This autumn, there are likely to be some lively, contentious debates about the merits of further regulatory reform in the retail investment business. The two big issues for policy-makers are whether to eliminate embedded compensation in the investment fund industry (a consultation paper on that idea from the Canadian Securities Administrators is expected soon) and whether to require that front-line financial advisors put their clients’ interests ahead of their own (a paper exploring that issue was issued earlier in the year, and the comment period closes Sept. 30).
Both issues are sure to be hotly debated, with deep convictions already apparent on both sides. But, ultimately, it will be up to policy-makers to wade through the morass of evidence and reach a verdict. As they do so, regulators should ensure that the best interest of investors is paramount in the decision-making process.
Historically, regulators have talked a good game regarding investor protection. But, too often, the results have not measured up. Instead, their efforts have left Canadian investors with a marketplace marked by a stubborn, possibly insurmountable information gap between the industry and its clients. The growing complexity of the investment business has only exacerbated that problem, as has the uncertain, evolving standard of care and the lack of viable routes to restitution for the average investor.
Policy-makers will hear many passionate, persuasive arguments regarding the need for and wisdom of further reform. In weighing those arguments, the policy-makers must assiduously separate data and fact from opinion and belief. They must be alert to the pernicious influence of self-interest. And, most of all, they must be prepared to put investors’ interests first in reaching any conclusions.
This will be harder than it sounds, given that regulators have their own distorted incentives, from fear of offending colleagues in the business to possibly jeopardizing lucrative future opportunities.
In deciding whether the industry must put investors first, regulators should ensure that they are prepared to do so themselves.
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