonda Goldberg, director of the OSC's Investment Funds and Structured Products Branch.

That process sets the regulatory agenda for the year ahead, and often longer, as these regulatory policy priorities typically are multi-year endeavours.

The IAP has long called for the introduction of a best interests standard and will continue to do so. But, in the wake of the roundtable, the IAP now also is considering where else to devote its energy, says Connie Craddock, the IAP's chairwoman.

A very positive step

The roundtable represents a very positive step, in terms of defining the specific issues posed by senior investors, for regulators and other policy-makers, Craddock says, a step that will help to guide the IAP as it develops its advocacy agenda for the coming year.

This agenda could include focusing on advisor proficiency, titles or licensing. Other measures cited in the report include using more mystery shopping to assess the quality of investment advice (a report on the regulators' first effort at this is expected to be published by March); examining the use of powers of attorney; enhancing the complaint process; and numerous other policy ideas.

Craddock also notes that the investment industry is doing some good work on its own to address these issues - as outlined in a report from the Investment Industry Association of Canada last year, which examined the best practices that are in use at some investment firms in dealing with senior clients.

As policy-makers contemplate how to protect senior investors better, these practices could start to find their way onto the agendas of securities regulators and investor advocates as well.

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