As Canada’s financial-sector regulators increasingly look abroad for best practices, it’s important to understand the measures undertaken in other jurisdictions.
That’s the reasoning behind an IFIC report that focuses on key measures implemented in 16 countries, including imposing a fiduciary duty on advisors, enhancing transparency and disclosure, improving advisor proficiency and banning embedded commissions.
The report finds that only 13% of total worldwide mutual fund assets of $39.4 trillion are covered — or slated to be covered — by embedded commissions bans.
In fact, there are considerable variations and inconsistencies in the types of products being regulated, reveals the report, with some jurisdictions imposing restrictions on only investment products, while others cover virtually all deposit, insurance, investment, mortgage and other commission-driven products.
Here’s a summary of IFIC’s key findings.
Embedded commissions bans are triggered by local circumstances
Of the four jurisdictions with bans (Australia, the Netherlands, the U.K. and South Africa), the decision to ban embedded commissions was triggered by local circumstances in three of the four.
For instance, the Australian reforms were established in reaction to the collapse of three major financial firms. In the Netherlands and the U.K., a commissions ban was introduced following a number of selling scandals in the insurance and mortgage sectors.
Seven countries have ruled out a total ban on embedded commissions (Denmark, Ireland, Sweden, Hong Kong, Germany, New Zealand and Singapore). In these countries — as well as in others — targeted reforms have been implemented.
“Targeted reforms are better able to address the underlying issues while leaving investor benefits intact,” says the report, which suggests the unintended consequences of a ban are higher investor costs, decreased product choice and an advice gap.
Few jurisdictions have a fiduciary or best interest standard
Australia is the only country to adopt a broad statutory best interest standard for advisors in the sale of retail funds.
In the U.S., the Department of Labor adopted a rule that expands the definition of fiduciary under the Employee Retirement Income Security Act by requiring investment advisers who provide advice for retirement accounts — including broker-dealers and insurance agents — to abide by a fiduciary standard. Compliance with the rule is scheduled for June 9, 2017.
Enhanced disclosure is the favoured regulatory option
“The majority of markets have made enhanced disclosure a key element of newly developed financial principles and policies,” says the report. Enhanced disclosure initiatives have been implemented in every country reviewed except the U.S. The majority of disclosure has come in the form of detailed information on fees and commissions to improve transparency.
Overall, “There is no consensus on how to deal with potential conflict,” says the report.
Read the full report, which lists the regulatory reforms in the 16 countries studied, along with recent developments.