As the final steps in the client relationship model, Phase 2 (CRM2), finally come into force in mid-July, more major regulatory changes on several fronts clearly will follow close behind.

At the end of April, the Canadian Securities Administrators (CSA) launched its promised consultation on both a “best interests” standard and a series of related “targeted reforms.” These include measures that aim to improve the client/industry relationship by altering the rules regarding conflicts of interest, “know your client” and “know your product” obligations. These reforms will be in addition to the new client statements required under CRM2, which will include much more detailed information about the costs and performance of clients’ investments.

Assessments of product and risk suitability also are likely to be under the regulatory microscope, as are the wide variety of titles used by advisors, among other issues. In addition, the CSA is expected to set out its plans for possible reform of mutual fund fee structures sometime this summer.

A separate white paper published by the Investment Industry Regulatory Organization of Canada (IIROC) late last year could touch off a debate about the future of industry self-regulation in Canada. (See Industry also call for change, below.)

Taken together, these initiatives are setting the stage for an even greater transformation of the Canadian investment business in the coming years.

The prospect of further fundamental reform is welcome and necessary to investor advocates. “The evidence is clear that several aspects of the business models currently used in the Canadian financial services sector cause harm to investors and to the market generally,” says Neil Gross, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), the Toronto-based investor advocacy group.

“It’s good that the CSA has acknowledged a need for change,” Gross says. “But the actual need is for profound change, and the question is whether the proposals [the regulators] are examining are sufficient to bring about profound change. In particular, the heart of the matter is whether conflicts of interest should continue to be tolerated.”

The question of how far regulators should go to bolster investor protection is sure to be hotly debated during the summer. The comment period on the CSA’s latest consultation paper runs until August 26, and the regulators indicate that there also will be roundtable meetings to explore some of these issues.

Yet, the best interests standard in particular is not a matter on which the regulators currently agree. The CSA’s paper highlights a philosophical divide within the CSA itself over the issue of whether there should be such a standard for advisors.

According to the CSA’s paper, Ontario and New Brunswick are most in favour. British Columbia is adamantly opposed – and not even prepared to consider feedback on the issue. The other provinces are somewhere in between those poles, sharing some of B.C.’s concerns about the potential negative consequences of introducing a best interests standard, but also willing to consult on the idea.

The Ontario Securities Commission (OSC) insists that a best interests standard is necessary for a couple of reasons. For one, the OSC believes that such a standard would make the targeted reforms about which the rest of the CSA agrees are necessary more effective. Maureen Jensen, chairwoman of the OSC, says that those proposed reforms aim to address known regulatory concerns. However, what she refers to as an overarching “aspirational principle” that requires advisors to put their clients’ best interests first would require dealers and advisors to do so in every circumstance. Investors deserve “nothing less” than a best interest standard, she adds.

This view is heartily endorsed by the OSC’s independent Investor Advisory Panel (IAP), which says that it supports the “immediate introduction of a best interest standard.” In a submission to the OSC, the IAP states that a best interest standard “is a basic first step in investor protection and it is long overdue.”

In addition, research from various regulators has shown that many investors already assume that advisors are required to put their clients’ interests first. And, Jensen says, the regulatory reality should match that perception.

Yet, this apparent willingness by investors to trust their advisors, and rely on them to put their clients’ interests first, is leading regulators at the British Columbia Securities Commission (BCSC) to the opposite conclusion on the question of a best interests standard. The BCSC’s regulators worry that investors already rely too heavily on their advisors, and that the adoption of a best interests standard will only give clients a further false sense of security. The BCSC also maintains that the proposed targeted reforms will significantly enhance investor protection, and that the inclusion of a best interests standard in those measures may create uncertainty for the industry.

The initial reaction from the industry has been to line up behind the BCSC’s position. Both the Investment Industry Association of Canada (IIAC) and the Investment Funds Institute of Canada indicate that they support the idea of the “targeted reforms,” but that a best interests standard isn’t necessary.

The IIAC suggests that the proposed set of targeted reforms, coupled with the final implementation of the CRM2 requirements, and the new point-of-sale disclosure regime for mutual funds (which took effect on May 30), will strengthen investor protection sufficiently and boost investor confidence. Adding a best interest standard, the IIAC argues, could create uncertainty and lead to higher legal and compliance costs.

Having any of these initiatives materialize into concrete policy changes is likely to take some time, and whether the various factions of the CSA can reach a common position remains to be seen.

The one thing that is becoming clear, however, is that those people who hoped that the CRM2 reforms would be the end of the road are likely to be disappointed.


The Ontario Securities Commission (OSC) publishes an annual draft of its policy agenda for the coming fiscal year – a laundry list of topics on which the regulator aims to make progress, as well as an outline of the plans to get there. The feedback the OSC gets on those proposals inevitably highlights other matters that also need attention.

This year, the OSC is receiving plenty of support for an agenda that’s heavy on retail investor issues, such as a “best interests” standard and mutual fund fee reform. Investor advocates, such as the Investor Advisory Panel (IAP), are pleased with this approach, but they’d also like to see the regulator take on other critical issues. These include improving access to retail investor restitution and enhancing the role of the Ombudsman for Banking Services and Investments as a venue for complaint resolution.

While the investment industry tends to push back against the seemingly ceaseless tide of reform proposals, the industry sometimes has things to add to the regulator’s to-do list. For example, the Investment Funds Institute of Canada (IFIC) recommends that the OSC help to lead an effort to provide specific protection to vulnerable investors, such as seniors, or to others who may be susceptible to financial abuse.

IFIC recently called on the OSC to work with the mutual fund industry and others to: identify barriers that may discourage dealers and financial advisors from dealing with issues involving “at risk” clients; work with the self-regulatory organizations to establish a regulatory “safe harbour” to help firms handle these clients; and develop regulatory guidance in this area.

In addition to these retail investor issues, a number of comments call on the OSC to add several corporate governance issues to its agenda this year. Along with calls for the regulator to keep pushing for greater diversity in corporate boardrooms and executive suites, to address assorted proxy voting issues and to adopt mandatory “say on pay” shareholder votes, several portfolio managers and shareholder advocates demand that the regulator revisit the requirements for companies to make disclosure about their environmental practices. These demands suggest that amid growing investor concern about such risks, such as climate change, regulators should re-examine both the adequacy of their policies and issuers’ compliance in these areas.

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