IAP to examine ‘advice gap’

Investor advocates will press for planned retail investor reforms, study the impact of innovation on investor protection and research the so-called advice gap, a new report says.

The Investor Advisory Panel (IAP)—an independent investor advocacy group financed by the Ontario Securities Commission (OSC)—indicated in its latest annual report that it will examine whether or not there’s an advice gap in Canada.

“The IAP will seek to obtain data that paints a picture of the advice being provided to mass market investors and the nature, extent, depth and frequency of that advice,” it said.

The threat of a shortage of financial advice is commonly cited by industry groups as a reason to avoid tougher investor protection rules.

“We believe this initiative will clarify concerns over the emergence of an advice gap in Canada and the perceived risk that Canadian investors with small accounts stand to lose access to impactful advice once embedded commissions are removed and they are asked to pay directly for the advice they receive,”  IAP added.

Yet, at this point, regulators have not decided to eliminate embedded commissions.

Last year, the Canadian Securities Administrators (CSA) said they would put an end to the use of deferred sales charge (DSC) fee structures and the payment of embedded commissions to discount brokerage firms.

However, those reforms remain in limbo amid opposition from the Ontario government.

In its report, IAP reiterated its support for the CSA’s planned reforms in this area.

“While we look forward to seeing the government’s revisions, we remain confident that the CSA’s proposals constitute ‘smart’ regulations that will generate benefits and encourage growth across the investment industry,” it said.

Given the Ontario government’s high-profile ambition to reduce the cost of regulation, IAP noted: “Rather than adding a regulatory burden, [the CSA proposals] create opportunities for new, more consumer-centric business models to evolve, compete, and thrive.”

Alongside its focus on industry incentive structures, IAP also said that it will be studying the prospects for innovation, such as “robo advice,” to improve investor outcomes.

“Technology could be the next step in finally addressing the asymmetry that exists between investors and the industry and a true path to empowerment for retail investors in Canada,” it said.

To that end, IAP said it will continue to study forthcoming tech innovations — beyond robos and open banking — that could help investors optimize their personal finances, and whether existing rules provide adequate investor protection in the face of ongoing innovation.

The CSA’s proposed client-focused reforms, which would revise existing rules and embed best interest principles within the existing rules on conflicts, suitability, KYC and KYP, also remain a key priority for IAP.

“While the Client Focused Reforms lay the groundwork for a transition to more professional industry practice standards, for them to succeed, vigilant compliance and active enforcement by the regulators is essential,” said IAP chair Neil Gross.

Industry proficiency standards and title reform are another top issue for the group, particularly in the wake of Ontario’s budget, which promised to introduce some regulation of advisor and planner titles.

“We are pleased to see the Minister of Finance propose a new title protection framework in this year’s budget and we urge that these reforms be expedited,” said Gross.

The prospect of structural regulatory reform to create the Cooperative Capital Markets Regulator (CCMR), which was also highlighted in Ontario’s latest budget, remains a concern for IAP.

“We remain dismayed by the continued lack of an Investor Office in the design as well as the absence of a mechanism for retail investor policy input in the form of an investor advisory body similar to ours,” it said. “This does not encourage optimism about the future of securities regulation in Canada and the potential for a national regulator appropriately focused on a mandate to protect investors and foster market integrity.”