Three approaches raised in debate on investment industry standards

By Susan Yellin | January 25 2017 07:32AM

Photo: Freepik

The debate is long from over on what investment industry standard will best serve investors. Will it be through a proposed, over-arching best interest standard? Should reforms on disclosure and transparency be allowed to gather strength before determining a next step, or should the industry continue with the rules it already has in place?

All three views were raised by members of the investment industry, legal profession and investor advocacy groups during a public roundtable in Toronto in December on the proposed best interest standard as well as targeted reforms, such as suitability, proficiency, know your client, know your product, conflicts of interest and standardization of business titles.

Several public hearings

The roundtable, hosted by the Ontario Securities Commission (OSC), was just one of several public hearings held across the country, including British Columbia, Nova Scotia, Quebec and Alberta.

The original consultation paper on which the roundtables are based was published in April with a comment period that closed at the end of September.

The British Columbia Securities Commission however, did not discuss the best interest standard at its roundtables, because it believes the proposed targeted reforms are enough to strengthen the standards of conduct in the best interests of investors. As well, it says that as it now stands the proposed over-arching regulatory best interest standard is vague and unclear.

Strong reservations

Securities commissions in Quebec, Alberta, Manitoba and Nova Scotia have said they have strong reservations about introducing a regulatory best interest standard on top of the targeted reforms but wanted to hear comments on the best interest standard.

Ontario and New Brunswick regulators are in favour of the best interest standard saying it would enhance the effectiveness of the proposed targeted reforms.

“In my own personal view, I do not believe that the targeted reforms go far enough,” Maureen Jensen, chair and CEO of the OSC, said in her opening roundtable comments. “They are incremental and important but they don’t meet the entire goal. Protecting investors is one of our greatest responsibilities as regulators, and we know that the current models are not serving investors the way they deserve.”

Many clients already think their advisors are acting in their best interests, said Ursula Menke, chair of the OSC’s Investor Advisory Panel.

With “disappointingly low” levels of financial literacy and increased longevity, more Canadians are expected to save for their own retirement and many rely on advisors for help, said Menke.

But she said many transactions put advisors in a conflict-of-interest situation with their clients because they are paid by the producers of the products they sell. “The imposition of a best interest standard would go a long way to realigning the interests of investors and registrants,” she said.

Expectations gap

As it now stands, there is “an expectations gap” between advisors and their clients, said Lawrence Haber, a former executive with National Bank Financial.

Haber said the industry faces the choice of either spelling out the duty of care advisors owe to their clients or lowering investor expectations so they see their advisor as only a sales person.

 “I think the reality is this genie is out of the bottle,” said Haber. “We’ve now had 25 or 30 years of these trends, this evolution. I think going backwards would be the wrong way to go.”

Randy Cass, founder and CEO of Nest Wealth Asset Investment Inc. said his firm was “100%, without any hesitation, in favour of the best interest standard,” especially since the industry portrays itself in the position of caretakers and advisors to the general public.

“We have tried suitability, we have tried disclosure, we have tried building rule books that can prop open heavy, safe bank vault doors – and no matter what we try there is a way around it,” said Cass. “The beauty of a principle-based approach is that there is no way around principles…The first two things it clearly does is rule out bad apples right away and rule out things that are entirely not in the best interest of the consumer.”

Haber said his firm, whose products consist of low-cost ETFs, still sees relatively new business coming in with portfolios filled with deferred sales charges, a practice that has long been decried by many in both the industry and investor advocacy groups.

But Ian Russell, president and CEO of the Investment Industry Association of Canada, said the industry doesn’t have to choose between the two extremes of adopting a best interest standard or lowering the expectations of investors. The entire industry can agree that everyone wants the best outcome for clients, said Russell, noting regulators have already written a sound rule book that should accomplish that goal.

Define responsibilities

What is needed, said Russell, is to define the responsibilities advisors need to live up to as well as guidance on how to do a better job.

He said the industry already has a very broad principle of duty of care to deal honestly, fairly and in good faith. “That principle is there. The question really is: have we given it enough focus both in terms of a principle in adhering to it, and have the regulators given it enough focus in enforcing what really lies behind it?”

Principle-based regulation is a common-sense approach that gives both the industry and investors great flexibility, said Margaret McNee, a senior partner with McMillan LLP in Toronto.

In time, a new regulation will be accompanied by a companion policy and interpretations of the rules which in many cases could serve everyone better than a prescriptive standard, said McNee.

Peter Moulson, vice president, wealth management compliance at CIBC, said bringing in a new set of regulatory standards will be a challenge to operationalize.

Currently, CIBC’s wealth management compliance division – procedures, policies, training and systems – are based on the policy of client suitability, which is different than best interest standard, said Moulson.

To mitigate risk, Moulson said he could foresee a scenario where his firm would offer order execution only, or fully advisory or fully fee-based models where issues of conflicts of interest over compensation could be more easily addressed.

Prema Thiele, a partner with Borden Ladner Gervais LLP, said the industry should give recent transparency and disclosure regulations, such as CRM2, some time to develop to determine how far they go in meeting the needs of investors before jumping ahead with the proposed best interest standard.

Thiele also said whatever course the regulators take, they should be careful not to blur the lines between trading and advising, the “two backbones” of the current regulatory structure. 

Tread with caution

“We have to tread with caution in holding registrants to standards they simply cannot meet and simply go toward blurring those lines between trading and advising.”

She also said that regulators should not proceed with targeted reforms unless there is national consensus.

But waiting for all provinces to agree on all the proposed standards is a recipe for frustration, said Cass.

“If that’s the way forward, my guess is that you’re going to end up with some middle-of-the-ground compromise that is watered down and no one is completely happy with,” he said.

While he acknowledged that it may be difficult to run a national business with different provincial requirements, he said it’s up to the industry to rise to the highest level of standards.

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