Canadian regulators are proposing “targeted reforms” to raise standards for financial advisers who deal with retail clients, but disagreements among the provinces stopped them short of recommending an overarching “best interest” standard that has gained traction in countries from Australia to the United States.
The reforms proposed in a consultation document released Thursday by the Canadian Securities Administrators involve managing and disclosing conflicts of interest, limiting the use of titles, and beefing up required knowledge of clients and investment products.
While a broad and overarching regulatory best interest standard — which requires that the client’s interests be put at the forefront of every investment decision — is supported by the Ontario Securities Commission and New Brunswick’s Financial and Consumer Services, it is not being proposed for Canada.
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For now, Canadian regulators are united only on the proposed targeted reforms they say will “better align the interests of registrants to the interests of their clients and enhance various specific obligations that registrants owe to their clients.”
With the exception of the British Columbia Securities Commission, the provincial regulators have agreed to continue to consult on a best interest standard that would form “an over-arching” framework and “governing principle against which all other client-related obligations would be interpreted,” according to the document released Thursday, which lays out the targeted proposals that will be open to public consultation for the next 120 days.
However, while the objections of most commissions are not strong as those of the BCSC, there is far from unanimous support for the adoption at any time of a regulatory best-interest standard, which proponents say is an effective way to mitigate conflicts of interest that can cloud advice. Without it, advocates say, advisers need to provide simply “suitable” advice to a client, which opens the door to, for example, recommending funds that pay the highest fee or commission.
But the CSA document released Thursday says securities regulators in Quebec, Alberta, Manitoba and Nova Scotia “share strong reservations on the actual benefits” of the best-interest standard. They are also noted to be “concerned with the potential unintended outcomes of the codification of such as aspirational standard of conduct.”
The BCSC’s concern is that the standard “is vague and unclear and will create uncertainty.”
Nigel Cave, vice-chair of the British Columbia commission, said in an interview with the Financial Post that his commission believes the best outcome for investors will come from implementing the “clear, practical, and enforceable” targeted reforms proposed Thursday.
“We’re concerned that the (best interest) standard will not deliver on its promise and may in fact exacerbate one of the key issues that we have identified in our research, which is that in certain circumstances investors may over-rely on their registrant (adviser)” he said.
“We at the British Columbia Securities Commission believe that investors are better (served) by asking more questions, understanding about fees, doing some homework, taking ownership of their investment lives,” Cave said. “And if you believe there’s a broad best-interest standard that would protect you in all decisions, in all circumstances, you may not ask those questions.”
The splintering of views among Canadian regulators along provincial borders has a further iteration. Saskatchewan’s Financial and Consumer Affairs Authority is awaiting feedback from the process before weighing in on what would be a “significant regulatory change.”
It is perhaps not surprising that the path to higher standards for advisers is proving to be bumpy and divisive. It has not been without conflict in other countries that don’t have to contend with securities regulation that changes, as Canada’s does, when one crosses provincial borders.
Jurisdictions including Australia and the United Kingdom have raised adviser standards in recent years through methods such as imposing best interest standards, raising proficiency requirements, and restricting certain forms of compensation.
A form of the best interest standard called a fiduciary rule was most recently introduced in the United States by the U.S. Department of Labor to govern advisers who deal with retirement accounts.
Canadian regulators have been mulling the introduction of a best interest standard since 2012, meaning the process will have been under way for nearly four years by the time the latest comment period to review Thursday’s proposals concludes at the end of August.
The way adviser reform is shaping up in Canada, it is possible this country will wind up with different rules in different provinces when it comes to a best interest standard — even if the universally backed proposed reforms now under consideration are adopted.
Former OSC chair Howard Wetston raised the idea of provincial securities commissions going in different directions when he stepped down in November. In an interview with the Financial Post, he said Canada’s most populous province could act alone in implementing a best interest standard for advisers who deal with retail clients even if other provinces didn’t see the need.
There are past precedents, from crowdfunding rules to prospectus exemptions.
But it may not be practical to apply standards to advice on investment products, many of which are sold across the country, based on distinct provincial rules. This could be further complicated as the federal government and a handful of provinces and territories, including Ontario and British Columbia, move towards merging existing participating provincial securities commissions into a brand new market watchdog, the Cooperative Capital Markets Regulatory System.
Cave, the BCSC vice-chair, declined to speculate on where a regulatory best interest standard would fit into the co-operative regulatory, noting that anything to do with the federal-provincial watchdog will be determined at the political level.
For now, the targeted reforms under consideration by Canada’s existing securities watchdogs include amending rules to require firms and advisers to respond to identified material conflicts of interest in a manner that prioritizes the interest of the client. Another proposal would increase the requirement for an adviser to understand a client’s financial circumstances and risk profile — including loss aversion. The proposals also suggest limiting the titles that can be used by advisers, and would include a designation popular with investor advocates: salesperson.