As the Canadian financial advisory industry awaits a verdict from regulators on the question of whether they will impose a fiduciary duty on the provision of retail investment advice, a similar debate is taking place south of the border.

The U.S. Department of Labor (DOL) has been holding a series of public hearings regarding a rule proposal unveiled earlier this year that would impose a fiduciary duty on various forms of retirement advice. During four days of hearings in mid-August, the DOL heard from approximately 75 witnesses debating the merits of requiring financial advisors to act in their clients’ best interests. The hearings followed almost 2,600 comment letters and 20 petitions, the latter reflecting the views of almost 330,000 individuals, that were submitted on the proposal.

That level of engagement in a regulatory debate may seem outlandish to Canadian policy-makers, but the crux of the arguments underlying the massive volume of feedback would be entirely familiar. For example, just as the Canadian Securities Administrators heard in the responses to a consultation paper it issued in 2012 and in a series of roundtable discussions held in the summer of 2013, much of the financial services sector in the U.S. is opposed to the DOL’s proposal. U.S.-based firms argue that holding advisors to a fiduciary standard will raise costs, cause certain investors to lose access to advice and reduce investor choice.

Conversely, consumer and investor advocates are in favour of a fiduciary standard on the grounds that the suitability standard is inadequate and that advice often is marketed to investors as if it will be in clients’ best interests. So, the financial advisory industry should be obliged legally to live up to that standard in practice.

In fact, even Canadian investor advocates are arguing in favour of the DOL’s proposal in the hope that, if nothing else, the adoption of a fiduciary duty in the U.S. might help to push Canadian policy-makers in that direction as well.

“In Canada, our regulators are greatly influenced, if not controlled, by the industry, with the result [being that] there has been little advancement in investor protection for decades,” says the Toronto-based Small Investor Protection Association Inc.’s (SIPA) comment to the DOL.

“We applaud the [DOL] and President Obama for their stance on implementing fiduciary duty with regard to retirement savings,” the SIPA comment adds. “We fully support this initiative. We remain hopeful that your actions may have influence on our government in Canada.”

At the same time, several firms with Canadian roots also weighed in on the U.S. proposal, with varying degrees of opposition. On the dovish side, Toronto-based Bank of Montreal’s comment recommends a series of modifications to the proposal to ensure firms can provide certain kinds of investor education and information without attracting fiduciary standards and liability, yet still holding firms and advisors to those standards when they’re providing genuine investment advice.

TD Ameritrade Inc.’s comment is somewhat more vehement in that firm’s opposition to the rule, arguing that a fiduciary duty will restrict investors’ access to information and advice, as well as create confusion among investors.

Yet, TD Ameritrade’s comment adds that the firm supports fiduciary standards for certain kinds of advice: “The [DOL] should respect the intelligence of the retail investor as we do and allow brokerage firms to continue to provide investment choices, education, tools and assistance, and when making a specific recommendation, do so under a best interest standard. This is attainable and the industry is supportive.”

Some in the U.S. financial services sector expressed support for a fiduciary standard – just not the rule the DOL is proposing. Rather, if there is to be a “best interests” standard introduced, the U.S. sector wants securities regulators – namely, the U.S. Securities and Exchange Commission (SEC) along with the Financial Industry Regulatory Authority (FINRA) – to establish and enforce that standard.

As part of the post-financial crisis reforms in the U.S., the SEC has been charged with developing a uniform fiduciary standard for broker-dealers, which currently are held only to a suitability standard, and for investment advisors, who are subject to a fiduciary standard already.

However, the SEC has yet to put forward a proposed common standard. And in the absence of such progress, the DOL has decided to push ahead with its own proposal. Now, an argument has arisen about whether the DOL should team up with the SEC to devise a joint standard.

Says the comment from Toronto-based Royal Bank of Canada (RBC) to the DOL: “We strongly believe that a uniform standard promulgated jointly with the SEC is the more practical, common sense solution and would result in a greater benefit to investors (including retirement investors) and less disruption and interruption of services for our client base.”

RBC’s comment recommends that the DOL, along with the SEC and banking and insurance regulators, develop a best interests standard that applies to all financial services professionals for all types of accounts: “Such a standard would be established in conjunction with the SEC and FINRA and be premised on identification and management of conflicts, targeted fee and product risk disclosure, and effective management of compensation incentives.”

Although the advisory industry in the U.S. appears to be opposed to the introduction of a fiduciary standard for retirement advice in general – or, at the very least, reluctant to have that standard introduced via the DOL – the DOL apparently is committed to going ahead.

In early August, Thomas Perez, the U.S. Secretary of Labor, sent a letter to a group of U.S. legislators who had expressed concern about the DOL’s proposal and its impact on the advisory industry, indicating that the DOL doesn’t intend to back down and that the hearings were primarily about ensuring the final rule is both effective for investors and workable for the industry.

“We will move forward toward issuing a final rule that balances the input we have received,” Perez says in the letter. “[T]he cost of inaction is too high.”

The U.K. launches new review

As policy-makers in both the U.S. and Canada struggle with the question of whether tougher investor protection measures will lead to a shortage of financial advice, the U.K. is launching its own inquiry into the so-called “advice gap” and what can be done to close it.

In early August, the U.K.’s Financial Conduct Authority and the H.M. Treasury unveiled plans for their Financial Advice Market Review (FAMR), a study to devise ways to make financial advice work better for consumers.

The review will examine whether there’s a lack of affordable advice available to households with lower net worth; whether regulatory or other barriers are limiting the ability of firms to provide advice to these clients; and what can be done about it. The FAMR also will consider emerging technologies for providing advice, commonly known as “robo-advisors.” And the review will look at ways to increase the demand for advice as well.

The entire legal and regulatory framework that governs the provision of financial advice in the U.K. will be up for review as part of the study, as will the system for providing redress in cases in which consumers suffer due to bad advice.

The broadly based review will gather evidence in a wide range of markets, not just regarding investments. The FAMR also will look at mortgages, consumer credit and insurance markets. Once the review identifies the major problem areas, it will focus on developing recommendations in time for the British government’s 2016 budget, which would be delivered next March.

Although the FAMR’s purpose is to uncover problems in and devise solutions for the U.K. market, the review’s findings will be followed closely in Canada and the U.S., where the U.K.’s recent reforms (such as the elimination of third-party commissions) have attracted plenty of attention from regulators, investor advocates and the investment industry.

Indeed, several witnesses at the U.S. Department of Labor’s (DOL) hearings into its proposed new fiduciary rule made reference to the FAMR – calling upon the DOL to wait for the results of that exercise before going ahead with a rule.

© 2015 Investment Executive. All rights reserved.