01 Attention, shoppers!
IIROC, the OSC and the MFDA have released the results of their joint mystery-shopping initiative, and advisors didn’t disappoint.
They scored “even better than anticipated,” says Prema Thiele, a partner at Borden Ladner Gervais in Toronto. She notes the initiative follows the lead of the U.K.’s Financial Conduct Authority (FCA). Three years ago, the FCA dispatched “actual actors to go out to their equivalent [of] IIROC members and pose as clients. It’s all an attempt to determine and assess what kind of value and disclosure is going on.” Mystery shoppers made more than 100 stops in Ontario, including at investment dealers, mutual fund dealers, exempt market dealers and portfolio managers.
Eighty-eight of those stops had sufficient data for assessment. “There were no examples of serious misconduct found that necessitated regulatory action,” says the joint report.
“Investors heard about investment products that advisors could sell in 78% of shops and were asked about their investment objectives in 89% of shops. Investors were less likely to hear about product fees (56%), be told about the risk/return relationship (52%), be asked for thorough know-your-client (KYC) information (32%) or be told about advisor compensation (25%).”
In 11% of the U.K. mystery shops, advisors gave their retail customers “unsuitable” financial advice; in a further 15% of cases, the advisor didn’t get enough client information to ensure their advice would be suitable. “Canada was much better—there’s no question about that. There was certainly a lot less non-compliance, but I felt the regulators were saying they still feel they’re scratching at the surface of things and not getting into the real weeds.” That would mean an in-depth look at advisors’ KYC procedures, says Thiele, who wonders, “Are they doing the deep dive?”
Another key area is fee disclosure. The report, she notes, says “a discussion of the specific advisor’s compensation occurred quite infrequently, [but] not the firm’s compensation […]. It was one of the least likely topics [to be] discussed between the advisor and the shopper.”
The report also flags the problem of inflated, confusing business titles. There are so many different titles in use that retail investors get confused about what services a firm or rep provides, the report says. “It overcomplicated the process of choosing and making that comparison, because people had such different titles,” Thiele explains. “Someone seemed to be so senior, but they had only five years of experience. They had a title that made them seem like they were in the industry forever.”
Thiele expects CSA and the OSC to launch an initiative that would require advisor titles to better reflect their training and experience. “That’s going to upset the apple cart, for sure,” she warns. “People really like their titles.”
02 CSA eyes fixed-income transparency
Back in June, we reported on the OSC’s assessment of the fixed income market, which highlighted lack of transparency in the bond space. In September, CSA acted on the report’s findings with a series of proposals.
Grabbing the most attention is the regulator’s announcement on corporate debt securities: “We propose that trade information for all corporate debt securities executed by dealers be made publicly available, subject to delayed dissemination and volume caps, by the end of 2017,” CSA says in Staff Notice 21-315.
The new system will be phased in over the next two years in two parts. In mid-2016, IIROC will disseminate post-trade information for primary dealers, and by mid-2017 it will cover all other participants. Reporting will be done through IIROC’s fixed income trade reporting system, the Market Trade Reporting System (MTRS 2.0). This information won’t appear in real time, but will lag one or two days after a trade. Depending on how ready MTRS 2.0 is, IIROC will announce exact dates of these phases and a more precise timeframe for information release by the end of this year. “A one-day lag’s not as good as it is in the U.S., where they wait 15 minutes,” says Joey Mack, director of fixed income at GMP Securities. Mack is referring to the Trade Reporting and Compliance Engine (TRACE) system that the Americans have been using for several years.
“The average investor there can go on the TRACE website and look up any corporate bond they’re considering and see where it traded in the last 15 minutes.”
In Canada, explains Mack, “there is no central place where Canadian fixed-income security pricing is made available to the public.
However, CanPX does have limited information, and the online brokers post inventories, while the newspapers used to have a select list of bond prices as well.”
CanPX is a government-mandated bond-market information service. Since last year, this joint venture between Canada’s major bond dealers and interdealer brokers has been posting the previous day’s price and yield highs, lows and closing levels for all 340 corporate securities it tracks. “My desk alone trades 2,000 securities at any given time,” notes Mack, “and there are 25,000-30,000 securities on any big bank’s book at any time.” He warns that, in fixed-income markets, there are so many different issues with so many different features. “More transparency on pricing is good, but may not necessarily help the average investor make informed investment decisions.”
Mack also feels that fixed-income trading will remain “a data challenge problem for all Canadian dealers,” but from a market perspective this announcement is overdue and welcome.
“You’re seeing more transparency. That’s going to be good for buyers. […] Before, you basically had nothing.”
New OBSI head wants greater enforcement powers
Canada’s new financial services ombudsman says she would welcome regulatory changes giving the organization more power to enforce its decisions—but notes such changes would come at a cost. Although OBSI can recommend that firms compensate clients up to $350,000, companies are under no obligation to abide by the organization’s decisions.
OBSI’s only enforcement tool is its “name and shame” mandate, which allows it to go public with its findings if a company refuses the arbitrator’s recommendations.
However, Sarah Bradley—the woman chosen to head up the organization after long-serving ombudsman Douglas Melville stepped down last spring—says that system contains weaknesses. “Nobody is really happy with naming and shaming,” says Bradley, the former chairwoman and CEO of the Nova Scotia Securities Commission.
“Binding authority, or the ability to make enforceable recommendations against firms, would, I think, be beneficial to the vast majority of our stakeholders, but we do have to also keep in mind that it will come at a cost,” she says.
Originally published in Advisor's Edge Report
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