With the call for securities regulators to require financial advisors to put their clients’ interests before their own growing ever louder, regulators now appear ready to act.

The Canadian Securities Administrators (CSA) is slated to publish a consultation paper at the end of April that will propose measures designed to strengthen the obligations that dealers and their representatives owe to their clients. That paper, which will be published after Investment Executive’s press deadline, will be out for a 120-day comment period – setting up yet another summer of debate over the prospect of tougher standards for financial advisors.

In an unusual move, the CSA announced the forthcoming release of the paper in a staff notice on March 31. That notice implies that regulators have decided the current rules simply aren’t enough to protect investors adequately: “Regulatory action is required to better align the interests of registrants to the interests of their clients, to improve outcomes for clients and to clarify the nature of the client/registrant relationship for clients.”

That decision in itself represents a win for investor advocates. The investment industry, conversely, has maintained that the existing rules are good enough and that regulators should wait until after the second phase of the client relationship model (CRM2) reforms are adopted fully before deciding whether more action is necessary. (The remaining CRM2 requirements, which aim to improve transparency, take effect this July.)

However, regulators appear to be resolved to impose further reforms. The justification for additional action is hinted at in the B.C. Securities Commission‘s (BCSC) latest service plan for 2016-19, which reports that the BCSC has identified a handful of basic regulatory concerns with the existing environment, including: misplaced trust and reliance; client portfolios are underperforming common benchmarks; and clients are not getting the results intended from the regulatory framework.

Now, the first question these proposals raise is: just what measures will regulators propose? Certainly, the introduction of a statutory “best interest” standard is likely to be one of the options.

Earlier this year, the Ontario Securities Commission (OSC) signalled in its draft statement of priorities its intention to consult on the possible adoption of a best interest standard. The OSC still appears to be in favour of exploring the idea.

“While no final decision will be made without broad public consultation, the OSC has expressed its support for the development of a best interest standard,” confirms Maureen Jensen, the OSC’s chairwoman.

An independent government committee that’s examining the regulation of financial planning in Ontario also calls for a statutory best interests standard that applies to financial advice. The committee’s preliminary recommendations, released in early April, advocate that the government introduce a statutory best interest duty in Ontario. According to the report, this step would clarify the legal duty of care, reduce investor and industry confusion, and bring the regulatory reality more in line with client expectations.

At the same time, the OSC indicates that other reforms may be up for consideration. The OSC’s draft priorities state that the regulator intends to conduct consultations on “targeted regulatory reforms” or additional guidance “to improve the advisor/client relationship” in addition to consulting on a best interests standard.

A wide variety of “targeted reform” possibilities were raised during the CSA’s initial consultation on conduct standards that was carried out in 2012-13. The policy options proposed during those consultations include: banning embedded commissions; increasing proficiency standards; regulating advisor titles; improving rules on conflicts of interest; creating different advisor categories (fully independent advisors and sales reps who provide restricted advice); and enhancing mechanisms for investor restitution.

Which, if any, of these options will be up for consideration in the forthcoming CSA consultation isn’t clear. Alison Trollope, director of communications and investor education with the Alberta Securities Commission (ASC) in Calgary, notes: “While we believe regulatory action is required, what that action looks like is yet to be determined.”

The ASC will decide on reforms, along with the rest of the CSA, after the consultation process takes place, she adds.

The second big question, then, is: will regulators follow through with reforms.

Neil Gross, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) – a Toronto-based investor advocacy group that has long supported the adoption of a best interests standard and a variety of other reforms to bolster investor protection – indicates that he’s not sure whether regulators are committed to reform or if this exercise will turn out to be just more talk.

The OSC indicates in its draft priorities that it aims to develop recommendations on reforms “including an implementation plan” in its current fiscal year, which ends March 31, 2017. But if history is any guide, these fundamental reforms typically take years rather than months. And there’s no question that the regulators will face determined industry resistance if they do decide to pursue a best interests standard.

Indeed, the Investment Industry Association of Canada (IIAC) says in a recent submission to the OSC that the IIAC is “disappointed the OSC (and CSA) has decided to move forward with a client best interest standard following the five-year effort to implement the CRM rule framework.”

The IIAC’s comment supports the “principle” of advisors putting clients first and maintains that the existing Investment Industry Regulatory Organization of Canada’s (IIROC) rules already require advisors to “meet the best interests of their clients, particularly in the important area of compensation-related conflicts of interests.”

Thus, the IIAC’s comment suggests that regulators should focus on ensuring compliance with these existing standards rather than create new ones.

This view that the IIROC rules already create a best interests standard of sorts for investment dealers was echoed by that self-regulatory organization (SRO). In early April, IIROC published its own notice, which declared that the SRO’s existing rules and policy guidance already put clients’ best interests before the interests of dealers and reps – although, the notice acknowledges, further guidance may be required to “make this point absolutely clear.”

Historically, the courts have held that investment firms and advisors may owe fiduciary duties to clients, depending on the specific circumstances of the client/advisor relationship, but that there is not an automatic obligation to put clients first.

Proponents of adopting a statutory best interest duty argue that doing so will remove any uncertainty about whether firms are required to put clients’ best interests ahead of their own.

Moreover, despite IIROC’s contention that its rules already require firms to prioritize clients, the SRO’s notice agrees with the CSA’s conclusion that further regulatory action is required to improve outcomes for investors and to align investor and industry interests better.

“We are committed to working with the CSA through this consultation process,” IIROC’s notice states, “to ensure a consistent standard of care for all regulatory platforms.”


The renewed debate over a possible introduction of a best interests standard in Canada comes at a time when the U.S. is going through its own epic battle over conduct standards for financial advisors.

The global context for the Canadian Securities Administrators’ (CSA) forthcoming paper on possible reforms to client/advisor relationships – and the preliminary recommendation from an expert committee in Ontario calling for a best interests standard for financial advice – is a series of similar debates playing out in the U.K., Australia and, most recently, the U.S.

Specifically, the U.S. Department of Labor (DOL) released the final version of a new rule in early April that will impose a fiduciary duty on advice provided for retirement accounts.

Under the DOL’s new rule, slated to take effect in April 2017 (although firms would have until Jan. 1, 2018, to be fully compliant), advisors will be required to put clients’ interests first when selling products that will be held in retirement accounts (the U.S. equivalent of RRSPs). Advisors still will be able to receive commissions and revenue-sharing payments under the rule – provided that those advisors explicitly commit to providing advice that is in clients’ best interests.

The DOL’s rule also aims to define what constitutes “fiduciary advice,” so that dealers and advisors can provide general investing information without triggering the fiduciary duty. But when specific investment recommendations are provided for retirement accounts, that advice must be in clients’ best interests.

The DOL’s rule also will require firms to: adopt policies and procedures designed to ensure that advisors provide best interest advice; be prohibited from providing incentives for advisors to act contrary to clients’ interests; and disclose all compensation-related conflicts to clients.

In general, the U.S. investment industry has opposed the DOL rule – and some of the arguments will be familiar to followers of the debate in Canada: the tougher standards will limit investor choice, will make advice more expensive and will reduce the availability of advice to smaller clients. The U.S. Securities Industry and Financial Markets Association indicates that it is studying the final version of the DOL’s rule to assess how it will work for the brokerage industry.

The DOL’s fiduciary rule has also been in the works since 2010. The latest iteration of the proposal was released in April 2015, then went through a five-month comment period and several days of public hearings. More than 3,500 comments were submitted. As a result, the final form of the DOL’s rule incorporates several changes that aim to ease the compliance burden.

Meanwhile, the U.S. Securities and Exchange Commission (SEC) is continuing to work on its own uniform fiduciary standard, which could apply to both investment advisors, who are subject to a fiduciary duty in the U.S. already, and broker-dealers, which are required to meet suitability standards only. The SEC was mandated to propose a common standard under U.S. regulatory reforms stemming from the global financial crisis of 2008-09, but the regulator still is struggling to come up with a proposal.

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