Investor advocates and regulators are clashing over the state of investor protection and the prospect of future reforms ahead of a looming debate this autumn about raising standards for financial advisors and altering compensation models in the financial services sector.
In early August, the Investor Advisory Panel (IAP) – the independent investor advocacy group funded by the Ontario Securities Commission to represent retail investor interests in the regulatory arena – fired a shot across the bow of the Investment Industry Regulatory Organization of Canada (IIROC).
A letter from the IAP, ostensibly responding to IIROC’s latest strategic plan, also criticizes IIROC’s commitment to standing up for the interests of retail investors and condemns the self-regulatory organization’s (SRO) effort to involve retail investors in its governance and policy development process.
“We believe that unless IIROC, under the direction of its Canadian Securities Administrators (CSA) overseers, reforms its culture and governance, it will continue to fail in its mandate to protect investors,” the IAP’s letter states.
The IAP’s letter also calls on IIROC to support the proposal for a statutory requirement for advisors to put clients’ best interests before their own, a proposal that the CSA presented in a consultation paper earlier this year.
The comment period on that paper closes on Sept. 30. The regulators also are expected to hold roundtable meetings in the autumn to discuss the possible implementation of a best interest standard in some provinces.
In light of those efforts, the IAP’s letter calls on IIROC to “take a leadership role in the current discussion about improving advice standards for Canadians.”
Ordinarily, taking a public stance on possible CSA reforms would be unusual for an SRO; but this particular issue is an odd one, given that it lies at the heart of client/advisor relationships and the dissent that exists within the CSA over whether there should be a best interest standard. So far, Ontario and New Brunswick are most in favour of the concept, whereas British Columbia is opposed and the rest of the provinces fall somewhere in between.
Nevertheless, IIROC already weighed in on the concept of a best interest standard in April, when the SRO published a regulatory notice that declared IIROC believes the combination of its existing rules and guidance already create an obligation for IIROC-licensed advisors to resolve conflicts of interest in the best interest of their clients.
Yet, the IAP’s letter states that panel finds IIROC’s assertion unconvincing: “In fact, it has been widely contradicted by investors’ experience. IIROC members routinely deny this assurance when responding to IIROC regarding investor complaints and in litigation before the courts. Nonetheless, IIROC fails to take any action against such denials.”
Neil Gross, executive director of the Toronto-based Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), an investor advocacy group, says the organization “shares the concerns raised by the IAP.”
In particular, FAIR Canada would like more clarity from IIROC regarding its claim that it already imposes a best interest duty on advisors, Gross says: “We find the comment hard to understand because IIROC members and their advisors have long been allowed to do things that a best interest standard should prohibit – such as utilizing business models in which conflicts of interest are endemic or recommending high-fee products when equally suitable low-fee alternatives are available.”
IIROC, in response to the IAP’s letter, has reiterated its position that its rules already effectively impose a best interest standard. In addition, the SRO is pledging to change its rules, if necessary, to clarify the obligation.
Specifically, Andrew Kriegler, IIROC’s president and CEO, defends the SRO’s investor protection record in a letter dated Aug. 16, and also addresses some of the specific criticisms the IAP has levelled.
On the question of best interests, Kriegler wrote: “If we need to make further changes to make absolutely clear that IIROC’s rules put the best interest of the client ahead of the interests of the registrant, we are prepared to do so.”
In an effort to determine whether changes are needed, IIROC is examining how firms handle compensation- related conflicts. Kriegler’s letter indicates that IIROC believes these conflicts “are at the core of most ‘best interest’ issues.” Furthermore, Kriegler reports that IIROC has found through its compliance examination process that member firms are doing a good job of handling other conflicts that may arise.
IIROC carried out a survey of its member firms this summer to get a better understanding of investment dealers’ handling of compensation-driven conflicts. The SRO is analyzing the survey results and also is following up with certain firms to seek more detail, says Lucy Becker, IIROC’s vice president of public affairs.
If that exercise reveals a need for rule changes, Kriegler’s letter states, the IAP will be part of that process: “I would invite the IAP to support our work in building out the guidance, compliance and review structure surrounding the requirements of registrants to act in the best interest of their clients, and to make specific suggestions if you feel that changes to the existing rules and guidance are needed to make the obligations absolutely clear.”
Kriegler’s letter also defends IIROC’s commitment to investor protection: “I am proud of IIROC’s record in fulfilling its investor protection mandate and our internal culture, which is strongly committed to serving the public interest.”
In addition, his letter notes, the CSA’s periodic oversight reviews of IIROC (most recently in March) confirm that IIROC is fulfilling its mandate.
© 2016 Investment Executive. All rights reserved.