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Increasing disclosure rules questioned by advisors

By Susan Yellin | December 04 2015 07:00AM

Disclosure seemed to be the word of the day at the fall summit of the Independent Financial Brokers Association of Canada (IFB) in November. But whether disclosure dealt with mutual fund advisors’  “outside activities,” potential conflict of interest for life-licensed advisors or changes stemming from CRM2 – the amount of disclosure was questioned by some advisors.

For its part, the Mutual Fund Dealers Association (MFDA) said it was concerned that some advisors may not be providing clients with required written disclosure on their “outside business activities.” So for the past four years it has been working on making the concept of “outside business activities” clearer for advisors by crafting a new proposed rule.

Outside activities

Marc Guerin, director, member education with the MFDA, said the regulator has now removed the “business” part of the title in the proposal, which is intent on updating and shedding light on advisor actions that must be disclosed in writing to clients and dealers.

In the past, said Guerin, much of the discussion about disclosure focused on other “business” activities, which generally would have been repetitive and served as a regular source of income. But now regulators are emphasizing outside activities that can include a single transaction or event.

Guerin said the MFDA is particularly concerned about outside activities where there may be direct or indirect payment or compensation, such as an officer or director position on a board. 

Specific positions of influence

Also on its list is whether MFDA-licensed advisors are in specific positions of influence if they also take on roles as religious leaders, health-care professionals or military officers, he said.

One advisor in particular was upset that he has to disclose more information to regulators and clients than he would to an employer – a statement that was applauded by others attending the seminar.

Another advisor, Hamilton, Ont.-based Cheryl Sampson, said advisors meet potential clients in many different situations, whether it be babysitting at a church or volunteering at a hospital.

“Who does not want to do business with someone they already know?” she asked after the seminar. “This is building relationships and that’s part of what our business is all about.”

But Guerin said anyone in a “position of influence” must be on the alert, including caregivers.

“Health-care professionals, be it volunteering or otherwise…are helping to take care of [a person’s] health, you are in a potential position of influence, a potential position to take advantage of that person because you may have access to their health and well-being and state of mind,” said Guerin. “You may be asked to take on a caregiver role, which may include some financial caregiving – even though you are not being compensated at all, it is still something that can be abused.

“We’re not saying that everyone in that position is doing it for the wrong reason – the vast majority are doing it for the right reason.”

Guerin said the proposed rule, when passed, will contain scenarios that will more clearly outline the scenarios that will, and will not, be considered appropriate as outside activities for MFDA advisors.

Meanwhile, the Financial Services Commission of Ontario (FSCO) has completed its latest set of questionnaires showing that life insurance advisors are generally compliant – except in one area dealing with the disclosure of actual or potential conflicts of interest to their clients in writing, said Anatol Monid, FSCO’s executive director, licensing and market conduct division.

A 2013 suitability compliance questionnaire by FSCO noted that while 90% of agents surveyed said they always disclose conflicts and potential conflicts of interest to clients, only 50% said they do so in writing, as they are required to do.

In response, FSCO published a series of educational bulletins on the requirements, conducted follow-up life insurance agent questionnaires and held additional on-site compliance reviews with life insurance agents to assess their compliance with the law.

The latest numbers indicate that of the 79 examinations FSCO conducted in 2015, 10% were not following the rules by disclosing actual or potential conflicts of interest – in writing – to their clients.

Monid said it’s troubling that there are laws in place dealing with disclosure of conflict of interest that some life insurance agents still aren’t following.

“We may need to have a conversation with our colleagues at the Ministry of Finance and say: do we need to introduce more regulation to ensure people follow those practices? It leaves us with no choice. It’s what’s trending.”

Written disclosure

Written disclosure is part of a framework endorsed by the Canadian Council of Insurance Regulators. IFB, Advocis and the Canadian Life and Health Insurance Association have all provided guidance on conflict of interest, with information provided on each organization’s website.

Independent insurance advisor Lawrence Geller, who was part of a group that helped put together the original template for disclosure, said he too can’t understand why there is non-compliance in this area.

Geller, who attended the IFB summit, said having written disclosure is relatively simple and so is determining what might be considered conflict of interest.

“A conflict of interest might be that I qualify for trips, it might be that I qualify for bonuses, it might be that I have a loan or chargebacks. I am paid on commission for my work,” he said.

Another advisor challenged that there are many people who work on commission – such as car salespersons – but they don’t have to make conflict of interest disclosure to potential owners.

“But they are not fiduciaries,” pointed out Geller. “We are. A car salesman sells cars. We sell money products. They are very different.”

“The problem is that we keep thinking that we are going to be judged on the standards of yesterday. When something goes wrong we are going to be judged on whatever the standards are when we’re judged. Don’t go into the past. Think what the highest possible standards are. Think about what you would want if you were the client. Do that and you’ll be right.”

Disclosure is also a major point behind CRM2, the “incredibly detailed” set of regulations aimed at the disclosure of fees and other reporting rules for the mutual fund industry, said Rebecca Cowdery, a partner at Borden Ladner Gervais LLP.

A perfect storm

Cowdery termed ongoing regulations in the mutual fund industry as a “perfect storm,” and said regulators have always focused on mutual funds because they’re the easiest kind of security to regulate.

But while CRM2 is all about disclosure, Cowdery said she has now heard that some regulators and investor advocates are saying there might be too much information for investors to comprehend once CRM2 rules are fully released. “I find this a little bit disheartening after we’ve gone through CRM2 for the regulators to say that as almost a justification that there’s a need for more.”

She cautioned advisors not to underestimate the influence of investor advocates and suggested to IFB members that while their organization provides feedback to regulators, they should too on an individual basis.

Cowdery recommended that financial advisors have a facilitated roundtable of their own and give the results to regulators. “If they are listening to investor advocates they should also be listening to you.”

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