Regulators pursuing ‘better outcomes’ for retail investors
Canadian Securities Administrators says despite criticism, reforms ‘raise the bar’
Most of Canada’s provincial watchdogs will not introduce a “best interest” standard to raise the bar for how retail investors are treated by their investment advisers, a decision the head of the Canadian Securities Administrators says has been mis-characterized as not looking out for investors.
Louis Morisset, who chairs the umbrella group for provincial regulators as well as for Quebec’s Autorité des marchés financiers, said in an interview that regulators across the country believe “better outcomes” for retail investors should be pursued through higher standards for advisers.
They just don’t all agree that a standard requiring the best interest of the client to be paramount in every investment decision is the way to get there, Morisset said.
“We believe to raise the bar … it’s really by putting in force the package of targeted reforms” proposed last year, which aim to reduce conflicts of interest, govern the use of titles, and beef up an adviser’s knowledge about clients and financial products, he said.
“They will offer much more practical, meaningful, and effective ways to raise those standards.”
All the provinces under the umbrella of the CSA agree on the targeted reforms, while the best interest standard — now endorsed only by regulators in Ontario and New Brunswick — would “create confusion” as well as “legal and regulatory uncertainty,” Morriset said.
“Very valid” concerns were raised during consultations that began last year, he said, including that it would be difficult to measure and assess whether a “best interest” standard had been met, and therefore tough for regulators to ensure compliance with such an “aspirational” standard.
In practice, Morisset said, a best interest standard could also let existing conflicts go unchecked because unique industry circumstances — such as dealers that sell only proprietary products — would make a uniform standard impractical.
“You have to be very careful here in trying to craft a standard that will not be workable in the Canadian environment,” he said. “Or if it becomes workable, it will be workable because of many safe harbours that have to be added, or will have to be created, to make people understand the limits of such a standard.”
Despite these concerns, the Ontario Securities Commission is pushing ahead with a best interest standard and will lay out how it sees the new requirement working in a consultation paper to be published by next spring, OSC vice-chair Grant Vingoe told the Financial Post this month.
Morriset said he felt the need to speak out about the diverging plans in order to clarify the CSA’s intentions and reject the suggestion that Canada’s investment industry had an undue influence on the road that most regulators in the country have chosen to follow.
“We’re not at all captured by the industry,” he said, adding that the majority of CSA member regulators rejected the best interest standard based on all the feedback they received, which included input from investor advocates.
One such group is “disappointed” by the limited commitment to adopt a best interest standard in Canada. On its website, the Foundation for the Advancement of Investor Rights (FAIR Canada) says a best interest standard would “greatly improve” the relationship between dealers, advisers, and their clients.
The “targeted reforms” alone, which are proposed by all the regulators, “will not properly address the problems associated with conflicts of interest and conflicted compensation structures,” FAIR Canada says.
Raising standards for investment advisers who deal with retail clients has been a global trend since the financial crisis of 2008. Australia and the United Kingdom, for example, have adopted a best interest standard. The United States was on the road toward an even higher fiduciary duty for advisers, but this stalled with last year’s election of Donald Trump as President.