Retail investors never had a chance.
As the auditor general’s review of the Ontario Securities Commission (OSC) makes plain, regulators’ efforts to bolster investor protection were neutered by a combination of investment industry lobbying and political interference. Policy-makers must now be prepared to act quickly and convincingly when the latest reforms prove inadequate.
The AG’s report showed that decisions to preserve embedded compensation structures and to forgo best-interest standards in the face of clear evidence of investor harm were shaped by ideology and self-interest rather than sound public policy.
The report further revealed the depth and breadth of political meddling — from direct government interference at the policy level (its ultimately failed bid to preserve deferred sales charges) to indifference about the importance of regulatory independence and credibility.
Even the regulator’s leadership was sacrificed on the altar of political partisanship. Experienced OSC board members were replaced with appointees sourced solely by the government without the usual input from regulators — at the ultimate expense of the board’s regulatory, governance and adjudicative capabilities.
The OSC’s board plays several critical roles, including policy-making and presiding over hearings before the administrative tribunal. The AG’s report found all these functions suffered due to the government’s handling of the OSC’s board.
The biggest casualty is the retail investor. Instead of straightforward, fundamental advances in investor protection — through the elimination of embedded compensation structures and the adoption of best-interest standards — investors are left with needlessly complex measures that aim for incremental improvements without truly addressing underlying conflicts.
Already there’s evidence that those reforms will prove ineffective. Major bank-owned dealers are shrinking their product lineups and favouring proprietary funds at the expense of third-party offerings.
The Ontario government has now asked the OSC to study an issue the government helped create by preventing regulators from making purely policy-driven decisions. While this newfound interest in investor protection is welcome, the exercise could have been avoided by allowing the professionals to do their jobs in the first place.