Client-focused reforms (CFRs) are some of the most extensive regulatory reforms since National Instrument 31-103 was first implemented.
These reforms are sweeping, they’re intended to have a very substantial impact on the relationship between firms and their clients, and they’re designed to improve outcomes for clients, this according to the Ontario Securities Commission (OSC) chair, CEO and commissioner, Grant Vingoe, who described the current state of affairs for the benefit of those gathered for Symposium 2021, presented by Advocis in November.
Vingoe’s comments were part of the expert panel on CFRs, which touched on the regulator’s goals, the small dealer’s concerns and observations from a prominent investor advocate’s point of view. The group discussed CFRs and the changes they will require, vulnerable clients, CFR-related changes to the know your client (KYC) process, and whether or not information about a client’s environmental, social and governance (ESG) preferences should be required as part of that discussion.
Joining Vingoe in the discussion were Greg Pollock, Advocis president and CEO who moderated the panel, Ken Kivenko, president of Kenmar Associates, and Clay Gillespie, managing director of RGF Integrated Wealth Management.
Conflicts of interest
CFRs are an opportunity for advisors to become more professional and augment the financial planning services that are provided to their clients, Vingoe continued, adding that the regulator’s goal is to mitigate or eliminate conflicts of interest.
“We’re going to be watching really carefully and examining to ensure that goal is attained and that the many excellent advisors who’ve been observing these principles already as best practices will be joined by the rest of the advisory community in raising standards to this consistent high level,” he says.
Dealers, meanwhile, are working on the cost of implementing systems that record already existing habits and processes.
Implementation and the technology costs
“As a smaller dealer, these rules make all the sense in the world,” Gillespie says. “We’ve had rules and policies around this. The concern of the smaller dealer is not the actual rules, it’s the implementation and the technology costs to put them in place,” he adds. “How to record it in a fashion that will make various regulators happy when they do their audits and such. That’s really the concern.”
Kivenko, meanwhile, says “the problem we see is that there’s still a lot of flex,” pointing out that regulators have yet to interpret various terms and definitions. “For instance, material conflict, how will that work out? What is professional judgement? What does best interest really mean? How do you determine when something is truly optimized? I think it’ll take time.”
He took the time then to express concerns about some bank-owned dealers taking the position that know your product (KYP) rules were a constraint which required them to reduce their product shelves to proprietary products only. “We’re a little concerned. How will you be able to say that you’re acting in the best interest when you can’t look at a range of products?” he asks. “We don’t believe it’s possible to be compliant and have a restricted shelf.”
Proprietary products
Saying there is no disputing the conflict, Vingoe says the OSC has stated that offering proprietary products is a conflict of interest. “I don’t mean this in a pejorative sense, but it is a type of self-dealing when the only type of product being sold is the one that an affiliated entity manufactures. It is a per se conflict of interest,” he says.
“Ken is right that we didn’t go so far as to prohibit the sale of proprietary products, partially because it’s hard to actually define when it’s damaging and when it’s not. There are small firms that are manufacturing their own products. There’s a vast difference between a small firm engaged in that activity or a small advisor having a relatively limited shelf because of resource limitations, doing comparisons, it’s another thing for the principal distribution channels in this country to be eliminating choice from their offerings in at least one channel. We’re equally worried that phenomenon can spread.”
He adds that the percentage of sales of proprietary products by banks is very high and has grown over the years. “Ultimately I think there’s a will that if we don’t see positive change in this area, we’ll have to use other tools to bring it about.”
At his own company, Gillespie says the firm already wants their advisors to know what products they’re using. “We don’t want to restrict the product shelf, we want the advisors to do their due diligence and pick the products that are best for their clients. As a firm, we’re not the ones that are really going to set the product shelf,” he says, adding that every product on the shelf will still need to be approved or not, but the training is expected to be simple. “They’ve done all this work in the past. The problem for us is codifying it in some electronic way that I can show the regulator. The main concern for us is how to put it in a system and the cost to do that.” He adds that the challenge is more of a dealer issue than an advisor issue. “I don’t think our advisors are going to notice very much because it’s not a dramatic change to our process now.”
Vulnerable clients
Finally, a discussion about vulnerable clients and whether or not a probe of ESG concerns should be part of the KYC process, both rounded out the conversation.
In discussing vulnerable clients, panelists say regulation changes are a step in the right direction. Vingoe says it’s an area of concern that is evolving. “It’s a critical area because we see, unfortunately, that it’s not uncommon at all to see financial abuse involving vulnerable investors,” he says. “It’s not easy at all, but it’s a powerful statement by the CSA (Canadian Securities Administrators).”
The industry, regulators and investor advocates all share a common commitment to combat financial abuse, he adds, but says the work is still a work in progress. “Clearly we’re not all psychologists with a deep understanding of these issues to actually detect financial abuse as it’s occurring and then appropriately restrict an account,” he says. “There’s going to have to be a level of training and retaining of expertise. We’re training our own staff to deal with senior’s issues and issues involving vulnerable investors.”
He says the trusted contact person (TCP) rules are one important step forward. He adds that regulators going forward will need to work to ensure that privacy laws are coordinated with the efforts being made in this area.
ESG criteria
The last area discussed that is also evolving is the use of ESG criteria in investing and whether or not advisors should be required to collect information about a client’s ESG preferences. In this respect, the panelists were very much in alignment on the matter, saying ESG is still hard to define, making it difficult to codify as a requirement.
“It’s really hard to put it on the KYC as a discussion (point) until we actually can define it as an industry,” Gillespie says, a sentiment somewhat echoed by the others as well.
“There is tremendous support among the population to invest in firms that are environmentally conscious, but ESG as a broad term, I think it’s going to be very hard to define it,” Kivenko says. “Different values and different cultures and different experiences will determine what is socially acceptable.”
Vingoe was even more specific in describing the necessary preconditions needed if ESG were to be included in KYC discussions in the future: “The essential building block to enable advisors to work with ESG are issuer disclosures that are comparable,” and auditable, he says. “Until we actually have the building block of standards, we’re going to be limited to enforcement and compliance being applied to the most egregious conduct,” he adds. “The information base isn’t strong enough yet to actually make it a definitive requirement in knowing your customer, but we are looking for egregious cases of misnaming. Greenwashing is a serious concern.”
