If the role of regulators is to stoke competition, then signs that several big banks are shutting their doors to independent, third-party investment funds is exactly the sort of anti-competitive behaviour that should inspire regulatory action. This year, an Ontario government task force recommended expanding the Ontario Securities Commission’s (OSC) mandate to include an obligation to foster competition and capital formation.
At the same time, the task force called for action to promote the availability of independent investment products in banks’ massive distribution channels.
Since then, the banks have moved in precisely the opposite direction.
As reported in our 2021 Report Card on Banks, several banks have removed third-party funds from the shelves of their branch-based financial advisors in anticipation of the client-focused reforms (CFRs), which take full effect at the end of this year. Those new rules introduce several measures designed to serve the interests of retail investors.
Unfortunately, the easiest way for firms to avoid conflicts of interest between proprietary and independent products is to simply eliminate third-party funds.
Yet, by narrowing product lineups down to proprietary funds alone, the banks are vulnerable to critics who allege their overwhelming market power stifles competition and innovation in the Canadian investment industry.
The task force report warned that banks could shrink their shelves in response to the CFRs — a move it stated would be contrary to the public interest. And the task force recommended the OSC take regulatory action — including possibly banning proprietary channels outright — if banks remove third-party funds.
The fact that some of the banks are behaving as the task force and some investor advocates feared should not be a surprise. The question is whether regulators are prepared to defend independence and investor interests.