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The Canadian Securities Administrators (CSA) is proposing an ambitious set of reforms that aim to reshape the retail investment business and provide clients with a better bargain from the industry. Yet, as the comment period for the proposals came to a close, the biggest outcry came from financial planners – and investor advocates.

The CSA published a set of proposals in late June that aim to improve industry conduct and produce better results for investors by nudging them toward lower-cost, more diversified portfolios that generate better risk-adjusted returns. Specifically, the CSA is proposing changes to suitability and conflict-of-interest rules to incorporate “best interest” principles, along with new “know your client” and “know your product” requirements, as well as curbs on referral fees.

Given the significance of the proposed changes, the CSA published its planned reforms for a longer than usual 120-day comment period, which concluded on Oct. 19, as Investment Executive was going to press. The initial feedback from the investment industry on the regulators’ proposals was sanguine – but investor advocates and financial planners were more critical.

Investor advocates are disappointed that the CSA is abandoning the idea of imposing a formal, overarching best interest standard on the industry.

The Canadian Foundation for Advancement of Investor Rights’ (a.k.a. FAIR Canada) submission to the CSA states that the investor advocacy group continues to “believe that a statutory best interest standard is necessary, desirable and feasible.”

FAIR Canada’s submission states that the CSA’s proposals may nudge the industry in the right direction, but they “will not achieve the profound shift necessary to ensure Canadians receive the objective, professional financial advice that is needed.” Primarily, that’s because regulators aren’t seeking to eliminate compensation structures that can leave investor and industry interests in conflict.

Moreover, FAIR Canada’s comment argues, requiring firms and financial advisors to resolve conflicts in investors’ favour is not the same as establishing a duty to act in clients’ best interests. The submission points out that the self-regulatory organizations (SROs) – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – already have rules that require investment firms to address conflicts in the best interests of their clients, yet that measure hasn’t produced an environment in which clients’ interests come first.

“The impact on investors,” FAIR Canada’s submission states, “include holding higher-cost mutual funds (thereby reducing returns), being sold proprietary funds rather than third-party funds (which are likely suboptimal), being charged embedded fees in fee-based accounts (overcharged, and possibly [for a] poorer-performing fund), failing to record interest earned on fund assets, being sold [initial public offerings] given commissions earned (high risk), being inappropriately placed in [deferred sales charge] funds, being sold [units in specific] funds due to payments and gifts by mutual fund manufacturers, such as bottles of champagne, Tiffany necklaces, lavish parties and sports and entertainment tickets, rather than as a result of choosing the investment [that’s] better for the investor.”

As a result, FAIR Canada’s comment continues, a best interest standard ultimately is necessary to produce a “transformation of the investment industry so that Canadians can achieve financial security.”

The submission from the Ontario Securities Commission’s Investor Advisory Panel (IAP), an independent investor advocacy group, states that a statutory best interest standard would be the ideal way for regulators to bring about improved industry conduct and better outcomes for investors. However, the submission acknowledges that “alternat[iv]e paths can be taken to arrive at much the same destination.”

With that concession in mind, the IAP’s comment endorses the CSA’s efforts to embed best interest requirements into the existing rules. However, the IAP’s submission stresses that regulators must be prepared to insist that the industry evolve in response to these rule changes: “Vigilant compliance and active enforcement will be central to ensuring the relationship between registrants and clients truly evolves from one that is focused on the selling of investment products to one driven by a professional ethos of providing beneficial financial advice. Regulators must insist that business models adapt to these changes. But even more fundamentally, a reshaping of industry culture will be needed to achieve the CSA’s [objectives].”

The IAP’s submission adds that the industry will benefit in the long run if pushed to adapt and ultimately evolves into a business that does a better job of aligning with its clients’ interests.

Meanwhile, submissions from the Investment Industry Association of Canada (IIAC) and the Investment Funds Institute of Canada (IFIC) argue for more clarity from the regulators on certain provisions and for greater flexibility for firms to comply with the new requirements in various ways. However, the IIAC and IFIC aren’t vehemently opposed to the underlying thrust of the proposed reforms.

Indeed, the IIAC’s submission states, the CSA’s proposals “in general represent a positive and necessary effort to create a level playing field in the wealth business, where firms are similarly regulated and clients protected regardless of the channel by which they enter the industry.”

Although industry groups aren’t arguing against the addition of best interest principles to the CSA’s rules, their submissions maintain that these principles should be harmonized with similar provisions that already are part of IIROC’s and the MFDA’s rules.

For example, IFIC’s submission states that the institute “supports the adoption of a best interest standard in the management of conflicts of interest that is consistent with existing SRO rules.”

The segment of the industry that’s most opposed to the CSA’s proposals is unregistered financial planners, who fear that the CSA’s proposals to curb referral arrangements will have major consequences for those financial planners. In particular, unregulated financial planners who provide clients with planning advice and don’t sell any products but instead refer clients to portfolio managers to implement financial plans, view the CSA’s proposed limits on referral fees as an existential threat to that business model.

The submission from the Vancouver-based Institute of Advanced Financial Planners (IAFP) states the group welcomes reforms that will require mutual fund dealers and their representatives to put their clients’ interests first and to combat situations in which reps are compensated for services they don’t provide (such as advisors collecting investment fund trailer fees without providing clients with ongoing advice or planning).

However, the IAFP is concerned that proposed curbs on referral arrangements “would reduce Canadians’ ability or inclination to pursue an ongoing relationship with a qualified financial planner.”