Regulators must take action to address investment industry practices that entrench conflicts of interest and harm investors, says the Investor Advisory Panel (IAP) in a letter to the provincial securities commissions and self-regulatory organizations.
Specifically, the IAP, an independent advisory group that represents investor interests at the Ontario Securities Commission (OSC), recommends that regulators deal with such investment industry compensation practices as embedded commissions both through policy reform and enforcement action.
The Canadian Securities Administrators (CSA), the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) published the results of recent reviews of compensation-related conflicts last year that “paint a disturbing picture of widespread, indeed endemic, firm non-compliance with current conflict of interest rules,” says the IAP’s letter to the CSA, IIROC, and the MFDA.
“While firms are only required to manage conflicts rather than avoid them, the evidence is clear that they are not managing them at all — they have instead established compensation programs that actually create conflicts,” the IAP’s letter says.
Specifically, the CSA’s review revealed, “18 different kinds of systemic, firm-wide practices that put firms’ and advisors’ commercial interests ahead of their clients’. These are not isolated instances of an individual registrant’s failure to properly manage a serious or material conflict,” the IAP’s letter notes. “Instead, the [CSA review] documents firm business models whose compensation and personnel policies are explicitly designed to incentivize and reward registrant behaviour that profits the firm and its employees at the expense of the client.”
Various other industry practices — such as awarding professional titles based on sales, cross-selling, providing higher payouts for certain funds or account types, and basing compensation for branch, or compliance, personnel on sales — also constitute serious conflicts, the letter states.
“We are concerned about the regulatory responses to these serious findings,” the IAP says, adding that it’s not clear how firms that employ these practices can be considered in compliance with the existing rules.
“Investors need regulators who will ensure that rules are enforced,” the letter states, adding that the regulators should also adopt reforms, such as introducing a statutory best interest standard and eliminating embedded compensation, to better address these inherent conflicts of interest.
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