The Ontario Securities Commission (OSC) has clarified that it’s conducting compliance exams at five bank-owned mutual fund dealers following a survey in which mutual fund reps said clients had sometimes been recommended products or services that weren’t in their interests.
“The next phase of the work involves focused compliance examinations of the bank-affiliated mutual fund dealers related to specific concerns identified in the survey,” OSC spokesperson Andy McNair-West said in an email on Thursday. “We are now conducting these examinations, including obtaining and assessing information” — such as the use of scorecards — “directly from each of the five bank-owned mutual fund dealers.”
The survey on sales culture was a joint effort by the OSC and the Canadian Investment Regulatory Organization (CIRO). When the regulators released their report in July, they said they would focus on “obtaining and assessing information” to understand the dealers’ sales practices.
“As consumers and investors, we don’t need another study,” consumer advocate Harvey Naglie said. “We need some action.”
In his email, NcNair-West said, “To clarify, the OSC is not undertaking research but rather has established a multi-phase regulatory initiative in response to a media report.”
CBC media coverage last year of strong-arm sales tactics at the banks’ fund dealers motivated the regulators to conduct the survey, which considered such things as sales environment and sales pressure arising from scorecards — “providing information about key areas of concern that we need to explore in more depth,” McNair-West said.
Of nearly 2,900 mutual fund reps at Ontario branches of the banks’ fund dealers, 25% said clients have been recommended products or services that aren’t in their interests at least “sometimes.” (The research considered mutual funds only, not products such as credit cards and mortgages, which the reps can also offer.) The regulators said the finding may be tied to compensation, incentives and performance metrics — scorecards, in particular.
One-third of the reps said clients have been provided with incorrect information about products and services recommended to them at least “sometimes.”
The findings indicate “a cultural failure inside the banks’ sales force,” consumer advocate Harvey Naglie said. “Unsuitable advice is not the exception — it’s systemic.”
Further, “every month of delay [in meaningful regulatory action] simply means more investors are steered into unsuitable products.”
But Laura Paglia, CEO of the Canadian Forum for Financial Markets, said the regulators’ research provided insufficient evidence to establish a systemic problem: “Broad questions were asked of various employees, and answers [were] provided sometimes based on perceptions and sentiments.”
Most of the mutual fund reps in the survey were licensed only, with no other credentials. On average, 10% of their pay was variable.
Regarding perceptions, 23% of the reps agreed there is high pressure to sell potentially unneeded products or services to clients, for example, while 60% disagreed. The regulators described the 23% as a “sizable minority” that is “concerning.”
Still, Paglia questioned why the regulators’ response would be to gather information, including about scorecards.
“CIRO and the OSC would already have access to [the dealers’] scorecards in light of the powers they already have,” Paglia said. “They audit them, they review their complaints, they review their compensation practices.”
The compliance exams will “enable us to obtain an understanding of the sales practices in place at these firms and how they may impact the behaviour of mutual fund dealing representatives, as well as any potential impacts to investors,” McNair-West said in the email.
Thursday’s email repeated the July report: “Once we have completed our review and analysis of the information from each of the five bank-owned mutual fund dealers, we will consider the regulatory tools available and determine whether further action is required to ensure ongoing compliance with securities laws.”
“We have an entire supervisory system in place,” Paglia said, to prevent unsuitable product sales.
Naglie isn’t holding his breath as the regulators learn more about the bank-owned dealers’ sales practices — whether they call it a review or research or an exam.
“You can sell a lot of crap to people under the suitability guise — and we have, as a country and as a financial services sector,” Naglie said. “Sadly, it looks like we will continue to do just that.”