CSA’s proposed client-focused reforms—or CFRs, as they’re fast becoming known—were a hot topic at IFIC’s annual leadership conference in Toronto Thursday.
While the institute is supportive of the CFRs overall, it doesn’t concur with one of the key drivers of the proposals: improving investor outcomes. “It should be up to the innovative and competitive market forces—and the free market—to achieve better investor outcomes,” IFIC’s president and CEO, Paul Bourque, said at the conference.
“No one got everything they wanted,” he said, referring to IFIC’s collaboration with the regulators on the proposals. “However, in my experience, a successful rule is often one that no one really likes but everybody can work with.”
Bourque also noted that embedded commissions aren’t banned (except DSCs), since proposed amendments address conflicts and suitability in the best interest of the client.
The CSA introduced its client-focused reforms in June, with detailed proposals to ban DSCs and limit trailing commissions following in September. On the same day that CSA released those proposals, the Ontario government said it wouldn’t support them, putting the reforms in doubt.
Bourque went on to offer IFIC’s “high-level” critique of the proposals, focused on four themes.
Extensive use of policy guidance. Bourque said most of the guidance in the companion policy to the amendments (31-103CP) is uncontroversial, but some of it falls short.
“Guidance cannot prohibit or mandate specific conduct,” he said. “Some of the guidance sounds like a rule.”
For example, the product due diligence guideline says a security can’t be approved based solely on information received from issuers.
“This reads like a prohibition,” he said, “and goes beyond what firms and representatives must comply with under the KYP sections of the rule.”
Uncertainty created by a focus on low cost. In suitability amendments to the companion policy, CSA says it expects registrants to recommend the “lowest cost security available” that meets suitability requirements, unless the registrant has a reasonable basis for determining that a higher-cost security would be better for the client.
CSA further says it expects that proposed amendments to the conflicts-of-interest rule and related guidance will encourage a greater use of lower-cost mutual funds (among other outcomes).
The implied preference for lower-cost products could lead advisors to conclude that cost is the most important factor in the suitability determination, said Bourque. The amendments will have the unintended consequence of devaluing advice and shortening product shelves, he said, unless greater clarity is provided on what’s considered reasonable for choosing a higher-cost product.
Reduced investor choice. Some of the proposals could have the opposite of their intended effect, decreasing product choice and increasing barriers for new entrants, said Bourque.
For example, KYP proposals indicate firms must understand how their products compare with similar ones available on the market, which introduces uncertainty as to what “similar products” means, he said. “An overly expansive interpretation may cause many firms to reduce their product shelf rather than expand it.”
Bourque further took issue with how the CFRs prohibit a firm from relying solely on disclosure to address conflicts in the client’s best interest. That imposes a higher standard on securities registrants than is currently imposed on common-law fiduciaries, he said.
Instead, he suggested CSA permit disclosure alone in some circumstances, but require further mitigation where compensation conflicts exist that could affect investment selection.
Regulatory harmony and consistency. Bourque suggested that some CFR elements be harmonized with existing SRO guidance, though he didn’t offer examples. He also called out instances where proposal language isn’t consistent, again introducing uncertainty. For example, KYC proposals include the phrasing “thoroughly understanding the client” and “meaningful understanding” of a client’s investment needs and objectives.
Ultimately, the proposals aim to strengthen the advisor-client relationship, he said, so it’s “important that we get this right. […] We are not at the finish line, but I am confident the finish line is in sight.”