The Investment Industry Regulatory Organization of Canada (IIROC) issued a notice to dealers on Wednesday in which the self-regulatory organization (SRO) says it believes regulatory action is needed to raise conduct standards for investment firms and protect clients. To start, the SRO is stepping up compliance attention on compensation-driven conflicts, including the operation and oversight of firms’ commission grids.
In the notice, the SRO says that it agrees with a recent pronouncement from the Canadian Securities Administrators (CSA) declaring that regulatory action is necessary to “better align the interests of registrants to the interests of their clients, to improve outcomes for clients.”
See: Regulators mull better aligning the interests of clients and advisors
IIROC indicates that it intends to work with the CSA, which is planning to issue a consultation paper on the issue toward the end of April, to ensure consistent standards of care for all dealers — whether they are under the direct oversight of the provincial securities commissions or belong to an SRO.
In the meantime, IIROC suggests in the notice that there is already, effectively an obligation for investment firms to operate in their clients’ best interest: “We believe that, taken together, our [dealer rules] and guidance put the best interest of the client before the interests of IIROC-regulated dealers and their representatives. We acknowledge that further clarification of our rules and guidance may be necessary to make this point absolutely clear.”
In particular, IIROC says in the notice that it’s concerned about firms’ efforts at managing compensation-related conflicts of interest, which, it says, is key to improving the alignment of client and industry interests.
“Our recent examination of conflicts of interest management practices of IIROC-regulated firms indicates firms can and should improve the way they supervise and address existing and potential conflicts of interest,” IIROC’s notice says. “In our view, inadequate oversight will inevitably result in conflicts not being identified, or in conflicts not being addressed in a manner that considers the best interests of the client.”
Specifically, IIROC reports that its recent compliance reviews have found that most of the firms it reviewed “lacked a meaningful process to identify, deal with, monitor and supervise compensation-related conflicts.”
For example, the IIROC notice says firms lack a process for identifying reps that recommend products that generate higher revenue when cheaper alternatives exist; that they don’t have processes to intensify oversight when advisors are approaching compensation thresholds; and that while firms say they always put clients’ best interests first, “we found little supporting documentation as far as compensation-related conflicts were concerned.”
To address these shortcomings, IIROC indicates that it is ramping up its compliance efforts in this area and that it will consider whether further rules, or guidance, may be necessary. To that end, the SRO says that it’s immediately enhancing its compliance reviews “to more closely examine compensation grids, supervisory oversight of advisors recommending products with high commissions and the monitoring of advisors approaching compensation thresholds.”
IIROC also intends to conduct a survey of dealers by June to assess firms’ oversight and monitoring of compensation-related conflicts. This survey may lead to further targeted compliance exams, and it will inform any policy-making in this area.
“These measures will assist firms and their representatives to identify, manage and supervise compensation-related conflicts of interest in accordance with the outcomes that we expect as a public interest regulator,” IIROC says in the notice.
This latest salvo from IIROC follows not only the CSA’s recent announcement, but also the introduction of a new fiduciary standard in the U.S. on Wednesday as well as recommendations from a government panel in Ontario yesterday that call for a statutory best interest standard for financial advice and financial planning.
See: U.S. unveils final version of fiduciary rule
See: Expert committee calls for regulation of financial planning, statutory duty
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