In comment letters for CSA’s client-focused reforms, both PMAC and FAIR Canada put the focus squarely on fiduciary duty—the former organization to show why the reforms don’t make sense for portfolio managers; the latter, to show why the reforms don’t go far enough.
CSA’s reforms propose amendments to rules concerning KYP, KYC, suitability, conflicts of interest and relationship disclosure. Comments were due last week.
While FAIR Canada commends the spirit behind the reforms—to align the interests of advisors and clients—it says in its letter that reforms won’t achieve the “profound shift necessary” to ensure clients receive objective advice.
Why? They don’t prohibit compensation that misaligns advisor-client interests. Instead, the industry relies on the reforms’ provisions to manage conflicts—something the industry has a poor track record accomplishing, FAIR says.
In support of its position, FAIR Canada holds out existing conflict provisions from IIROC and the MFDA, which it says have not only failed to result in objective advice in clients’ best interests but have also allowed incentive practices related to compensation to flourish.
Over the last two years, the CSA, IIROC and the MFDA have issued notices describing “a litany” of compensation-related arrangements and incentive practices, says FAIR Canada in its letter. As presented, the reforms attempt to “square the circle,” it says.
What’s needed is a statutory best interest standard as a prescriptive obligation, as well as a guiding principle in conduct, toward clients, FAIR says. Such a move would result in “transformation of the investment industry so that Canadians can achieve financial security.”
At the least, advisors should be required to actively mitigate, not simply address, conflicts. Says FAIR Canada: “‘Mitigate’ means ‘lessen the gravity of (an offence or mistake) or make (something bad) less severe, serious or painful.’ It is essential that the proposed amendment not adopt the problematic language of ‘address.’”
KYP and suitability concerns
Commenting on suitability, FAIR Canada again recommends a fiduciary duty be applied to “any generalized retirement planning, financial or investment recommendation” that encourages bringing assets to a firm. This would include taking early retirement, electing a lump sum in lieu of a pension or refinancing a home to use the equity to invest.
In addition, it suggests advisors provide clients with written explanations of a recommendation, along with reasons and a discussion of compensation.
In its comment letter, IG Wealth Management highlights transferred-in assets and KYP reforms. The proposals say securities from another firm that are transferred in by a client but otherwise unavailable at the new firm, must undergo the same rigorous KYP analysis as securities on the new firm’s shelf.
The requirement could discourage transfers-in, as such an analysis likely wouldn’t be operationally feasible for firms, says IG. The result: a client would have fragmented accounts or investors might sell securities, with negative tax consequences.
IG suggests that in these instances a tailored KYP process apply, such that firms undertake “reasonable due diligence” without the full inquiry and assessment required for products on the firm’s shelf. In practice, that means firms could accept traditional investment funds and listed equities and fixed income products, assuming they’re prospectus-qualified and subject to ongoing regulatory scrutiny, says IG.
KYP reforms don’t apply to portfolio managers, who deal with securities and strategies, not product shelves, says PMAC in its comment letter. In fact, the client-focused reforms must be tailored for portfolio managers, since they’re already bound by a higher fiduciary duty.
For instance, enhanced KYC and suitability obligations should be more clearly scalable to portfolio managers’ business models and account for limited mandates and client types, PMAC says. Portfolio managers “provide discretionary investment management and should not be confused for or treated as financial planners, unless they are and hold themselves out as providing such services,” says PMAC in its letter.
Concerning titles, PMAC says emphasis should be placed on the duty of care an advisor owes the client. Client-facing portfolio managers should be “investment counsellors,” it says; registered portfolio managers who only select securities should be “portfolio managers.”
Likewise, FAIR Canada says the use of “advisor” can be misleading when a registrant isn’t required to act in a client’s best interest. Though title reform and proficiency standards are longer-term CSA projects, FAIR Canada urges CSA not to delay on proficiency in particular, as Canada lags other jurisdictions.
IG, which allows the use of seven titles, suggests CSA hold off on title reform while the group of regulators works separately on titles and designations. Revising firm documents will be costly for firms, says IG, and multiple title changes may confuse clients.