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01. Investor and advocate comments on CSA proposal 33-404

Investors support CSA’s proposed regulatory standard for advisors to act in the clients’ best interest, saying the current suitability and disclosure standards aren’t good enough.

While some investors support the proposed securities regulatory standard, others are pushing for a statutory rule.

The OSC Investor Advisory Panel’s (IAP) commented on CSA proposal 33-404, saying, “Embedded fee structures and other drivers of conflicts of interest would be eliminated within a best interest framework.”

The panel adds: “It would shift the conversation between advisors and clients from one that is focused on a sales transaction to one that is driven by professional standards of financial advice that is in the client’s best interest.”

Only a fiduciary duty provides that shift from sales approaches to professional standards, writes Andrew Teasdale, CFA, in a separate comment. The proposed standard is more accurately called a “best product standard,” he says.

Instead of focusing on standards for transactions, regulation should focus on processes for the construction, planning and management of assets, he says. Kenmar Associates, an investor education and protection group, agrees.

Arthur Ross, a retired senior, calls suitability “a cunning wealth-management industry invention to provide regulatory cover for conflicted advice.” He sees the KYC form as the closest thing the industry has to explicitly inform suitability, but says the form can’t match a transaction to a client’s financial needs. He supports KYC reforms, along with better risk profiling, and says both client and registrant should sign the form.

Kenmar Associates suggests an additional targeted reform to improve dealer complaint handling. Investor complaints were part of CSA’s research informing the proposal, and comments reveal palpable frustration with the status quo.

For example, Alan Blanes, on behalf of his father, Harold Blanes, appeals to article 29 of the Universal Declaration of Human Rights, which says in part, “Everyone has duties to the community.” With that in mind, Banes asks for a ban on “mindlessly sending people with grievances to a quagmire of unmotivated and apathetic ‘resources’ that refuse to acknowledge any duty to help.”

IIROC and MFDA complaint-handling rules need an overhaul, he says, coupled with enforcement. He suggests a timely followup process on fraud reports made to regulators and service agencies.

Along with others, he cites an evaluation report on OBSI’s mandate: in 2015, 18% of non-backlog complainants to OBSI who should have received compensation received less than what OBSI recommended—$ 41,927 less, on average. OBSI requires binding authority, says Blanes.

Concern that the proposal will create an advice gap is misguided, says the IAP, noting that only 56% of Canadians currently use an advisor. Thus, a best interest standard provides a platform on which to grow. Further, the U.K. has reported no increase in the advice gap after the introduction of a best interest standard.

Many comments highlight that seniors rely heavily on financial advice, since fewer retirees have pension plans. When it comes to advisor titles, “the industry is using made-up titles to deceive investors,” especially seniors, says Ross. Peter Whitehouse, a retiree, gives the examples of “seniors specialist” and “retirement expert.”

In contrast to the three proposed title options, the Canadian Foundation for the Advancement of Investor Rights (FAIR) offers a simple title distinction:

Use “advisor” for those with a statutory best interest duty, which the group says goes hand-in-hand with a ban on embedded commissions. For everyone else, FAIR says, use “salesperson.”

02 Legislation passed to create new Ontario regulator

If you’re licensed to sell life insurance or segregated funds in Ontario, you’ll soon have a new regulator: the Financial Services Regulatory Authority (FSRA), which will replace the Financial Services Commission of Ontario (FSCO).

FSRA will oversee insurance companies, pension plans, loan and trust companies, credit unions, mortgage brokers and co-operatives.

Upon review, FSCO was deemed reactive and lacking in funding, says Jill McCutcheon, a partner at Borden Ladner Gervais.

That’s because the demands of Ontario’s financial markets outgrew the current structure and mandate of FSCO, says Lawrence Ritchie, a partner at Osler, Hoskin & Harcourt. He was part of the expert panel that recommended the creation of the new regulator after reviewing the mandates, structures and governances of FSCO, the Financial Services Tribunal, and the Deposit Insurance Corporation of Ontario.

“Convergence of financial products […] gives rise to overlap of regulatory jurisdiction and an increased regulatory burden,” says Ritchie.

The panel recommends that regulators work together: “The idea is there would be a specific statutory obligation to co-operate and integrate regulation” of similar products or activities, says Ritchie. Consumers would thus “benefit from the same level of regulation regardless of who the regulator is,” and advisors and manufacturers or distributors of financial products would benefit from a reduction in overlapping regulation.

There are almost 20 different insurance regulators across Canada, notes McCutcheon, because of shared federal and provincial jurisdictions. The new regulator will be an independent body—and that’s an international best practice principle, she says.

Of note is the recommendation that FSRA share information on disciplinary and enforcement actions with other regulators, which doesn’t happen as often as it should (see our June 2016 Advisor.ca investigation on the matter). Other recommendations (among a total of 44): syndicated mortgages, currently subject to FSCO, should be subject to securities regulation; and FSRA should require the disclosure of costs for products and services.

Yet another independent committee is reviewing Ontario’s regulation of financial planning and advisory services, with its final report expected in early 2017.

“It’s part of that overall commitment that customers [be] treated fairly,” says McCutcheon, noting an office of the consumer is also being created. “These are all pieces of one puzzle […] to modernize [how] business in the financial sector is regulated in Ontario.”

by Michelle Schriver, assistant editor of Advisor Group.

Originally published in Advisor's Edge Report

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