Investors on OSC’s advisory panel are pressuring regulators to increase client protection and compensation when things go wrong.
“Regulators are now well aware of the changes that must be made to protect investors and foster an industry that puts investors’ needs first and foremost,” said Ursula Menke, Chair of the Panel. “This means introducing a best interest standard, eliminating conflicted compensation and making access to restitution and dispute resolution a reality for Ontario investors.”
In past years, the panel has been frustrated with the slow pace of the OSC’s progress on improving investor protection, but members say investors will benefit from the focus on investor protection in the OSC’s 2016 Statement of Priorities.
Those priorities include a best interest standard, compensation arrangements in mutual funds, regulatory compliance and enforcement, and the needs of seniors.
These are solid steps forward. However, the panel is pushing the OSC and other regulators to address the fundamental misalignment between the needs and interests of investors and the industry that serves them.
As such, several key themes have driven the panels submissions, comments, and focus this year. (Read the full report here.)
THE NEED FOR A BEST INTEREST STANDARD
During 2015, the panel repeatedly urged OSC to create a best interest standard, which would require advisors to put their clients’ interest first.
It’s a basic first step in investor protection – and it’s long overdue.
This panel also pushed the Financial Services Commission of Ontario (FSCO), the Financial Services Tribunal (FST), and the Deposit Insurance Corporation of Ontario (DICO), to foster a system that puts clients first.
CONFLICTED COMPENSATION IN THE ADVISOR-CLIENT RELATIONSHIP
During the year, the Panel continued to urge the OSC to act to prohibit the payment of embedded trailer commissions. Other jurisdictions have already done so – the OSC must follow suit by eliminating all third-party embedded commissions and remuneration.
As part of this issue, the panel expressed concern about the proliferation of new products designed to skirt around CRM2. These rules don’t apply to insurance products because insurance companies don’t fall under the purview of securities regulators.
CONFLICT RESOLUTION AND RESTITUTION
The G20 High-Level Principles on Financial Consumer Protection states:
“Jurisdictions should ensure that consumers have access to adequate complaints handling and redress mechanisms that are accessible, affordable, independent, fair, accountable, timely and efficient.”
The panel is lobbying for restitution, which it argues is essential to the complaint and redress process and should be of paramount importance to regulators.
Specifically, it recommended a compensation fund that would not only compensate victims of fraud but offer restitution for consumers who are harmed by poor or negligent behaviour on the part of their service providers or registrants.
THE KNOW-YOUR-CLIENT PROCESS
The KYC process is a key concern for the panel. It funded a study on risk profiling that revealed that regulators offer little guidance on how firms and advisors should determine a risk profile, which is an essential part of the suitability process.
They also found that 83% of the risk profile questionnaires they reviewed to be “not fit for purpose,” creating a fundamental and dangerous gap in communication between the investment industry and the individuals it serves.
THE INTRODUCTION OF A COMMON REGULATOR
The panel has repeatedly urged the OSC to ensure that the new Capital Markets Regulatory Authority acts in the interests of Ontario investors. Among several recommendations, it has asked that the revised Capital Markets Act include an investor advisory panel to ensure that the investor perspective is represented at all levels of policymaking.
The panel is comprised of 7 members appointed by the Chair of the Commission following a public application process and on the advice of a selection committee consisting of up to three Commissioners. The Panel provides regular reporting through the Investor Advisory Panel website.