The Ontario government has asked regulators to investigate the decisions of major bank-owned dealers to eliminate third-party funds from their product shelves — a shift that has been blamed on the forthcoming client-focused reforms.
At the Ontario Securities Commission’s (OSC) annual conference in Toronto on Tuesday, provincial Finance Minister Peter Bethlenfalvy said he wrote to the OSC’s chairman and CEO, Grant Vingoe, asking the regulator to investigate two sets of concerns: bank-owned dealers curbing independent fund sales, and tied selling that was flagged by the Capital Markets Modernization Taskforce (such as banks tying lending to equity underwriting mandates).
In his letter, Bethlenfalvy invoked a provision in securities legislation to ask the OSC to undertake a review and report back by Feb. 28, 2022 with potential recommendations for addressing these concerns.
The letter highlights “concerns that some of Ontario’s largest financial institutions are halting sales of third-party investment products or may be unduly restricting sales of third-party investment products in certain business lines.”
The letter further noted that some financial institutions have cited the CFRs, which take effect at the end of the year, to explain their moves to restrict shelf space.
“However, it appears that these actions would result in a narrowing of investment products offered to investors,” the letter said. “This practice would run counter to the underlying intent of the CFRs, which is to mitigate conflicts of interest and ensure that investors have access to the products that best serve their needs.”
In his remarks at the conference, Vingoe indicated the regulator is looking at how product shelf construction was carried out, and is analyzing the possible consequences of independent products being squeezed out of the banks’ massive distribution channel and of innovative new products being prevented from getting off the ground.
Vingoe also stressed the purpose of the CFRs is to increase choice for investors and to enhance professionalism in the investment business, noting he sees the reform as a “sea change” for the advisory business in Canada.
Some of these issues were flagged by Ontario’s taskforce in its final report, which called for action to defend shelf space for independent investment products at the bank-owned dealers, while also raising concerns about tied selling.
Among other things, the taskforce report recommended that the OSC and self-regulatory organizations step up oversight of product shelf issues, “including targeted reviews and publication of guidance regarding conflicts of interest as a result of shelf composition.”
The taskforce also recommended measures to combat tied selling “to facilitate growth of independent dealers and ensure issuer choice.”