confused man

Regulatory efforts to raise conduct standards in the retail investment industry and curb conflicts of interest that can harm clients are challenged by industry firms that don’t seem to understand what constitutes a conflict.

The British Columbia Securities Commission (BCSC) published a report detailing the results of its latest compliance reviews of firms that it directly regulates, including portfolio managers, investment fund managers and exempt market dealers. The regulator found “recurring deficiencies” in how some of these firms deal with conflicts of interest.

As part of a national sweep, the regulator’s compliance work in 2022 focused on the conflict of interest provisions of the recently adopted client-focused reforms.

Among other things, the regulator’s review identified firms that failed to understand the sorts of activities that commonly pose material conflicts, that recognized the existence of conflicts but didn’t know they were material, and that failed to have policies in place to adequately deal with conflicts.

The BCSC said the top conflicts it found involved referral arrangements, compensation practices and gifting practices.

It reported that approximately half of the deficiencies it found in adviser/fund manager firms involved a lack of policies and procedures for dealing with specific conflicts, such as gifting and referral arrangements.

Additionally, it found firms that failed to recognize that compensation models based on revenue or sales targets generally represent material conflicts; that paying different commission rates for certain products, or clients, creates a conflict; and that the risk of negative consequences for failing to meet targets sparks a conflict too.

“Compensation arrangements that are entirely or partially variable based on sales and revenue targets almost always create material [conflicts] between registered individuals and their clients,” the report said.

Some firms provided disclosure about these conflicts, while others did not. And some of the firms that provided disclosure didn’t provide enough detail to reveal the significance of the issue.

“While providing disclosure is necessary when a firm has material compensation conflicts, it may be insufficient to address these conflicts by disclosure only,” the report noted.

“We expect registered firms to ensure they are living up to the requirements of Canadian securities regulators when it comes to managing and avoiding conflicts of interest,” said Peter Brady, executive director of the BCSC, in a release. “We want to identify problems and make sure they get addressed before investors get hurt.”

In addition to the conflict of interest failings, the reviews found various other deficiencies, including reps using misleading titles, firms not collecting adequate know-your-client information, and issues with firms’ financial filings.