Countries from the United States to Australia have embraced the idea that a “best interest” standard is the right way to go when it comes reducing conflicts of interest in the relationship between a financial adviser and client. But, in Canada, the fractured regulatory system appears to be making it tough to get there.
The Canadian Securities Administrators, the umbrella group for the country’s 13 provincial and territorial securities commissions, is unveiling a new consultation paper Thursday that is expected to contain proposals to “enhance the obligations of advisers, dealers and representatives toward their clients.” But industry sources suggest it will not contain a single unified vision for rolling out the best interest standard, which requires that the client’s interests be put at the forefront of all investment decisions.
“I don’t think there’s a commonly held view on the client best interest standard across all the commissions,” Ian Russell, chief executive of the Investment Industry Association of Canada, told the Financial Post on Wednesday, a day before the consultation paper was to be released.
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Officials at the Ontario Securities Commission have been the most vocal advocates of a best interest standard. It is viewed by proponents as an effective way to mitigate conflicts of interest that can cloud advice. The current standard simply requires advisers to provide “suitable” advice to a client, allowing them, for example, to recommend a mutual fund that pays them the highest commission.
“I don’t get the impression [the OSC’s view] is necessarily held elsewhere,” Russell said. “And my sense from the other regulators … is that I don’t think there’s necessarily an agreement that a full-bore client best interest standard or unique overarching rule or standard is needed.”
Assessing and tweaking existing rules dealing with conflicts, client and product knowledge, and disclosure of compensation — and stepping up compliance with those rules — could be as effective, Russell said.
It would not be a surprise if the path to higher standards for advisers is bumpy and divisive. It has not been without conflict in other countries that don’t have to contend with securities regulation that changes, as Canada’s does, when one crosses provincial borders.
The effort in Canada to raise the standards of advisers who deal with retail clients will have been under way for nearly four years by the time the latest comment period for Thursday’s proposals concludes at the end of August.
It is possible Canada will wind up with different rules in different provinces. There are past precedents, from crowdfunding to prospectus exemptions. Outgoing OSC chair Howard Wetston raised the idea of provincial securities commissions going in different directions when he stepped down in November. In an interview with the Financial Post, he said Canada’s most populous province could act alone in implementing a best interest standard for advisers who deal with retail clients even if other provinces didn’t see the need.
But it may not be practical to apply standards to advice on investment products, many of which are sold across the country, based on distinct provincial rules. This could be further complicated as the federal government and a handful of provinces and territories, including Ontario and British Columbia, moved towards merging existing securities commissions into a brand new market watchdog, the Cooperative Capital Markets Regulatory System.
The international sweep to reduce conflicts in the investment advice industry, largely by making changes to the way advisers are compensated and introducing a fiduciary or best-interest standard, recently reached the United States. While the U.S. Securities and Exchange Commission recommended a uniform fiduciary or best interest standard in 2011 for all brokers, dealers, and investment advisors providing advice to retail clients, it was ultimately the U.S. Department of Labor that took action. Final rules for advisors who deal with retirement accounts were released this month, aimed at reducing conflicts and costs.