Managing potential conflicts of interest is an important part of your job, as is meeting the compliance and disclosure requirements related to such conflicts.
As noted by the CSA in a recent staff notice–which looks at firms’ compensation arrangements and incentive practices across the industry–regulators have been reviewing these types of arrangements as part of ongoing work to address concerns that are arising in the client-registrant relationship.
CSA’s proposed targeted reforms and best interest standard (BIS), and the upcoming consultation on embedded commissions, are part of the same move to improve client-advisor transparency and communication.
As noted in a recent release, IIROC’s review has focused on three different aspects of compensation-related conflicts. Those are:
- product shelf and account types offered;
- compensation arrangements; and
- supervision issues.
The SRO says, “We are reviewing 20 firms representing a cross-section of the IIROC membership. In addition to responding to specific review questions, firms also provided supporting documents.”
IIROC won’t publish its full results summary until 2017 but notes firms have receieved high grades for staff training as well as for encouraging representatives to perform product due diligence.
But the SRO is concerned about firms that “provide a higher payout to representatives for fee-based revenue versus commission-based revenue, [as] this could act as an incentive for representatives to favor moving clients into fee-based accounts even when it would not be in the best interests of such clients.”
Compensation tied to proprietary products and supervision conflicts of interest are also a weak spot for firms.
Once full results are published in 2017, IIROC says it will “determine whether guidance and/or rule amendments are needed to better address compensation-related conflicts.”
MFDA’s report looks at the key findings of its 2016 targeted review of member compensation and incentive programs. It also lists next steps.
MFDA warns, “We believe it is reasonable for firms to incentivize their staff and reward performance that contributes to the firm’s financial success. However, compensation practices and incentive programs should not encourage unsuitable or inappropriate advice.
“In addition, compensation and incentive practices must comply with National Instrument 81-105 which prohibits dealers from providing incentives that favour mutual funds of one mutual fund company over mutual funds of other mutual fund companies.”
One issue that MFDA found was “a small number of members” weren’t complying with NI 81-105. “Specifically, we identified members who provided incentives that favoured proprietary mutual funds or mutual funds of a particular fund family over other mutual funds. These cases have been referred to our Enforcement Department.”
Further, says MFDA, “We also identified compensation and incentive practices that, in our view, increase the risk of mis-selling and unsuitable advice. Specifically, we identified compensation structures that provided additional incentives to recommend deferred sales charge funds. We expect firms to properly manage these risks and consider amendments to their compensation structure[s].”
Finally, MFDA notes, “Compensation and incentive concerns are not limited to the distribution of mutual funds,” even though NI 81-105 only applies to mutual funds. It adds, “In many cases the types of compensation or benefits dealers receive from other investment products or referral arrangements are the types of compensation or benefits that are prohibited by National Instrument 81-105 for mutual funds.”
MFDA will continue to montior firms and work with regulators like CSA and IIROC.