Every financial crisis brings new initiatives and rules to improve the world’s financial system, and the Canadian retail financial sector is no exception. Since the financial meltdown in 2008, regulators and governments across the globe have been in high gear with a vast array of proposals. In some jurisdictions, namely Australia and Britain, they have made fundamental changes to the practice of offering retail investment advice through new service rules and requirements.
Despite Canada’s healthy economic recovery since 2008, we have also developed many new rules and engaged in many conversations on how to improve the overall Canadian financial system and make the retail market for financial consumers fair and transparent. But are all these new rules and proposals solving the real problem for consumers and the advice that they receive?
This patchwork of changes from governments and regulators from various industry sectors, such as insurance and securities, are all well meaning; but because they are unco-ordinated, they have caused problems of clarity and consistency for financial planners and financial consumers.
This list of proposals and rule changes is numerous; it includes:
> A restarted national securities regulator initiative.
> A focus on the financial literacy of Canadians.
> The newly released second phase of the client relationship model, better known as CRM2.
> A discussion around banning trailer commission fees for mutual funds, much like Britain has already done.
> A discussion concerning the need for a “statutory best interest duty” for advisors and dealers, which some observers claim is really a fiduciary standard.
> Exploring the suitability and rigour of designations and titles that various advisors and financial planners hold out to the public.
Furthermore, it’s worth noting that regulatory arbitrage is occurring because securities regulators are bringing in new requirements without co-ordinating with their insurance counterparts. In addition, each province cannot ensure that the rules are consistent across the country.
If the federal finance minister really wants to leave a legacy, he should create a financial authority through his national securities regulator initiative that regulates all components of the financial system, regardless of sector or product, across Canada.
This new body should ensure that financial consumers receive independent advice as well as a consistent experience when seeking financial advice and services — all backed by consumer protection legislation. An independent advice channel is essential to servicing these consumers, in which financial planners who are recognized as professionals can earn a living through client fees and ensure that the “best interests” of the client is the focus of the engagement.
This new approach to providing financial advice to consumers is needed when you consider that financial planners take a holistic approach to their clients’ needs and they may give investment, insurance or perhaps lifestyle or estate planning advice. As a result, they need to have consistent rules to hold out their qualifications and service to their client regardless of what industry sector they are advising within.
In parallel, a financial consumer does not know or care that when seeking financial advice or services that the rules may be different depending on the industry sector or product. The consumer should receive the same level of qualifications from their advisors or financial planners; the same high level of client engagement, due diligence and disclosure; and the same recourse if there is a subsequent problem with the advice and solution that they received.
The best way to have financial planners work in this new financial advice model is to use a recognized professional model much like other professions that deal with the public, such as lawyers.
Perhaps it’s naïve to think that we can achieve this utopia, but at least policymakers should consider these principles when launching new rules and regulations. In observing these policy processes over the years, I have concluded that we do things backwards in that we create macro rules and then try to right fit them to the advisory channel and consumers vs determining what consumers need and working the rules back up through the financial services value chain.
I will be exploring many of the regulatory initiatives I mentioned earlier in greater detail — as well as their potential positive or negative effects on financial planners and financial consumers, and how they could be directed to reach the principle of fair and transparent financial retail markets in subsequent articles.
Until then, let us ask for clarity and consistency.