Letters to the editor: IIROC firms already meet the best interests of their clients

A best interest standard, a ban on embedded commissions and a compensation fund for victims of investment industry fraud are key highlights on Toronto-based Canadian Foundation for Advancement of Investor Rights’ (FAIR Canada) wish list for the coming year.

“There’s a distinct expectations gap between what is required of ‘advisors’ and what’s expected by consumers,” FAIR Canada notes in its investor protection wish list, which was published on Friday. “Consumers are led to believe that advisors make recommendations in their best interest, but no such standard is actually in place.”

In addition, the investor advocacy group also states that it would like to see a ban on embedded commissions, particularly trailer commissions: “Trailing commissions carry serious potential for conflicts of interest and present high, opaque costs to consumers. Conflicts of interest are structural and systemic, harming not only investors but the market itself.”

Both these issues are already on regulators’ agenda. The Canadian Securities Administrators (CSA) is currently in the midst of consultations on proposed changes to the regulation of client/financial advisor relationships, including a possible best interest standard.

In addition, the CSA is also expected to release a paper that contemplates a possible ban on embedded mutual fund commissions by the end of the year.

FAIR Canada also has some novel recommendations for policymakers. For one, it calls on governments and regulators to consider establishing a fund that would compensate victims of frauds that are perpetrated by registered financial services providers.

“Consumers who have suffered losses through fraud should be compensated in a manner similar to that used in Quebec with the Fonds d’indemnisation des services financiers or the U.K.’s Financial Services Compensation Scheme,” FAIR Canada’s wish list states.

As well, FAIR Canada recommends that regulators should tackle the prevalence of clients borrowing to invest, which it sees as a possible systemic risk.

“We are concerned that some financial institutions irresponsibly promote borrowing to invest as an investment strategy despite the fact that in the vast majority of cases, it is not appropriate for the consumer and despite the fact that Canadians are already heavily indebted,” FAIR Canada says.

To stem the use of leverage, FAIR Canada recommends “prohibiting the receipt of commissions or fees in respects of amounts borrowed to invest based on a leveraging strategy.”

Finally, FAIR Canada’s list also includes a wish that policymakers adopt a statutory, national ombudservice with the power to make binding decisions and that a national, comprehensive, consumer-friendly registration check be introduced as well.

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