Fi­nance Canada eyes leg­isla­tive re­form

Feds are so­lic­it­ing com­ments about po­ten­tial changes re­gard­ing tech­no­log­i­cal change and other is­sues

Investment Executive - - NEWS - BY JAMES L ANGTON

the federal de­part­ment of Fi­nance Canada is in the midst of a con­sul­ta­tion on pos­si­ble re­form to the leg­is­la­tion gov­ern­ing the fi­nan­cial ser­vices sec­tor. In Au­gust, Fi­nance Canada re­leased its sec­ond con­sul­ta­tion pa­per as part of a two-stage re­view, lay­ing the ground­work for pos­si­ble leg­isla­tive change, which is due by the end of March 2019.

One of the cen­tral is­sues high­lighted in Fi­nance Canada’s pa­per is the state of in­no­va­tion in the bank­ing sec­tor and the rise of fi­nan­cial tech­nol­ogy (fin­tech) firms, which are de­vel­op­ing new, high-tech ways of de­liv­er­ing fi­nan­cial ser­vices to con­sumers.

This trend is fod­der for re­view be­cause, un­der ex­ist­ing leg­is­la­tion, there are curbs on the types of ac­tiv­i­ties that banks can en­gage in and on their in­volve­ment with fin­tech firms, which the banks would like to see eased.

The Cana­dian Bankers As­so­ci­a­tion (CBA) ar­gues in its re­sponse to the con­sul­ta­tion that the cur­rent en­vi­ron­ment is un­duly re­stric­tive be­cause it pre­vents cer­tain relationships be­tween banks and fin­tech firms, and im­pedes banks from in­vest­ing in fin­tech firms. The CBA calls on the gov­ern­ment to dis­man­tle some of these bar­ri­ers. (See story on page 14.)

“We are fac­ing a defin­ing mo­ment for the fu­ture of fi­nan­cial in­sti­tu­tions and the frame­work should en­sure that banks are po­si­tioned to par­tic­i­pate in fin­tech fully in this era of rapid tech­no­log­i­cal [change],” the in­dus­try trade group states.

In­vestor ad­vo­cacy group the Cana­dian Foun­da­tion for Ad­vance­ment of In­vestor Rights (a.k.a. FAIR Canada) ar­gues in its sub­mis­sion to Fi­nance Canada that the fi­nan­cial ser­vices sec­tor al­ready has shifted dra­mat­i­cally away from its ba­sic func­tion of tak­ing de­posits and pro­vid­ing loans, to­ward the sale of in­creas­ingly com­plex fi­nan­cial prod­ucts and the pro­vi­sion of ad­vice.

“The banks are in a unique po­si­tion to have a sig­nif­i­cant im­pact on the long-term fi­nan­cial se­cu­rity of Cana­di­ans,” FAIR Canada’s sub­mis­sion states. “How­ever, there has been lit­tle reg­u­la­tory change to ac­count for the in­creas­ing ‘holis­tic and ad­vi­sory na­ture’ of relationships be­tween em­ploy­ees and cus­tomers.”

Thus, FAIR Canada calls on federal pol­icy-mak­ers to in­tro­duce a “best in­ter­est” stan­dard on fi­nan­cial ser­vices sec­tor em­ploy­ees who pro­vide ad­vice to clients.

The prospect of a “best in­ter­est” stan­dard is the sub­ject of in­tense de­bate at the pro­vin­cial level, where se­cu­ri­ties reg­u­la­tors in On­tario and New Brunswick are pledg­ing to de­velop such a stan­dard for the fi­nan­cial ad­vi­sors they over­see. An ex­pert com­mit­tee in On­tario also is rec­om­mend­ing that a “best in­ter­est” stan­dard be in­tro­duced for all ad­vi­sors and fi­nan­cial plan­ners in the prov­ince as part of a broader ef­fort to in­tro­duce reg­u­la­tion to the plan­ning in­dus­try. FAIR Canada is now tak­ing the de­bate to the federal level.


“A best in­ter­est stan­dard would com­bat the pro­lif­er­a­tion of harm­ful prod­ucts, dam­ag­ing sales prac­tices and fi­nan­cial in­cen­tives not in the client’s best in­ter­est,” FAIR Canada’s sub­mis­sion says. “A best in­ter­est stan­dard would be a sig­nif­i­cant step [to­ward] en­sur­ing that Cana­di­ans do not re­ceive mis-sell­ing and com­pro­mised ad­vice, and would re­quire banks to adapt their busi­ness prac­tices so that em­ploy­ees no longer pri­or­i­tize sales over the in­ter­est of the client.”

Al­though the best in­ter­est de­bate ad­dresses how hu­man em- ploy­ees treat fi­nan­cial con­sumers, the grow­ing role of tech­nol­ogy in both the fi­nan­cial ser­vices sec­tor and so­ci­ety gen­er­ally raises ques­tions about how the ma­chines fi­nan­cial ser­vices firms em­ploy treat clients. As firms col­lect more data about clients and de­velop in­creas­ingly pow­er­ful tech­nol­ogy for an­a­lyz­ing and utiliz­ing the data, their abil­ity to drive con­sumer be­hav­ior grows stronger, too.

One way pol­icy-mak­ers are con­sid­er­ing to push back against the grow­ing power im­bal­ance be­tween the in­dus­try and con­sumers is so-called “open bank­ing,” which in­volves re­quir­ing banks to share their con­sumers’ data with third-party firms. Al­ready, some ju­ris­dic­tions, such as Europe, are man­dat­ing open bank­ing as a way of stok­ing com­pe­ti­tion and em­pow­er­ing con­sumers by push­ing banks to share client data with other firms.

In the­ory, this shift would foster greater com­pe­ti­tion that re­sults in con­sumers en­joy­ing bet­ter fi­nan­cial prod­ucts and ser­vices. But given gen­er­ally low fi­nan­cial lit­er­acy, many peo­ple may not be in a po­si­tion to judge wheth- er they’re get­ting a good deal in fi­nan­cial ser­vices. The idea also car­ries pri­vacy and se­cu­rity risks.

At this stage, the tra­di­tional in­dus­try play­ers — big banks and in­sur­ers — are high­light­ing the risks and down­play­ing the pos­si­ble con­sumer ben­e­fits that open bank­ing could bring. They rec­om­mend that pol­icy-mak­ers take a slow ap­proach in in­tro­duc­ing open bank­ing.

Apart from the is­sues re­lated to the power im­bal­ance be­tween the fi­nan­cial ser­vices sec­tor and con­sumers, the Fi­nance Canada pa­per also tack­les some higher-level cor­po­rate gov­er­nance con­cerns, such as is­sues of gen­der di­ver­sity and share­holder democ­racy.


For ex­am­ple, Fi­nance Canada is propos­ing to in­tro­duce a “com­ply or ex­plain” model, re­quir­ing fed­er­ally reg­u­lated fi­nan­cial ser­vices firms to dis­close their ap­proach to gen­der di­ver­sity as a way of fos­ter­ing greater di­ver­sity. Fi­nance Canada also con­tem­plates sev­eral share­hold­er­friendly re­quire­ments de­signed to com­bat di­rec­tor en­trench- ment, such as man­dat­ing an­nual di­rec­tor elec­tions and re­quir­ing ma­jor­ity vot­ing stan­dards.

These pro­pos­als are get­ting a strong “thumbs up” from in­sti­tu­tional in­vestor groups such as the Pen­sion In­vest­ment As­so­ci­a­tion of Canada and the Cana­dian Coali­tion for Good Gov­er­nance (CCGG). The lat­ter group states in its sub­mis­sion that mea­sures de­signed to en­cour­age im­prove­ments in di­ver­sity and to en­hance share­holder democ­racy “are crit­i­cal to mod­ern­iz­ing the fi­nan­cial sec­tor frame­work.”

Share­holder ad­vo­cates are call­ing on pol­icy-mak­ers to go fur­ther by in­tro­duc­ing en­hanced proxy access, which would give sig­nif­i­cant share­hold­ers the power to nom­i­nate their own di­rec­tors along­side man­age­ments’ can­di­dates.

The CCGG’s sub­mi­sion says share­hold­ers who own 3% of a com­pany for at least three years should have the right to nom­i­nate up to 20% of the board, and that both the share­holder nom­i­nees and the man­age­ment nom­i­nees should be placed on a univer­sal proxy for share­hold­ers to con­sider.

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