The imposition of a fiduciary duty on financial advisors is the fondest wish of the Canadian Foundation for Advancement of Investor Rights (FAIR Canada) for the year ahead.
The investor advocacy group has released its wish list of the top investor protection improvements that it would like to see implemented in the coming year. At the top of its list is the adoption of a “best interests” standard, which requires advisors to put their clients’ interests ahead of their own.
“There is a distinct expectations gap between what is required of ‘advisors’ and what is expected by consumers,” it says, noting that investors aren’t aware that advisors generally aren’t required to put the client’s interest ahead of their own.” Often, consumers are unaware that the financial services providers that they receive ‘advice’ from are simply salespeople pushing high-cost financial products,” it says.
If advisors don’t want to adhere to a best interest standard, they should be required to call themselves salespeople, and to warn clients that they are not required to recommend products that are in the best interests of clients, it suggests.
Second, FAIR wants to see a ban on all forms of third-party embedded commissions, such as trailing commissions. “Trailing commissions carry serious potential for conflicts of interest and present high, opaque costs to consumers,” it says.
While it hopes that securities regulators will seriously consider banning trailing commissions, as other jurisdictions are doing, it says that at a minimum, investors should be told of any costs or fees “clearly and in plain language both before they invest (in Fund Facts) and after (in annual cost reports).”
“The investment fund industry’s continued opposition to the disclosure of trailing commissions is an indication that the industry worries that if investors were aware of these costs they would question what services they received for the money they paid and would seek lower-cost alternatives,” it says.
Third, FAIR Canada says it is also worried about a buildup of systemic risks created by leverage in retail investment accounts, and it calls on regulators to undertake targeted compliance reviews and canvass dealers to determine the extent of this problem.
The group would also like to see the Ombudsman for Banking Services and Investments (OBSI) empowered to issue binding decisions, and it calls on the industry to participate in OBSI in good faith.
“We would also like to see regulators take action should participants fail to comply with OBSI recommendations. Any ‘name and shame’ should trigger an inquiry into whether the firm complied with its supervisory obligations and whether it had acted fairly, honestly and in good faith in resolving the client’s complaint (as required by law) and whether they participated in the OBSI process in good faith,” it says.
Additionally, it calls on regulators to: implement a more consumer-friendly way to check advisors’ registration and disciplinary record; resist the urge to allow equity crowdfunding; and, reform the accredited investor exemption and do away with the Northwest Exemption.
Finally, it wishes for improved enforcement. “Regulators should prosecute all frauds and unregistered sales of securities where consumers have lost money as a result of the illegal conduct and not simply take administrative proceedings where fraudsters receive a slap on the wrist. More prosecutions would further deter fraud and misconduct,” it says.
The self-regulatory organizations should also have the power to collect fines when an individual ceases to work for an SRO-regulated firm, it says, “This would serve as a better deterrent against misconduct.” And, firms should be required to pay fines if an individual does not, it says.