The Ontario Securities Commission has released its concept paper for the Fair Dealing Model (FDM), which offers details of its proposal to reform the way the retail investment industry is regulated. The FDM would regulate the industry on the basis of the relationships people and firms form, rather than the products they buy and sell.

According to the OSC, the model is based around three fundamental principles: there should be a clear allocation of responsibilities; all dealings with retail investors should be transparent; and any conflicts of interest should be managed to avoid self-serving outcomes.

The paper lists 35 specific proposals detailing the new requirements the FDM would introduce.

The paper notes that the OSC is considering three possible approaches to address conflicts arising from third-party compensation: enhance transparency; place clear responsibility for the actions of representatives on a third party who compensates them; or require that compensation be paid directly by an investor rather than through third parties.

The concept paper’s main purpose is to encourage feedback. The core ideas originated with an advisory committee of senior investment industry participants, and were refined through a series of focus groups. A web site set up by the OSC, www.fairdealingmodel.ca, attracted thousands of visitors, over 300 of whom commented on aspects of the model.

“I expect the Fair Dealing Model to have a significant positive effect on our capital markets. It goes to the heart of what matters to investors: the quality and depth of their relationships with their advisors,” said OSC chair David Brown, in a news release.

The next step in the consultative process will be the creation of six working groups of industry participants who will work to resolve specific implementation issues. Each group will focus on a particular subject, such as compliance and legal issues, investor reporting techniques, or information technology implications. The OSC says it welcomes interested volunteers to join one of the groups. The regulator is also planning to stage a series of roundtable discussions in major cities across Canada.

“The Fair Dealing Model will benefit both investors and financial services providers,” said Paul Bates, who joined the FDM advisory committee while still CEO of Charles Schwab Canada, and has since been appointed an OSC commissioner. “Investors would receive more robust information — at the account opening stage, at the time of transactions, and in their account statements. Advisers would have clearer conduct standards to guide their activities. And ultimately, we should see fewer disputes.”

The FDM is an Ontario project, but the OSC says, given its’ preference for regulatory harmonization, it is unlikely to remain a local initiative.

“Ontario does not intend to implement the Fair Dealing Model without the participation of other regulators,” Brown said. “Changes as fundamental as these can best succeed with the cooperation and expertise of the other Canadian securities commissions and self-regulatory organizations.”

News release
http://www.newswire.ca/en/releases/archive/January2004/29/c4493.html

Fair Dealing Model Concept Paper
http://www.fairdealingmodel.ca