POS a ‘huge waste of money’

By Vikram Barhat | April 16, 2010 | Last updated on April 16, 2010
3 min read

Discontent with the new point of sale (POS) disclosure regime, proposed by the Canadian Securities Administrators, has become a little more strident.

Experts at the Strategy Institute’s recent Mutual Fund Point of Sale Conference expressed more than a hint of disapproval of compliance obligations that require proof that delivery took place within the requirements of the rule.

One of the reasons for the fund industry’s less-than-cheery reception is concern over the cost of compliance.

“Point of sale is a bad idea and a huge waste of money for everybody in the industry,” says Ellen Bessner, litigation partner, Cassels Brock and Blackwell.

The rule makes it mandatory for advisors to have written notes, or evidence in some other form, to prove to regulators that they indeed explained key details of the fund to their client at the point of sale. The ultimate objective is to ensure informed consumer choice.

“The assumption is that client wants to be educated and they want to know a lot about the products,” says Bessner. “I’d say there are many clients who do not want to and do not care to know or understand the products.”

She says those interested in knowing the product well can refer to sections of the prospectus that detail risks and information about who should be investing. “The prospectus is mandatory; clients have to get a copy. We should be using that prospectus better than we do already.”

As a defense counsel of advisors and dealers, Bessner says she routinely gets a number of cases with no handwritten notes. “So I’m not sure if we are really going to be able to convince the advisors to keep notes of their client meeting,” she says.

At the dealer level, she says, the regulators are going to be looking at the dealers to see what kind of education they are giving their advisors, and how they are going to monitor whether or not the facts are passed onto the clients.

Record keeping can be a complicated and costly affair, says Larry Boyce, senior vice-president, Sutton Boyce Gilkes Regulatory Consulting Group Inc (SBG).

He says, in a large firm, it can become a nightmare.

“The whole thing is a paper chase anyway. It becomes an operational question.”

Boyce is also cynical about the regulatory authority’s intention of client education. “There has been forever this wish on the part of regulatory community to somehow do something about the investor education,” he says. “So every time they get large piles of money building up… all of a sudden they set up some kind of a foundation or program for investor education.”

It is an exercise in futility made worse by a short lifespan, says Boyce.

“It is questionable whether it has any major effect. I don’t think it has. And very often these things get started with a great deal of excitement and then they quickly die,” says Boyce.

There were questions raised on the validity of the absolute need for investor education.

“How much do you expect a doctor to explain to you about the intricacies of whatever the diagnosis is, or a lawyer to explain intricacies about your legal situation so you can make the decision,” says Boyce. “How many investors really want to know something and how many just want to rely on the advisor to advise them properly.”

Boyce further says there is a lack of coherent philosophy and approach in the whole regulatory spirit.

“On the one hand they are saying it is the advisors responsibility to select the suitable investment for the client, understand everything about the client, and then recommend it to the client. And, on the other hand, they are saying an advisor can’t really be trusted to do that.”

This, he says, lead to the creation of “a whole other regime in order to make sure the client can notice when the representative is leading him down the garden path. This to me is an inconsistency of approach.”

It is argued that the proposed point of sale regulations smack of regulators’ distrust of advisors.

“Regulators are reinforcing this lack of trust issue by putting in these requirements,” says Bessner. “It is clear under the law that advisors are obliged to explain the product to the client. The question is how much and what precisely do they have to explain. And much of that depends on whether or not the client is sophisticated or interested.”


Vikram Barhat