Watchdog strengthens review of investment dealers
Compensation under microscope
Compensation grids and sales targets are coming under greater scrutiny as the Investment Industry Regulatory Organization of Canada steps up an assessment of how the country’s investment dealers handle compensation related conflicts.
Investment dealers will be required to turn over their compensation grids as a standard item in every upcoming business compliance exam, so the self-regulatory agency can “better review dealers’ treatment of compensation-related conflicts,” IIROC said Thursday.
The grids will help determine whether clients are being put into investments that trigger richer rewards for advisers and dealers.
“We will assess a Dealer’s grid to determine whether it is productneutral and unbiased with respect to account type. If we have concerns, we will perform further investigations,” the self-regulatory agency said in a document that includes the findings of a recent “targeted” review covering 20 firms from a cross-section of IIROC’s membership.
That review, which looked at how well investment firms are meeting a requirement to manage compensation-related conflicts in the best interest of the client, found that firms were relying too heavily on disclosure of conflicts without first addressing them with clients in another way.
The report said this was compounded by poor quality of disclosure.
IIROC said future business conduct compliance examinations would pay close attention to sales targets set by the firms, and their impact on sales. “It’s … possible inappropriate sales activity will result from a Dealer setting overly aggressive sales targets that representatives must meet,” the self-regulatory agency said in Thursday’s report.
Going forward, dealers will be asked “to explain the rationale behind sales targets and controls they have implemented to guard against inappropriate sales activity.”
In the recent targeted review, the regulator found a general “lack of comprehensive review of compensation programs and their associated conflicts.”
Another theme that came up repeatedly throughout the targeted review, IIROC said, was a shift to fee-based and managed accounts without appropriate supervision and monitoring of the risks associated with such accounts.
The regulator found most dealers provide the highest possible grid payout to their representatives for fee-based revenue.
“We also noted that, in addition to this maximum grid payout, a significant number of Dealers provide additional incentives to representatives in the form of performance bonuses linked to fee-based assets,” IIROC said. “Our concern is that clients may be moved into fee-based accounts, whether or not such accounts are consistent with the client’s best interest.”
IIROC found instances of “double-charging,” where clients in feebased accounts pay additional fees, or the adviser receives additional compensation on top of the standard account fee. This occurs in fee-based accounts that contain assets with embedded adviser compensation, and the regulator said dealers largely rely on manual processes to “back out” assets with embedded compensation.
“We recently issued a request for information from Dealers offering fee-based accounts, asking them to identify where their policies and procedures related to controlling conflicts associated with ‘doublecharging’ have not been followed, or where the best interests of clients have not been considered,” IIROC said.
“Depending on the responses, we will take appropriate regulatory action.”