The Canadian Securities Administrators (CSA) has published a staff notice that looks at firms’ compensation arrangements and incentive practices that are used to motivate representatives’ day-to-day behaviours.
The notice, called the CSA Staff Notice 33-318 Review of Practices Firms Use to Compensate and Provide Incentives to their Representatives, sets out associated potential conflicts of interest related to those arrangements.
The notice is part of the CSA’s ongoing work to address concerns arising in the client-registrant relationship. This work includes CSA’s proposed targeted reforms and best interest standard (BIS), and the upcoming consultation on embedded commissions.
In proposal 33-404, which proposed targeted reforms and the BIS, CSA indicated it would publish a notice summarizing compensation practices impacting representatives by the end of 2016.
So, the new notice, 33-318, lists the wide range of practices used to compensate reps. This includes direct tools such as commissions, performance reviews and sales targets, as well as indirect tools such as promotions and the valuation of representatives’ books of business.
In total, 27 compensation practices are listed, some cited for potential conflicts and some not. For example, some integrated firms offer incentives to favour proprietary products and that can create serious conflicts, says the notice. That can result in inappropriate advice or inferior client outcomes.
On the other hand, compensation based on qualitative client feedback — through surveys or outcomes, for example — isn’t cited for potentially creating conflicts. That’s because compensation is tied to client experience.
This compensation arrangement and incentive practice research was conducted in 2014 and focuses on practices in use for retail representatives at large financial institutions that serve clients in the MFDA and IIROC channels, as well as high-net-worth clients in the portfolio manager channel.
The CSA may issue further guidance or proposed regulation in light of its ongoing work to enhance the client-registrant relationship.
Read the notice here.