ED­I­TO­RIAL

Investment Executive - - FRONT PAGE -

Pol­icy-mak­ers must not for­get the lessons of the global fi­nan­cial cri­sis.

Much has changed for the fi­nan­cial ser­vices sec­tor in the 10 years since the global fi­nan­cial cri­sis. Bank bal­ance sheets are beefed up, tax­payer-funded bailouts are less likely and opaque mar­kets are more trans­par­ent. But there’s still much to be done, and pol­icy-mak­ers must not let dim­ming mem­o­ries of the cri­sis lead to com­pla­cency.

Sev­eral steps have been taken to make the fi­nan­cial sys­tem safer. But these achieve­ments, such as push­ing banks to hold more cap­i­tal, largely have in­volved the low-hang­ing fruit. What’s much trick­ier is ad­dress­ing the un­der­ly­ing cul­ture that led to the cri­sis in the first place. In Canada, for ex­am­ple, reg­u­la­tors still grap­ple with ways to move the sec­tor to­ward pro­vid­ing the ap­pro­pri­ate prod­ucts to in­di­vid­ual clients.

Canada’s home­grown cri­sis — the seiz­ing of the non-bank, as­set-backed com­mer­cial pa­per mar­ket — had far-reach­ing ef­fects. Thou­sands of re­tail in­vestors were un­wit­tingly ex­posed to that mar­ket when fi­nan­cial ad­vi­sors sold prod­ucts that they them­selves didn’t un­der­stand. Reg­u­la­tors have yet to ad­dress the cul­ture that al­lows such a prac­tice.

More­over, ev­i­dence of wide­spread re­tail in­vestor abuse — such as the sys­tem­atic over­charg­ing of re­tail clients by many of the coun­try’s largest fi­nan­cial ser­vices in­sti­tu­tions — has con­tin­ued to emerge since the cri­sis.

Con­cerns about con­duct in the re­tail in­vest­ment busi­ness pre­date the global fi­nan­cial cri­sis. But, in­stead of tack­ling the prob­lem head-on with more rig­or­ous stan­dards, reg­u­la­tors have, so far, tried to ad­dress the is­sue by in­creas­ing dis­clo­sure re­quire­ments. Yet, there’s lit­tle proof that dis­clo­sure can ad­dress ad­e­quately the vast power and knowl­edge im­bal­ance be­tween the fi­nan­cial ser­vices sec­tor and the av­er­age re­tail in­vestor.

The Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors’ lat­est ef­fort, the so-called “client-fo­cused re­forms,” rec­og­nize that dis­clo­sure alone is not an ad­e­quate answer to con­flicts of in­ter­est. These pro­pos­als would in­tro­duce “best in­ter­est” re­quire­ments to var­i­ous as­pects of the se­cu­ri­ties rules, along with ex­plicit “know your prod­uct” re­quire­ments, among other mea­sures.

These changes could ad­dress some of the long-stand­ing con­cerns with the sec­tor’s cul­ture that ex­ploded dur­ing the cri­sis.

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