April 13, 2017: This story has been corrected to reflect that the regulatory policy alternatives report was commissioned by the Ontario government, not written by the government. Finance Minister Sousa, however, has said he would use the report’s recommendations.
If you’ve been focusing on CSA’s proposed reforms, it’s time to switch gears. The Ontario government is close to implementing its own, very similar changes.
No official legislation has yet been released, but Finance Minister Charles Sousa says a report to the Ontario Ministry of Finance will be used to “develop and deliver specific consumer protection measures” for the financial industry. The latest version of the report, written by an expert committee Sousa appointed last year, was released the week before Budget 2017 and dated Nov. 1, 2016. The report provides further detail on how the ministry could:
- introduce a new financial regulator, called the Financial Services Regulatory Authority or FSRA. It would act alongside OSC and take the place of FSCO;
- curb the inappropriate use of titles (e.g., “financial planner” and “financial advisor”) and tweak the proficiency standards for professionals using such titles;
- harmonize regulation across Ontario’s various bodies; and
- introduce a statutory best interest duty (SBID).
According to Sousa, what you see in the latest report is what you’ll get.
Sousa spoke this morning about the government’s recommendations, telling attendees of the New Paradigm of Financial Advice conference, hosted by three think tanks, that “the financial services industry will continue to play a major role in [Ontario’s] economic growth,” and that the focus should be on “better serv[ing] customers” as the industry changes.
During a post-speech Q&A, Sousa noted that while further consultation will occur, the current recommendations already take into account research and industry commentary that has been collected since June 2015. More specific information on legislation changes will appear in the 2017 Ontario budget, he added, and throughout the coming year.
The question is how many will be impacted by Ontario’s possible regulatory changes, as well as whether concurrent changes by bodies such as CSA will be considered. The goal is to streamline regulation, not make it more complicated, but that’s easier said than done.
- Investors want a best interest standard
- Industry struggles with hurt feelings, debates principles at CSA roundtable
Breaking down the recommendations
If you look at the final report, the expert committee is mainly concerned about consumer confusion, and about financial planners and activities that fall outside of the scope of current regulations, leading to “financial planners performing work without […] oversight or specified proficiency requirements.”
Regarding the new regulator, the report says the mandates of the OSC and FSCO/the proposed FSRA should be “statutorily broadened” so they can regulate the financial planning and advice space. It adds, “No individual or firm should be permitted to provide, or hold out as providing, financial planning or financial advice without regulatory oversight.”
The goal is that anyone working outside of IIROC, MFDA and OSC be regulated.
Regarding financial planning titles, the committee proposes these regulators “develop a circumscribed list of approved titles that are descriptive of regulated activities. Those engaged in financial planning and the giving of financial advice should only be permitted to use approved titles,” says the report, noting these titles would be clearly defined for consumers.
To come up with a list of approved titles, the committee also wants to set the bar when it comes to what is considered “sufficient education, training, integrity and experience” for those using the financial planner title. In a release, IIROC says its reps “must meet and abide by high-quality regulatory standards” already, but that it will remain active in consultations.
The report says, “We recommend that the regulators [meaning OSC and FSCO/FSRA], following a review of independent credentialing bodies with experience in the field of standard-setting and credentialing […], recognize the appropriate credentialing entity or entities to credential individuals who wish to hold out as financial planners.”
There’s some slack when it comes to a potential SBID, a measure that Sousa concedes is “contentious.”
But the report suggests professionals only be exempt if they’re already subject to such a duty (e.g., portfolio managers) or where an individual firm “operates an order execution platform and no financial planning or financial advice is being provided to the customer” (e.g., a discount broker). And while CSA’s proposed best interest standard wouldn’t create a fiduciary duty, the recommended SBID would.
The report says, “Under a SBID, conflicts of interest must be avoided or controlled in a manner that prioritizes the client’s best interest.” But, have no fear, the report adds: “a SBID would neither guarantee return nor restrict compensation. Rather, it would more clearly delineate financial planners’ and financial advisors’ legal responsibility to provide unbiased, consumer-focused advice.”
Danger of overlapping rules?
It’s not lost on Sousa that CSA is hot on his heels with its proposals.
During the post-speech Q&A, he noted the committee’s recommendations are “not new,” but that the committee suggests regulators come up with “a common definition” of what it means to provide financial advice and regulate the activity. The report says “there have been several previous attempts” to better streamline regulations but that “Ontario should not wait for members of the CSA to act,” given CSA’s recommendations aren’t yet implemented and they “would apply to the securities sector only.”
During his speech, Sousa also pointed out, “We are making strong progress with our partners toward the establishment of the CCMR.”
Plus, Sousa announced the government will give SROs like IIROC and MFDA the ability to pursue disciplinary fines through the courts. While these fines aren’t used to pay investors for losses, they are used for protection initiatives, says IIROC in a release, and can be a “deterrence to potential wrongdoers.”
At today’s event, IIROC CEO Andrew Kriegler told Advisor.ca that he can’t comment on the government’s plans to, as the report says, create “a consumer-friendly process for recovery of financial losses from firms or individuals” that have provided “negligent financial planning, financial advice and financial product sales services.” It’s unclear where this money would come from.
However, Kriegler is optimistic about IIROC getting court access. Currently, “we can kick people out of the industry, but they can still go practice somewhere else and avoid paying fines.” This will give enforcement “more teeth” and raise IIROC’s collection rate, he adds.
When asked to comment on the Ontario government’s desire to regulate both financial planning and financial advice—the latter term wasn’t used in past committee reports—Kriegler said consultations showed “it’s difficult to separate the two activities, so they’ll be regulated together and treated equally.”
Overall, the response to the expert committee’s recommendations has been positive. Along with IIROC, FPSC, Advocis and PMAC have responded with praise.
In a phone interview that preceded today’s speech, PMAC CEO Katie Walmsley and in-house legal counsel Melissa Ghislanzoni commented on the report. Walmsley says she’s pleased the government may take more of a titles-based approach versus an activity-based approach, given they’re targeting those holding themselves out as financial planners. She says, “That reins in the scope. It was going to be very muddy in terms of [impacting] some of the work that credit counselors, lawyers and accountants do.”
Ghislanzoni points out there’s been “an express carve-out when it comes to the SBID,” a feature of all consultations so far. “This is practical and is in the best interests of investors,” and would protect portfolio managers.
PMAC also supports the creation of a centralized registry for financial planners, another of the proposals. It’s unclear whether CSA’s current registration database will be leveraged.
For the next few years, PMAC will monitor how regulations are streamlined, given the report mentions the Cooperative Capital Markets Regulatory System and CSA proposals but offers little detail on that front. “There was a reference to the CCMR,” but no details on how these changes and the FSRA would be integrated into the CCMR, “which is not too far off in 2018.”
FPSC, as a standards-setting and certification body for CFPs, says it “looks forward to lending its expertise to the government in the months ahead” in its release. It adds, “Canadian consumers will benefit if they have the knowledge and certainty that the people who hold themselves them out as financial planners have recognized qualifications.”
And, in an emailed statement prior to today’s speech, Advocis CEO Greg Pollock told Advisor.ca he also looks forward to “further consultations.” Following today’s speech, he said, “We fully support today’s announcement and the government’s acknowledgment that more regulatory changes are needed to protect the public. Because of fragmented and inadequate regulation, […] anyone can call themselves a financial advisor or planner, regardless of education or training.”
He adds, “There’s no industry-wide oversight or disciplinary process across the securities and insurance markets.” Overall, he says, “Every financial advisor should belong to a professional body and be required to adhere to minimum proficiency standards, a common code of conduct and a disciplinary process that has the authority to suspend an advisor who has wronged an investor.”