CSA has stopped short of calling for a fiduciary duty from advisors in its latest consultation paper. But, with the exception of BCSC, all Canadian securities commissions are consulting on* a best interest standard.

This standard is necessary, CSA says, despite initiatives like CRM2 and Point of Sale — those focus on disclosure, and therefore are “unlikely to sufficiently address the [key investor protection] concerns we have identified.”

Read: Only sell proprietary product? You’re a salesperson, argues CSA

CSA has come up with five umbrella principles they say will make it easier to enact investor-friendly reforms in future. The principles will also align investor expectations and assumptions with actual advisor behaviour.

Best interest standard versus fiduciary duty

Does calling it a “best interest standard” create a fiduciary duty? Says CSA: “Our view is that it does not, since our express intention is not to establish a statutory fiduciary duty for registrants, and although the phrase ‘best interest’ has been interpreted in some contexts as a fiduciary duty, in others it has not.”

The securities commissions prefer a principles-based rather than a prescriptive approach because that way, registrants have a guide for addressing situations that fall between specific rules. Principles would “allow registrants to take a flexible, tailored and contextual approach.”

Here are the five principles.

1. Act in the best interests of the client

2. Avoid or control conflicts of interest in a manner that prioritizes the client’s best interests
CSA reiterates that disclosure is not enough: “When deciding how to respond to a conflict of interest involving clients, only avoidance or controls (but not disclosure alone in most cases) are responses that, by themselves, can be fully effective in mitigating conflicts of interest. Disclosure alone is generally inadequate since clients (especially non-institutional clients) are often unable to fully understand such disclosure or effectively incorporate it into their decision-making process.”

Cross-country survey on best interest standard

Think it would be effective

  • Ontario Securities Commission
  • Financial and Consumer Services Commission of New Brunswick

Have doubts; are interested in seeing comments

  • Autorité des marchés financiers
  • Alberta Securities Commission
  • Manitoba Securities Commission
  • Nova Scotia Securities Commission
  • Financial and Consumer Affairs Authority of Saskatchewan

Against the standard

  • British Columbia Securities Commission

3. Provide full, clear, meaningful and timely disclosure
The proposal emphasizes the need for plain, balanced and truthful language in advertising and client communications.

4. Interpret law and agreements with clients in a manner favourable to the client’s interest where reasonably conflicting interpretations arise
If there’s any ambiguity when dealing with a client, the proposal says the interpretation should be in favour of the client. CSA is asking the industry, “Do you think this expectation is appropriate when the level of sophistication of the firm and its clients is similar, such as when firms deal with institutional clients?”

5. Act with care
The proposal recommends “significantly more care and diligence […] for at-risk or vulnerable clients, such as inexperienced investors, seniors, discretionary clients, etc.”

Read: IIROC proposal would “destabilize the MFDA,” says IFIC

Provincial concerns

Staff of the B.C., Quebec, Alberta, Manitoba and Nova Scotia securities commissions have expressed the following concerns about the best interest standard.

  1. The proposed best interest standard may exacerbate the expectations gap between clients and registrants because of the existing restricted registration categories and proprietary business models permitted in Canada. Clients may expect that all registrants have an unqualified duty to act in their best interests, not understanding that some conflicts would still be permitted.
  2. The proposed best interest standard will create legal uncertainty. It does not create a clear standard for registrants to follow or for regulators to enforce.
  3. The CRM2 and Point of Sale Initiatives are intended to improve communication in the client-registrant relationship around costs and investment performance. Their effectiveness should be measured before we consider a best interest standard.
  4. Other jurisdictions that have implemented a best interest standard have done so in conjunction with targeted reforms prohibiting certain conflicted compensation models.
  5. The proposed standard may impact interpretation of existing fiduciary standards for certain registrants, i.e., portfolio managers and investment fund managers.

Read: OSC pressured for best interest standard

*The original version of this article stated that all jurisdictions except BCSC are supporting a best interest standard. In fact, they are consulting on the standard. Return to the corrected sentence.