The Ontario Securities Commission’s (OSC) new policy of calling clients of registered firms during compliance reviews is likely to alarm clients, and could cause “significant” reputational damage to industry firms, exempt market dealers say.
At a conference hosted by the Exempt Market Dealers Association of Canada (EMDA) in Toronto on Tuesday, speakers raised concerns about the OSC’s recent announcement that it would begin contacting clients of registered exempt-market dealers, scholarship plan dealers and portfolio managers as part of its routine compliance review process. The purpose of the practice is to verify the accuracy of information given to OSC staff about a firm’s relationship with its clients.
“It’s important to recognize that the regulators need some levers to pull to get the information, the facts,” said Brian Koscak, chairman of the EMDA and partner at Cassels Brock & Blackwell LLP in Toronto.
However, he said he’s surprised that the OSC decided to implement this practice without consulting members of the industry. “There should be more dialogue with the street on how this should be done in a fair and equitable way that protects investors, allows the regulators to do their jobs as well as protects dealers, how they do business, and their reputations.”
David Gilkes, vice chairman of the EMDA and president at Toronto-based regulatory consulting firm North Star Compliance & Regulatory Solutions Inc., said he can understand why the OSC has decided to contact clients directly during compliance reviews.
“If you’re going to call clients, you will get accurate information, perhaps, on whether their KYCs are filled out correctly; you will be able to question whether or not the investor understood the product that he or she was buying,” he said.
“However,” Gilkes added, “clients don’t necessarily tell the truth.”
Indeed, he’s concerned that clients might blame their dealer or advisor for poor performance of their portfolio, or give the regulator different information about their risk tolerance than they gave their dealer.
Another concern is that clients will be alarmed by getting a call from a regulator, and could interpret it as a sign that their dealer or advisor has engaged in misconduct.
“We know what investors are like. They’re not necessarily rational,” Gilkes said. “The potential reputational damage to a dealer is significant.”
Toronto-based Advocis, which represents financial advisors across Canada, has raised similar concerns about the new practice.
To minimize potential reputational damage caused by the calls, Gilkes said the OSC should actively publicize the new policy so that investors are well aware that they could receive a call from the regulator as part of routine compliance examinations.
“Right now, that message hasn’t gotten out there, and I’m pretty sure investors are going to be frightened when they hear a call from the OSC,” he said.