That regulation of the securities industry in Canada is at a crossroads is not an overstatement, given the debate about whether a best interest standard should govern the conduct of financial advisors and investment dealers. Advisors and dealers perform a crucial role in Canadian capital markets; they help Canadians invest for their future and the future of their families; they act as gatekeepers for our capital markets.

The debate about whether or not to introduce a best interest standard is not only a regulatory debate; it also is a debate about the nature of the industry. The standard is about professionalism, culture and values – within each organization and industrywide. The standard also is about saying what you do and doing what you say.

The Ontario Securities Commission (OSC) has expressed strong support for a regulatory best interest standard in the Canadian Securities Administrators’ (CSA) Consultation Paper No. 33-404, which was published on April 28.

What does the OSC mean by a regulatory best interest standard? As a governing principle for advisor and dealer conduct, a best interest standard requires that, in addition to the current requirement to act fairly, honestly and in good faith, advisors and dealers (firms and representatives) act in their client’s best interest.

This concept is different from the system we have in place today, in which an advisor or dealer simply is required to recommend a product that is “suitable” for a client at the point of sale.

Central to the best interest standard is an expectation that advisors and dealers, in a prudent and unbiased manner, prioritize the interests of their clients ahead of their own and focus on achieving what is best for their clients. Investors mistakenly believe their advisors are required to act in their best interest already. It is time to close this gap.

In the CSA’s consultation paper, the regulators are unanimous on targeted reforms, but not on the need for a regulatory best interest standard. So, the question must be asked: “Do we really also need a regulatory best interest standard?” The short answer is yes.

The targeted reforms enhance specific obligations that advisors, dealers and their representatives owe their clients, covering areas such as conflicts of interest, know your client and know your product requirements, and use of business titles. While targeted reforms are necessary, they are not sufficient. Regulators can’t – and shouldn’t – create detailed, prescriptive rules to cover every possible interaction between clients and their advisor or dealer.

We need an overarching principle governing the relationship between clients and their advisors, a principle capable of both assisting in the interpretation of specific requirements and acting as a guide in addressing novel situations or evolving market conditions.

Despite what some comments state, the best interest standard is not intended to interfere with the registration categories under Canadian securities legislation, prohibit firms from charging clients for their services or prohibit firms from offering proprietary products.

The best interest standard does not guarantee that a client’s investments never lose value, result in the “best” or “highest” returns for the client, or result in the lowest-risk or lowest-cost product always being recommended to clients. A best interests standard does not create a fiduciary duty.

With a best interest standard, clients can be confident that their relationship with an advisor or dealer is governed by a standard of conduct that puts the client’s interests first. Advisors and dealers can be confident that the same governing principle and standard of conduct applies across the industry and to every client relationship. Ontarians can be confident that their trust in their securities industry is well placed.

The OSC is clear about the need for a best interest standard and is prepared to demonstrate leadership in this area. Ontario investors deserve no less.

Mary Condon is a professor at Osgoode Hall Law School; co-director, Hennick Centre for Business and Law; and a former Commissioner of the Ontario Securities Commission.

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