Skyline of the financial district
iStock

Increasing compliance requirements — such as enhanced know-your-product rules — provided cover for Canada’s banks to focus ever more exclusively on selling their in-house investment products, shutting out independent products and limiting client choice, says Sheila Murray, a corporate director and former president of CI Financial. 

“Under the guise of compliance and risk aversion, and doing the right thing for their clients, [banks] moved in favour of their own products to the detriment of having a balanced product shelf,” Murray said, speaking on a panel presented by NEO Exchange on Wednesday. The topic: Ontario’s Capital Markets Modernization Taskforce consultation paper, released in July.

Murray made the comments in support of proposal in the paper that banks be directed to offer independent providers greater access to their distribution channels. The task force set a deadline for Sept. 7 for comments, and intends to provide a final report with recommendations to the Ontario Minister of Finance before the year’s end. 

It’s really difficult [issue], but I think [the task force] is going in the right direction of encouraging more open shelf and transparency on the shelf,” Murray said. 

In its paper, the task force proposed that closed product shelves/proprietary-only shelves be banned in the bank-owned distribution channel. The task force noted that an estimated 80 per cent of product distribution currently goes through bank distribution channels, and that such concentration encourages the sale of proprietary product. 

The task force also proposed that bank-owned dealers be required to include products on their shelves if requested by an independent provider — unless the bank has determined “on a reasonable basis that a particular product isn’t suitable. Bank-owned dealers would have to document “a detailed rationale” for excluding a product and provide that documentation to the requesting producer. 

Finally, bank-owned dealers would report on the percentage of proprietary versus independent products on the shelf or sold on a quarterly basis to the Ontario Securities Commission. 

Murray says independent providers, such as her former firm, were already having a difficult time gaining access to bank channel distribution, and “that only became more difficult with enhanced know-your-client and know-your-product rules, [and other] enhanced compliance obligations.

Banks “understandably” decided to concentrate on selling their own products rather than expend effort on assessing the risk profile of competitor products, she said. 

In reply to Murray’s comments, panellist Cindy Tripp, a task force committee member, and founding partner and former co-head of trading at GMP Securities LP, said, “I think we all agree that there were unintended consequences from know-your-client and know-your-product [rules].” 

Tripp said that at some large institutions, know your product isn’t being pushed to the advisor, it’s being dealt with by the institution. That’s what’s caused this narrowing of the product shelves, and therefore, of course, more proprietary product being sold.” 

The task force hadn’t considered the unintended consequences of increased compliance requirements on product distribution, but wondered if it should, she said. 

Murray replied that industry regulators “absolutely have to” look at the issue: “[When] all of the pricing discussions happened, know your product and know your client translated [into] ‘get the client the cheapest product. Then we got ourselves into difficulty.