Storm Clouds over Saskatchewan field and tracks

Editor’s note: This column was written by former Inside Track columnist Ermanno Pascutto. Pascutto is the founder, former executive director and member of the board of directors of the Canadian Foundation for the Advancement of Investor Rights (a.k.a. FAIR Canada). He has had a career spanning more than 30 years as a senior securities regulator and legal practitioner in the financial markets in Canada and Hong Kong.

The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) is concerned with the Canadian Securities Administrators’ (CSA) long-awaited status reports on a best-interest standard and reform of mutual fund fees that were released in December, as they contain no commitment to address the serious investor-protection concerns raised.

The importance of these initiatives cannot be overstated: these are fundamental issues that affect Canadians’ ability to save for retirement and other goals. The investor-protection concerns raised in the consultation documents are real, pressing and require timely action in order to protect financial consumers.

The issues raised in the respective 2012 consultation documents have been on the regulatory radar for years. FAIR Canada co-hosted a full-day fiduciary conference in 2010 followed by another roundtable in 2011. Regulators, industry representatives, academics and investor advocates participated in these in-depth discussions. The U.K. and Australia have implemented reforms in the consumer interest; the Council of the European Union has just approved new rules; and the U.S. is considering doing so. But, in Canada, the initiative appears to have run into a roadblock.

As well, the high cost of mutual fund fees in Canada has been widely acknowledged for many years — even prior to the seminal Mutual Fund Fees Around the World report written in 2008 by Ajay Khorana, Henri Servaes, and Peter Tufano, professors from the Georgia Institute of Technology, London Business School and Harvard Business School, respectively.

Investment costs are a zero-sum game – a game that Canadian consumers are losing. The Ontario government has recognized the high cost of investing in its 2013 economic outlook and fiscal review as it intends to “work to reduce the cost of investing and provide individuals with the help they need to make informed decisions about financial savings.”

In response to these initiatives, many investment industry representatives responded with delay tactics — including calls for regulators to “wait and see” and to conduct further research. Heeding such calls and not following up the consultations with real and meaningful reform will result in a lost opportunity to address the underlying conflicts of interest that drive the “advice”-giving industry. It will also reinforce the view that the provincial securities regulators are not able to agree on meaningful and timely reform to protect consumers.

In a recent speech, Bill Rice, the CSA’s chairman, suggested that “we have problems because, in too many cases, the existing standards, on the part of the investor, are often not understood and, on the part of the salesperson, are often not abided by.” Although this is correct, it’s only the tip of the iceberg in consumer protection in the sale of investment products.

Investors today are ordinary Canadians who are increasingly forced to save for their own retirement, who have been lead by industry representations to believe that the current standard is one of best interest and that they should trust their “advisor” (not “salesperson”). The industry has benefited greatly from the misplaced trust that has resulted. The problem is not just the rogue advisor who does not comply with the existing rules — although that can, and does, occur too frequently — but that the standard is not high enough to fit the relationship that consumers expect and that the industry professes in its marketing and advertising.

Connie Craddock, chairwoman of the Ontario Securities Commission’s Investor Advisory Panel has been quoted as saying: “While we are fully committed to thoughtful, careful analysis and a measured regulatory response, we believe that the slow pace of reform in Canada is unacceptable. It’s time for Canadian regulators to move beyond discussion and study and raise the bar on investor protection.”

Thus, the CSA must provide timely solutions to the issues that it has identified in its consultation documents and commit to taking action in order to fulfil their investor-protection mandates. Publicly raising these important issues and then failing to address them would send a clear message that provincial regulators are either unwilling or unable to address market failure and that the current fragmented regulatory system does not work.

FAIR Canada is calling on Canadian securities regulators — and the provincial governments to whom they are accountable — to put the interests of Canadian financial consumers first and to make meaningful changes to address the issues raised by both the mutual fund fees and the best-interest consultations and to demonstrate the ability of provincial securities regulation to tackle critical issues on a timely and effective basis.

With contributions from Lindsay Speed, legal counsel and corporate secretary at the Canadian Foundation for Advancement of Investor Rights.