OSC drops push for adviser standard
TORONTO • The Ontario Securities Commission has dropped a controversial plan to introduce a “best interest” standard that would hold financial advisers to a higher duty of care after other market regulators across the country failed to embrace it.
Canada’s securities watchdogs are proposing a set of “targeted” reforms to reduce conflicts of interest between clients and advisers, as well as policy changes to prohibit certain trailing commissions for dealers who do not make a “suitability” determination in connection with the distribution of mutual funds.
The policy changes, proposed under the umbrella of the Canadian Securities Administrators (CSA), would also prohibit deferred sales charge options on mutual funds, where investors may have to pay a redemption fee if securities are sold before a pre-determined period of time. This prohibition appears to fall short of the full ban on embedded fees that has been imposed in other jurisdictions.
“In our view, these proposed policy changes … will create crucial enhancements to current practices that will better align the interests of investment fund managers, dealers and representatives with those of investors,” the CSA said in a notice published Thursday.
The umbrella organization for the country’s market watchdogs said the series of proposed changes would also “provide greater clarity on the services provided to investors and their associated costs.”
“We are pleased that all CSA jurisdictions have agreed on reforms that put clients’ interests first. This has been our objective all along,” said Maureen Jensen, chair of the Ontario Securities Commission.
“We have taken an approach that incorporates best interest principles across all core areas of the client-registrant relationship — suitability of advice and conflicts of interest — and addresses the specific concerns the OSC has in these areas.
“These changes mean that from the time an investor opens an account and onward, their interests must come first. This is a significant shift from the current system, and upon implementation, will have immediate benefits for Canadians that will serve them well, long into the future.”
Following global trends, the Canadian regulators have spent the past few years looking at whether to impose a broad ban on embedded commissions that are paid to financial advisers by fund companies. Critics say such commissions skew recommendations and create conflicts of interest between investors and advisers.
A parallel process weighed whether a standard where the client’s “best interest” had to be paramount in all decisions should replace a regime where the adviser obligation was to deal with clients fairly, honestly, and in good faith and to make investment recommendations that were “suitable.”
Australia adopted a fiduciary duty for advisers, something that was under way in the United States before President Donald Trump’s administration began to roll back regulation in the financial sector.
Bans on embedded commissions have been imposed in jurisdictions including the United Kingdom and Australia.
The latest Canadian consultations on embedded commissions last year drew 142 public comment letters, with about 84 per cent of the feedback from the investment industry, and the remainder from non-industry players including investors and investor advocates.
Based on the experience in the U.K. and Australia, critics of broad bans on embedded commissions have argued the bans create unintended consequences, such as reduced competition and an “advice gap” because some people aren’t willing to pay upfront adviser fees that replace embedded commissions.
Before Canada puts its targeted policy changes governing commissions in place, another notice will be published in September inviting comment on the proposed rules to eliminate deferred sales charge options on mutual funds, and trailing commissions for dealers who do not make a “suitability” determination in connection with the distribution of mutual funds.
The proposed targeted reforms for putting client interests first when making “suitability” determinations for investments, handling conflicts of interest, and clarifying what clients should expect from their advisers, are subject to a 120day comment period.
The partial reforms may come as a surprise to some industry players, given the strong positions taken by Jensen, chair of the Ontario Securities Commission, Canada’s largest capital markets watchdog.
In a keynote speech at the Toronto Region Board of Trade in September of 2016, Jensen said there was “compelling evidence” that embedded fees create conflicts that are detrimental to investor outcomes.
“For example, our research found that funds that pay higher trailing commissions attract more client money, even when those funds are underperforming,” Jensen said.
“In other words, embedded fees incent advisers to select funds with higher fees, regardless of performance of the fund — putting the adviser’s interest ahead of their clients’. This is not acceptable.”
Jensen was also a strong advocate for the “best interest” standard, something the OSC was planning to adopt before the latest notices from the CSA, despite having support from only New Brunswick’s Financial and Consumer Services Commission.
The CSA said Thursday that regulators in Ontario and New Brunswick “are not proposing to adopt an overarching standard at this time.”
Instead, the OSC and FCNB worked with the CSA on a “harmonized approach that infuses the client’s best interest into … conflicts of interest and suitability reforms,” the umbrella group says in the notice announcing the proposed reforms.
This should address specific concerns they had and allow clients to “immediately benefit” from the targeted reforms, the notice says. However, if these reforms fail to achieve the outcomes they are seeking for investors, the OSC and New Brunswick regulator “will revisit this approach.”
AGREED ON REFORMS THAT PUT CLIENTS’ INTERESTS FIRST.