The Canadian Securities Administrators’ (CSA) long-awaited proposals to allow embedded commissions to remain in place, eliminate deferred sales charges (DSCs) and heighten conduct standards for dealers and financial advisors, delivered on Thursday, drew widespread feedback from the investment industry and investor advocates.
The most polarized opinions were focused on the regulators’ decision to allow embedded commissions to remain in place, after a CSA consultation paper issued in early 2017 introduced the prospect of a ban. Most in the investment industry are happy that this method of compensation for financial advice still is an option.
For example, the Independent Financial Brokers of Canada (IFB), the Financial Advisors Association of Canada (Advocis), the Investment Funds Institute of Canada (IFIC) and the Investment Industry Association of Canada (IIAC) all expressed support for the CSA’s decision.
“The IFB is pleased that the CSA has not proposed a ban on all embedded commissions,” said Scott Findlay, the IFB’s chairman, in a statement. “At an [Ontario Securities Commission (OSC)] roundtable on this topic, I said that as an advisor myself, I share with many IFB members the concern that a ban on embedded mutual fund commissions would be extremely detrimental to clients, especially those with smaller accounts, and that paying an upfront fee would not be a viable option for most.”
Advocis also supports the decision, said Greg Pollock, president and CEO, in a statement: “We are pleased that the CSA has reconsidered its position and has decided to preserve choice with respect to how consumers pay for financial advice. Commissions have given consumers who otherwise could not afford access to advice the opportunity to work with a professional advisor, thereby improving their financial stability.”
Similarly, IFIC issued a statement supporting the decision to preserve embedded commissions, but noted that the “ban on deferred sales charges, however, will reduce choice for some investors. IFIC continues to believe that investors should have the freedom to choose the investment products and services that best achieve their financial goals.”
In contrast, the IIAC said in a statement that it’s in favour of regulators’ decisions on both embedded commissions and DSCs: “The IIAC supports the proposal to continue permitting mutual funds with embedded commissions and the CSA’s intent to prohibit all forms of the deferred sales charge option.”
Although most investor advocates were disappointed that the CSA didn’t go as far on embedded commissions as its original consultation paper had proposed, they were pleased that regulators are taking action to enhance conduct standards.
Said Frank Allen, executive director with the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), in a statement: “FAIR Canada continues to believe that eliminating embedded commissions is the preferable regulatory course of action, given the comprehensive, independent research findings (and our view that the market would be able to innovate and adapt), but we are pleased with the CSA’s proposed policy changes to prohibit DSCs, eliminate trailing commissions for online brokerage accounts (discount brokerages) and require all existing and reasonably foreseeable conflicts of interest, including conflicts arising from the payment of third-party compensation (including embedded commissions), to be either addressed in the client’s best interest or avoided.”
Added Wanda Morris, vice president of advocacy with CARP, in a statement: “The high fees many investors have been paying have been a significant headwind — and many have not even been aware of it. [The CSA’s proposals] reveal a path forward to significantly impact the way some companies do business. And that’s a good thing. Compared with their peers in other countries, Canadians are underinvested in low-cost [ETFs] and overinvested in high-cost mutual funds. Now that we’re living longer, experiencing record-low interest rates and our defined-benefit pension plans are disappearing, relief is overdue.”
In fact, even some in the industry, such as Atul Tiwari, managing director and head of Vanguard Investments Canada Inc., believe this move toward greater conduct standards and disclosure will mean that both advisors and investors will continue to focus on lower-cost options.
“Although there will not be a ban on embedded commissions, we believe that the Canadian market, like other regions around the world, will organically evolve away from [them],” Tiwari said in a statement. “The CSA has made clear that suitability determinations will need to be in the best interests of clients. This will likely accelerate the move that we are already seeing in advisors going from commission-based to fee-based models. We support that trend as providing superior fee transparency and enhancing the use of low-cost products to give clients better long-term returns.”
Regarding enhanced conduct standards, some in the industry are relieved that the proposals don’t include the introduction of a statutory “best interest” standard — especially one that would be applied in some provinces and not others.
“The CSA has been able to achieve agreement not only on these policy issues, but on measures that the securities commissions in Ontario and New Brunswick could agree to, in place of an over-arching best interest duty,” said Nancy Allen, the IFB’s executive director, in a statement. “It has been a major concern of IFB’s that if the CSA could not arrive at a harmonized approach, registrants conducting business in multiple jurisdictions would face a fragmented regulatory system that would not serve investors, or the industry, well”
Added Michelle Alexander, vice president with the IIAC, in a statement: “The proposed reforms have moved away from a sweeping and vague best interest standard that would have had uncertain application; provoked client and advisor confusion; and contributed to negative consequences for investors, advisors and the capital markets. Rather, the reforms are drafted to strengthen the focus on putting the client first in the client/advisor relationship. We are pleased the regulators have provided needed guidance and flexibility for firms and advisors to meet the expected standard of conduct.”
Still, even though the investment industry appears to have dodged a bullet in that there was no ban on embedded commissions and no proposal for a statutory best interest standard introduced, “there are a number of changes to consider and, ultimately, they could still have considerable impact on the industry,” said Susan Silma, practice leader, client and industry strategy, with Toronto-based PureFacts, in a statement.
For example, based on the wording in the proposals, Silma, a former OSC director, believes the CSA is taking an incremental approach to improve the balance between the investment industry and investors. Thus, if and when the proposals are adopted, regulators will be keeping a close eye to see whether the desired behavioural changes to put consider clients’ interests first are achieved.
“The proposals include an assertion on behalf of some of the regulators that, if the desired outcomes and behavioural changes are not achieved, they will revisit an overarching best interest standard,” said Silma. “I think that they may be testing us as an industry to prove our assertions that we don’t need their interventions and we will do what’s right on our own.”