TOUGHER FINANCIAL RULES
Canada’s securities regulators propose sweeping changes to better protect consumers from poor financial advice,
Canadian securities regulators propose sweeping changes that they say will better protect consumers from poor financial advice, excessive fees and underperforming investments. The move comes at a time when more consumers must rely on financial advisers to help them save for retirement as fewer firms offer traditional defined-benefit pension plans.
The centrepiece change would legally require financial advisers to put their clients’ “best interests” ahead of their own, the Canadian Securities Administrators say in a consultation paper released Thursday.
The “best interests” rule would mean, for example, that an adviser could not steer a client to the mutual fund (or other security) that pays the adviser the highest fee but may not be the best-performing investment for the client.
“This is a very exciting day for Canadian investors because many of these changes have happened elsewhere in the world and Canada is far behind,” said Maureen Jensen, chair and chief executive officer of the Ontario Securities Commission, Canada’s largest securities regulator.
“As more and more Canadians have to invest for themselves, they are really reliant on their advisers,” Jensen said in a phone interview.
Consumers place too much trust in their advisers, know too little about fees that erode savings, and are sometimes steered toward investments that are too risky, research by the securities administrators found.
Meanwhile, an investors’ advocacy group says the proposed changes may not go far enough.
As long as financial advisers are compensated by fund companies for recommending their products, they inherently face a conflict of interest, said Neil Gross, executive director of the Foundation for the Advancement of Investor Rights.
“It’s really good that the CSA has acknowledged the need for change. The question is whether the proposals they’re examining are sufficient to bring about profound change.
“We are concerned that the document seems to signal that you can have a best interest duty that still permits many of these conflicts to exist in the business models that are utilized,” Gross said.
The consultation paper will be cir- culated for comment for 120 days, after which a final rule would be published. No target date has been set. The step is the latest in a process that began in 2012.
Groups representing financial advisers have argued the existing rules, such as “know your client,” which assesses the clients’ risk tolerance, are adequate to protect consumers.
An industry association that represents advisory services at banks and other institutions said it has “grave reservations” about the proposed “best-interest” standard.
It could lead to confusion for both advisers and clients if some advisers begin restricting what products and services they offer, while some clients may have unrealistic expectations, the Investment Industry Association of Canada said in a statement.
The result could be increased litiga- tion and legal costs, the association said.
The mutual fund industry said it “shares our regulator’s goal of building adviser-client relationships that lead to good investor outcomes,” said Joanne De Laurentiis, president and chief executive officer of the Investment Funds Institute of Canada.
“Canada already has a robust regulatory framework that serves investors well, but there will always be room for improvement,” she added in a statement.
The proposed “best-interests” rule would apply to all financial advisers, including those working for banks, independent dealers and mutual fund companies in all provinces except British Columbia.
While most advisers do their best for their clients, the CSA said, consumers need better protection.