Advisors across Canada are worried about the Canadian Securities Administrators’ (CSA) proposal that all advisors be held to the “best interest” standard. Currently, advisors must deal fairly, honestly and in good faith with clients. In fact, both the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) include the best interest standard in their respective provisions addressing conflicts of interest so that there are certain safeguards even without the proposed changes. So, why all the fuss?
There have been articles written about the confusion that will arise if the CSA does mandate that all IIROC- and MFDA-licensed advisors must operate on a “best interest” standard. The reason for this concern is that the case law, which is judge-made law, equates the “best interest” standard to that of a “fiduciary” duty; or, as I refer to it, as the “F” word. The CSA is suggesting that to avoid this interpretation by judges, it will specifically provide that “best interest” is not “fiduciary,” but will that resolve the confusion?
The problem is that the CSA is trying to fix something that isn’t broken in Canada, like it might be in other countries that have made this change. Our judge-made law is pretty fantastic because the standard of care operates on a sliding scale, moving up and down depending on a client’s knowledge, sophistication, experience, involvement and mandate — discretionary or not — in respect of his or her account. If the client is highly involved and sophisticated, the advisor’s standard is lower; it then moves higher, to the fiduciary standard, when the client is unsophisticated and relies heavily on the advisor to make decisions on his or her account, especially if the account is traded on a discretionary basis.
The CSA’s proposal will make the standard consistent for both sophisticated and unsophisticated clients. Some might think that makes sense, but the effect will be as follows, using a simple example: An advisor will be held to the same standard regardless of whether he is serving Mr. Smith, a securities lawyer who has been trading in stocks, bonds and options for decades and engages in unsolicited trades, or Mr. Jones, who left school after grade 6 and who never invested in anything beyond guaranteed investment certificates. That’s not an improvement on the law as it stands now.
Furthermore, even though the CSA’s goal is intended, in part, to compel advisors to operate at a higher standard, I don’t know that this will do the trick, as I understand that advisors already believe they are obliged to put all clients’ interests ahead of their own. There’s tremendous pressure on securities regulators to insist that advisors operate at a higher standard. However, will changing the standard accomplish that goal? I don’t know.