Regulators’ proposed reforms draw mixed reactions
Various industry stakeholders have commented on the Canadian Securities Administrators’ (CSA) June 21 announcement which outlined its proposed reforms that take aim at conflicts of interest.
The Independent Financial Brokers of Canada (IFB) praised the regulators for reaching agreement on “a balanced set of reforms” that it says will be positive for investors, while not harming market competition.
“In particular, IFB is pleased that the CSA has not proposed to ban all embedded commissions,” said Scott Findlay, IFB’s Chair. “At an OSC roundtable on this topic, I said that – as an advisor myself – I share with many IFB members the concern that a ban on embedded mutual fund commissions would be extremely detrimental to clients, especially those with smaller accounts, and that paying an upfront fee would not be a viable option for most.”
Still favours regulatory best interest standard
In commenting on the regulators’ Client Focused Reforms, that include putting the client's interests first when making a suitability determination, the Canadian Foundation for Advancement of Investor Rights (FAIR Canada) said it “continues to believe in an overarching regulatory best interest standard governing the client-registrant relationship.”
Ontario and New Brunswick regulators had been in favour of a best interest standard but some other provincial regulators expressed strong reservations to this approach.
Believes that embedded commissions should be banned
Regarding the regulators’ decision not to ban all embedded commissions for mutual funds, FAIR Canada says it “continues to believe that eliminating embedded commissions is the preferable regulatory course of action.”
The organization, though, did praise the CSA’s proposed policy changes to prohibit DSCs, eliminate the payment of trailing commissions to dealers who do not make a suitability determination (i.e. discount brokerages) “and require all existing and reasonably foreseeable conflicts of interest, including conflicts arising from the payment of third-party compensation (including embedded commissions), to be either addressed in the client’s best interest or avoided.”
The Investment Industry Association of Canada (IIAC) expressed its support for the regulators decision not to pursue an overarching best interest standard as part of their Client Focused Reforms. “The proposed reforms have moved away from a sweeping and vague best interest standard that would have had uncertain application; provoked client and advisor confusion; and contributed to negative consequences for investors, advisors and the capital markets,” stated Michelle Alexander, IIAC Vice- President. “Rather, the reforms are drafted to strengthen the focus on putting the client first in the client-advisor relationship.”
IIAC also supports the CSA’s proposal to continue permitting mutual funds with embedded commissions, and its intent to ban all forms of the DSC option.
The Investment Funds Institute of Canada (IFIC), which represents mutual fund companies, stated that while it supports the regulators’ decision to preserve embedded commissions, it affirms that a ban on deferred sales charges “will reduce choice for some investors. IFIC continues to believe that investors should have the freedom to choose the investment products and services that best achieve their financial goals.”
However, IFIC welcomed the CSA’s Client Focused Reforms, saying the harmonized national approach to enhancing investor protection “will further align the interests of clients and their investment advisors.”
Fostering investor confidence
“Canada’s investment fund industry shares the CSA’s deep commitment to fostering investor confidence and enabling investors to achieve good outcomes,” said Paul C. Bourque, President and CEO, IFIC. “It is our view that the CSA reforms will both achieve these goals and serve to strengthen investor protection.”
The Investment Industry Regulatory Organization of Canada, which worked with the CSA in developing the Client Focused Reforms, stated that they will “fundamentally enhance the client registrant relationship.”
“We believe that the proper management of conflicts of interest, and compensation-related conflicts in particular, which are among the issues dealt with in these reforms, is critical to improving public confidence in our capital markets and our financial system,” stated IIROC.