OSC attempts to dispel

(April 8, 2003) The Investment Funds Institute of Canada kicked off its 6th annual Investor Education awareness month Monday with a breakfast in Toronto and those who attended were rewarded with an update on the new and controversial “fair dealing” guidelines that the Ontario Securities Commission is soon set to release.

The new initiative — which OSC chair David Brown first unveiled at this same event last year — seeks to better define the relationship between advisors and their clients. In last year’s speech, Brown suggested that the familiar ‘know your client’ form would be replaced by a larger document that more clearly defines the client’s objectives, details how the advisor is compensated and flags any potential conflicts of interest.

No surprise, then, but some in the industry are worried the new regulations will be yet one more burden on advisors who are already dealing with the fallout from the continued bear market.

In what might be considered a response to those fears, OSC chief economist Randall Powley delivered a keynote address to the breakfast crowd that attempted to douse some of the negative rumours that have begun to circulate. “There are a lot of misconceptions out there about what this initiative means,” said Powley.

One rumour currently making the rounds is that advisors will be limited to one type of relationship with a client. “A complete myth,” stated Powley. Another rumour is that institutions, regardless of size, would be forced to make every type of relationship available to the client. According to Powley, “there’s nothing in the guidelines about any of that.”

What will be in the guidelines is an attempt to make all “rights and responsibilities” of financial advisors and planners clearly defined and understood by the client. Transparency, of course, is the key word. But Powley warned that transparency means more than page after page of legal boilerplate or complicated compensation formulas. “Transparency means easily understandable,” he said.

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As well, basics such as transaction costs and portfolio return will likely become a standard part of any investment statement. “But these are things that are already being done by many firms,” noted Powley.

Powley also addressed the cost concerns of smaller firms that will surely feel the financial effect of any reforms more than bigger players.

In his address to this breakfast event last year, Brown said that the new regulatory regime should not unduly favour “neither large nor small firms”. On Monday, Powley suggested that the software necessary to comply with the new guidelines will be made available who those who don’t want to pay for their own development.

Nevertheless, the costs will likely be minimal for most, according to Powley. “We’re simply reflecting best practices out there. So this won’t be a big change for a lot of people. We’ve seen statements that are fully in compliance already.”

He also took pains to ensure the audience that the new regulations will be good for the industry, pointing out that the new model could go a long way to “relieve liability pressure.”

Whatever the case, the changes are coming and they will be substantial. “The impact will be structural,” said event host John Mountain, IFIC’s vice-president of regulation, in his closing remarks. Indeed, last year OSC officials went on record saying that the practice of mutual fund companies directly compensating advisors may be banned.

Although Powley didn’t spend much time on the subject in this year’s address, he did note the results of an OSC survey that found 75% of advisors agreed with the statement that “payments from manufacturers affect advisors.”

The OSC’s new regulations have been three years in the making and will likely be another year before implementation said Powley, with a concept paper coming soon. “I can’t say exactly when it will be released but it should be in the fairly near term,” Powley said, and suggested a transition period of one to two years would follow the adoption of any new guidelines.

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What do you think of Powley’s explanation of the “fair dealing model”? Will the transition be as seamless as he thinks? Where do you foresee any problems with the OSC’s proposed model? Share your thoughts and opinions on this subject in the “Free for All” forum of the Talvest Town Hall on Advisor.ca.

Art Melo is a Toronto-based investment writer.

(04/08/03)