CSA’s one-size-fits-all proposal is short-sighted, say industry comment letters

November 25, 2016 | Last updated on November 25, 2016
5 min read

Firms and advisors require flexibility to serve different clients. That’s the emerging theme in comment letters from investment houses on CSA’s proposed targeted reforms and best interest standard.

In a comment letter, four partners from Borden Ladner Gervais (BLG) sum up the consensus: “A one-size-fits-all regulatory regime does not recognize different […] business models and client relationships.”

Laura Paglia is one of those partners. “ ‘One-size-fits-all’ is meant to reference not only a proposal that is ill-suited across registration categories,” she tells Advisor’s Edge Report, “but also within the category […] the paper appears to be most focused [on], and that’s the investment advisor in an advisory relationship. Those relationships vary in spectrum as well.”

Proposed targeted reforms

The BLG partners write that, in effect, CSA’s proposed targeted reforms, released in the spring for consultation, mean “every client will need to undergo […] some form of a financial plan with their dealer (of any category) or adviser. This just does not make much sense.”

For example, they cite the client who simply wants to make an annual RRSP or RESP contribution or invest in a private equity fund.

The question is whether that would be in the client’s “best interest.” CSA has proposed that advisors should have a duty to act in the best interest of the client when providing investment advice.


Many commenters question the implications of collecting more client information—especially clients’ basic tax positions. Katie Walmsley, president of the Portfolio Management Association of Canada, and Margaret Gunawan, a director at BlackRock, comment that the requirement may exacerbate “the expectations gap by causing investors to believe that they are receiving tax […] advice.”

Says Paglia: “The CSA should not be aiming for a forms-based approach to regulation. Client knowledge and information comes from a variety of sources, including working with a client over a span of years and the instructions that they give, the conversations that you have—that’s not necessarily all on the [KYC] form.”

Conflicts disclosure

Under the proposals, firms and advisors would also be expected to confirm clients understand disclosed conflicts of interest.

“We believe in plain-language disclosure,” says Paglia, but that’s different from ensuring client comprehension, which is impractical.

Jeffrey Carney, president and CEO of Investors Group, comments the expectation is tantamount to “an objective test that requires a subjective determination as to a client’s state of mind.” Further, he says if firms and advisors fear increased liability from the proposed reform, many may serve only financially savvy clients, leaving those who most need advice to their own devices.

If clients must sign a form acknowledging comprehension, the requirement becomes “an administrative burden to clients, and unreflective of a typical communication pattern within a client relationship, which frequently relies on telephone or email,” Doug Guzman and Jennifer Tory, group heads at RBC, say in their comment.

Many advisors say the effects of POS and CRM2, requiring additional disclosures on mutual funds and fees, should inform any new disclosures.

KYP and suitability

Som Seif, president and CEO of Purpose Investments, calls the market investigation requirement for firms with mixed/non-proprietary shelves “prescriptive” and “onerous,” and likely to result in limited or more proprietary shelves.

He says the focus on approved product lists emphasizes product selection over asset allocation, which is “the prime contributor” to an appropriate portfolio. New products will aim to match the selection process, he says, not client needs.

Carney comments that all advisors have the potential incentive to recommend only the firm’s product list, whether it’s proprietary or mixed/non-proprietary. He therefore urges CSA not to tie suitability to product lists.


The consensus: none of the proposed options provides clarity for clients. And reducing an advisor’s title to “salesperson” (as CSA has proposed for some categories of reps in options one and two) devalues an advisor’s services, comment Guzman and Tory.

Carney says using “salesperson” for advisors in firms using proprietary product lists ignores the breadth of the lists, access to third-party portfolio management, and advisors’ potentially superior knowledge of proprietary lists. Further, he suggests the proposal’s attempt to categorize advisors is ironic considering the best interest proposal’s one-size-fits-all approach.

Some commenters, including Walmsley and Gunawan, suggest any new titles be rolled out with an investor education campaign.

Proposed regulatory best interest standard

There’s tentative support for the proposed best interest standard, with the caveat that national consensus—a non-starter—is required to avoid a fractured, uncertain regulatory framework.

But the proposed standard “doesn’t recognize the extent to which the law is informed by regulation,” says Paglia. “To draw this silo between a legal or statutory standard and a regulatory standard is a false silo. […] What it’s doing is de facto imposing a fiduciary standard on all registrants.”

That doesn’t concern Seif. He prefers the proposed standard to the reforms, seeing it as a way to close the expectations gap and ensure flexibility for advisors to consider products beyond a firm’s list. He comments: “No amount of conflicts of interest disclosure or rigorous KYP procedures can replace matching up the expectations of investors with the actual obligations of their advisors.”

Investors lose

Comments from investment houses repeatedly stress the proposals will hurt investors. The cost of advice will increase and shelves will narrow, diminishing choice and innovation.

Barry McInerney, chief executive of Mackenzie Financial, warns CSA’s forthcoming decision on banning embedded commissions may affect advice access and affordability, as might these proposals.

Citing 2015 research from Investor Economics, he says investors with less than $100,000 in investable assets make up 80% of Canadian households. In 40% of these, financial advice is sought for assets not more than $10,000.

Asks Paglia: How do the proposals affect average Canadians, most of whom are probably small investors? She notes that CSA fails to provide statistics on account sizes and how they vary countrywide, which are needed to assess if the proposals are viable for most Canadians.

With the proposals, Paglia adds, is CSA ultimately saying small Canadian investors should be subject to a different model—one without an investment advisor?

“That is the real risk,” she says.