TORONTO, Oct. 10, 2019 /CNW/ - The Canadian Securities Administrators (CSA), the umbrella organization to the provincial and territorial capital markets securities regulatory watchdogs, recently released the final rule amendments to implement the Client Focused Reforms initiative, in order to require registrants to put clients first when addressing conflicts of interest and investment product suitability.
The reforms amend National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and they come into force on December 31, 2019. This regulatory advancement culminates a seven-year regulatory proposal and consultation process intended to address concerns related to the client-adviser relationship, in a process that began in 2012 with an examination of standards of care and the potential for a best interest standard of care for investment professionals to replace the suitability standard.
FAIR Canada continues to comment on the Client Focused Reforms for the same reasons that we provided our views during earlier consultations and iterations starting with consultations in 2012. FAIR Canada's mission, as a national charitable and independent organization, is to advance the rights and interests of retail investors in securities regulation, public policy and other initiatives, as the Voice of the Retail Investor since 2008.
FAIR Canada wants to first acknowledge the thoughtful and collaborative approach taken to these rules which help to shift securities regulation away from a "buyer beware" traditional disclosure-based regime to one that does more to mitigate risk. We commend the CSA for embarking on a shift away from over-reliance on disclosure as a cure-all, and towards industry professionalization.
FAIR Canada has long been a proponent of the "best interest standard". The Client Focused Reforms no longer include the overarching best interest standard. However, we believe that the CSA has put considerable effort into trying to achieve a similar outcome to the "best interest duty of care" by using different tools – suitability, KYC, KYP, communications and conflict rules.
The amendments present some entirely new rules and also codify best practices found in regulatory guidance. The CSA's approach in these reforms to putting clients first through infusion of best interest principles should make it more difficult from a practical perspective to mismanage conflicts of interest, sell products that are inappropriate to the client's circumstances or present themselves or their firm's services in a misleading manner. This is achieved through heightened responsibilities in understanding their clients' circumstances, investment product analysis, investment product drawbacks disclosure, internal training, as well as identifying, addressing, avoiding and disclosing conflicts of interest. There is improved disclosure to clients of what they should expect from their advisor including scope of services agreed to and any significant restrictions, costs and limitations related to products. There is also a new "know your product" requirement. These new requirements are intended by the members of the CSA to provide better investor protection through better aligned industry and customer interests.
FAIR Canada continues to believe that the regulatory regime in Canada can be further improved for investors by addressing the compensation structures in the industry that distort advice, that breach regulatory rules or that unfairly diminish returns. In addition to the Client Focused Reforms initiative, FAIR Canada encourages the CSA to pursue further commission-related reforms. Specifically, we encourage the CSA to ban deferred sales charges (DSCs) and also to ban the sale of funds or series with embedded trailing commissions by discount brokers. DSCs have been referred to as "stealth wealth killers". They are used to avoid redemption and they diminish returns at a starting rate of an egregious whopping 5 or 6% (declining slowly over time), of which investors are often unaware. Trailing commissions are paid for advice that discount brokers are prohibited from providing and in fact do not provide. Canadian investors have paid significant amounts in fees to discount brokers resulting in $200 million class action lawsuits.
FAIR Canada supports the new rules under the Client Focused Reforms but also believes that to be truly effective they will require industry outreach to and engagement with the CSA Implementation Committee team, stringent enforcement, commission reforms (as a separate but potentially related initiative), as well as CSA follow-up on additionally improving proficiency standards to move further towards a more professionalized financial advisor service standard.
We encourage industry members to implement the reforms as soon as possible rather than to wait for the expiry of the lengthy phased transition period of 27 months. Both clients and registrants benefit from implementation of the new rules sooner rather than later.
FAIR Canada looks forward to any opportunities to collaborate with and support the CSA on future reforms to proficiency and to commissions.
For further information about FAIR Canada see: https://faircanada.ca/.
SOURCE FAIR Canada
For further information: FAIR Canada contacts: Ermanno Pascutto, Executive Director, (905) 467-9495, [email protected]; Douglas Walker, Senior Policy Counsel, (416) 728 -1629, [email protected]; Fern Karsh, Policy Counsel and Corporate Secretary, (647) 256-6692, [email protected]