The Ontario Securities Commission (OSC) says that it aims to make a decision on whether to ban embedded commissions or not in the coming year.
The OSC released its 2014-2015 draft Statement of Priorities on Thursday, which sets out its plans for the year ahead.
Among a host of issues, the most prominent for advisors is the ongoing work on the quality of investment advice, particularly whether embedded commissions should be eliminated, and whether a fiduciary duty should be imposed on advice.
The regulator is more definitive on the issue of mutual fund commissions, saying that it expects to reach a decision on whether to ban embedded commissions, cap them, or leave them untouched. To that end, it says a “Staff notice setting out key findings and status will be published by early 2015.”
To inform that decision, in the year ahead, the OSC is pledging to complete third-party research to determine whether different forms of compensation, such as embedded commissions, influence advisor behaviour. It says that the research will aim to quantify how much compensation for distribution affects fund sales, and to evaluate whether fee-based compensation affects advice and improves long-term results.
It’s more equivocal on the issue of whether a fiduciary duty should be imposed on financial advisors. While it says that the topic is still being studied, the OSC indicates only that it expects to complete its research in this area, evaluate options, and publish preliminary recommendations.
It also expects to publish a report on the results of the mystery shop of advice that’s being carried out in conjunction with the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), which will include issuing guidance on what constitutes non-compliant advice, compliant advice and good advice.
However, for the time being, it also appears to endorsing the current suitability standard, which investor advocates argue is inadequate. “The OSC must try to ensure that the reliance by investors on their advisers is well placed by setting standards and overseeing that the advice being provided is suitable and that any conflicts are managed appropriately,” it says.
And, it notes that the results of the mystery shop will be used to “inform targeting of future OSC suitability sweeps and best interest duty policy development”, which suggests that the suitability standard isn’t going anywhere in the near future.
Additionally, the OSC indicates in its draft priorities, that it aims to encourage the “expansion of product choices across distribution platforms”, but it doesn’t provide any specifics on that item. It also notes that with the provincial government examining the need for financial planning regulation, it will “work with the government as this initiative evolves.”
Next: Other policy areas to receive attention
Other policy areas to receive attention
In other policy areas, the OSC plans to publish proposals to update the order protection rule; it aims to review transparency in the corporate bond market and develop a proposal to increase post trade information; it intends to produce preliminary recommendations following its review of the proxy voting system; and to develop rules for the clearing of OTC derivatives and implement trade reporting rules in this market too.
The OSC also says it will support the efforts underway between British Columbia, Ontario and the federal governments to implement a cooperative securities regulator. “The resource implications for the OSC’s role in this initiative are currently unclear but are expected to be substantial,” it notes.
At the same time, the draft priorities indicate that the regulator is sensitive to the increasing regulatory burden. And, it pledges to continue seeking “less intrusive regulatory solutions and opportunities to avoid undue burdens on business”. It says it must look for ways to lower regulatory costs.
In terms of its financials, the OSC is forecasting revenues to rise by 6.1% from the previous year, following recent fee increases, which it says are necessary to meet its “evolving regulatory responsibilities, many of which are driven by work
at the international level.”
Nevertheless, as it also recently announced fee relief for small firms and issuers, the OSC expects to continue operating at a deficit in 2014-2015, and it says this move will impact its ability to reach cost recovery by the end of fiscal 2016. As a result, the commission says it will no longer have a general surplus by March 31, 2015; although it does maintain a $20 million reserve that may be used to fund operations.
The draft priorities are out for comment until June 1. “Consultation is critical to our success as a regulator and this draft statement of priorities is our cornerstone accountability document, which sets out where we will focus in the next 12 months,” said Howard Wetston, chair and CEO of the OSC. “We encourage feedback from stakeholders as we believe an open dialogue is vital to responsive and effective regulation, and the success and security of our markets.”