Regulators scrutinized

By Vikram Barhat | December 3, 2010 | Last updated on December 3, 2010
4 min read

Financial intermediaries are still licking the wounds inflicted by the economic downturn, financial scandals and subsequent loss of client trust. Regulators, it would seem, couldn’t have chosen a more unfortunate time to twist the regulatory knife.

But advisors who take their business seriously will find a way to overcome challenges; they must pursue excellence in all seasons, said Greg Pollock, president and CEO of Advocis, speaking at the Distinguished Advisor Conference 2010 in Orlando, Florida.

He admitted that unnecessary regulation could be counter productive to financial advisors who seek to prosper by helping their clients achieve their goals.

“Regardless of the non-wavering commitment of yourselves to your clients, regulators are jumping into the fray,” said Pollock. He admitted that regulators are working in the best interests of the consumer, but not always effectively.

There are a large number of regulators engaged in making rules and overseeing the activities of financial advisors in Canada, said Pollock. “Added to the mix is the new national securities regulator, which, though a few years away, is likely to replace many but not necessarily all of the provincial securities commissions.” And that is what advisors are up against in order to just do their jobs and serve Canadian families, he added.

Financial advisors in Canada are amongst the most highly regulated. “We know that there are at least 50 regulatory commissions, government departments, and other entities in Canada that have a role in regulating financial advisors.”

These regulators are closely monitoring what’s happening internationally to see if what works there will work in Canada. Pollock was particularly critical of Canadians regulators’ one-size-fits-all approach to problem solving. That approach “is all too common among most Canadian regulators,” he said referring to the noises being made about advisors’ compensation structure as a result of the recent developments in the UK, Australia and the U.S.

Many financial advisors detest the regulation of the securities side, particularly from the MFDA. “Advisors consider the MFDA and their dealer compliance departments needless requirements (that) interfere with client relationships that the advisors consider belong to them.”

Admitting the regulators are here to stay, he stressed the need for proposed regulations to address real and identifiable problems while taking into account concerns of intermediaries. “The industry needs smarter and less proscriptive legislation that does not negatively impact advisors or their clients.”

He called for principles-based regulation that focuses on outcomes and identifying the bad actors. Additionally, he identified the need for an advisor panel that can participate in regulatory development. It comes down to who really is in the best position to understand the industry and client needs.

Pollock pressed his point further by citing the recent CRTC regulation which binds financial advisors by the same rules as other phone solicitors. “The intent of these initiatives is laudable; there’s nothing wrong with protecting consumers from online and phone calls or emails,” he said. “But this has to be balanced to accommodate legitimate business practices of our industry that in the end benefit the consumer.”

Creating a Catch 22, the regulation says an advisor can’t call a prospective client without a prior consent, and they can’t email them to get that prior consent. “Maybe the CRTC wants us to build our businesses by carrier pigeon or smoke signals.”

On the subject of financial literacy in Canada, he said financial advisors can and must lead the charge. “There is no one group better positioned to make the goal of financial literacy a reality than (financial advisors), dedicated to the financial welfare of Canadian families.”

Pollock also questioned the rationale behind increasing attention on banning commissions to impose a strict fiduciary standard. The problem with arguing publicly against the fiduciary standard is that this could be seen as the financial intermediaries arguing against putting the client first. Pollock, however, insists there’s an important difference between putting clients’ interest first and being a strict fiduciary.

“We should be careful not to agree too quickly that financial advisors should be subject to a strict fiduciary standard,” said Pollock. “We do need to fully understand the implications.”

One of the main concerns about the fiduciary standard is its severity. Once any failure to fulfill the duty of care is found, no matter how small, the financial advisor who is a fiduciary will be 100% liable. “Legally, this has a huge implication for the cost of doing business for an advisor.”

The issue of compensation rarely fails to raise doubts about honest execution of fiduciary duty. “The commissions that are at the heart of the distribution system benefit consumers by making it possible for thousands of knowledgeable, professional financial advisors to provide ongoing service to their clients,” said Pollock. “Any dramatic re-engineering of the system is liable to result in dramatically reducing consumer’s access to these informed services.”

The industry, he said, needs to prevail upon regulators and policy makers to take an incremental regulatory approach that maintains commission-based compensation for sellers. “In a perfect world all consumers would have access to professional financial advisors, and financial advisors would offer advice that is untainted by the bias in conflict of interest,” he said. “And then there’s the myth that Canadians would happily pay for professional financial advice separately from financial products.”

Pollock also warned that “a quest for a perfect system, where advice is entirely free of any possibility of bias, could wreck a good system that serves Canadians very well.”

He expressed belief that Canada would not, in all likelihood, adopt the same kind of financial advice reforms as in the U.K. and Australia. “Canada has not experienced the kind of systemic scandals that have undermined confidence in financial services industry of the scale and severity that has lead to reforms in the U.S., U.K. and Australia.”

Vikram Barhat