The Canadian Foundation for the Advancement of Investor Rights (FAIR Canada) is asking the CSA how firms will follow conflict of interest requirements and still meet best interest standards given compensation methods such as embedded commissions.
In an open letter to the CSA, FAIR Canada says the best way to implement a best interest standard “is the adoption of rules that prohibit embedded commissions and other advisor compensation arrangements that foster the misalignment of client and advisor interests (“conflicted remuneration”).”
FAIR Canada wrote the letter in response to the CSA’s request for comment on reforms. In June, CSA published an update to the consultation paper 81-408, “Consultation on the Option of Discontinuing Embedded Commissions” and amendments to National Instrument 31-103.
The organization asks in its letter how CSA’s proposed reforms would address conflicts of interest if firms can still use embedded commissions, incentive programs and sales targets, and are allowed to only sell products from a related issuer.
Specifically, FAIR Canada asked how firms would address conflicts of interest and provide advice in the client’s best interest in four scenarios:
- A client who works with an MFDA dealer who only recommends proprietary funds with embedded commissions;
- A client who is deciding whether or not to commute the value of her pension;
- An advisor who recommends leveraged investing to a client; and
- An exempt market dealer offering prospectus-exempt products to its clients from related or connected issuers only.
The organization is also asking CSA how its members will ensure firms comply with the requirements to address conflicts regarding the best interest of the client from a “compliance and enforcement perspective.”
CSA is accepting comments on the consultation paper 81-408 and amendments to NI 31-103 until Oct. 19.
The CSA proposals would also ban deferred sales charges, as well as trailing commissions to discount brokers. Official proposals and transition measures for those items are expected in September, with a comment period to follow.