Statutory best interest duty needed for investors

In comments submitted to the Canadian Securities Administrators (CSA) paper on a possible statutory fiduciary duty, FAIR Canada argues that imposing such a requirement would increase investor protection; result in better financial outcomes for consumers; improve competition and the level of professionalism in the financial services industry; and, bolster trust in the industry too.

It says a best interest duty would improve outcomes for consumers because it would explicitly require firms and reps to consider investment costs in determining whether the investment is in the investor’s best interest; it will reduce investors’ agency costs as they won’t have to scrutinize recommendations for conflicts of interest; and it will make recommendations more objective. At the same time, it suggests that if embedded commissions were prohibited, industry competition would be enhanced, and “economic forces would spur innovation in the delivery of cost-effective advice”.

Ultimately, FAIR Canada recommends that the CSA implement a statutory best interest duty when advice is provided to retail clients, and that this take place “as promptly as possible in order to create market conditions where advisors and dealers must determine that the products they recommend are in the best interests of their clients.”

In the case of mutual fund dealers, FAIR Canada says that reps must be required to consider products outside their registration to show that they have acted in the best interest of the client; and, if necessary, advise the client of the type of products that they should investigate further either with full-service brokers or discount brokers. The group also says that regulators should consider allowing fund dealer reps to become registered to sell other collective investment products, such as exchange traded funds (ETFs).

Alternatively, FAIR Canada suggests that regulators could take a phased approach, and follow a “restricted advice” model, similar to the approach in the UK. Such restricted advice reps would be required to call themselves salespeople, and must disclose that they are providing restricted, not independent, advice. And, the group says that conflicted remuneration structures should be banned, regardless of whether it’s paid in the context of restricted, or independent, advice.

Indeed, the group says that, if regulators do impose such a duty, they should also consider whether embedded commissions are compatible with that approach. FAIR Canada says it has “great difficulty” understanding how a dealer (or rep) required to act in the client’s best interest could accept payments from a third party and fulfill their duty to the client.

FAIR Canada also says that the CSA should examine the services provided by discount brokerages and assess whether certain services should be subject to a best interest standard too. And, it recommends that a best interest duty should also apply to recommendations involving products that aren’t technically securities, such as segregated funds or principal protected notes.

Finally, FAIR Canada says that regulators should not be obliged to justify this duty on the basis of a cost-benefit analysis, as these are not accurate, and are not the correct way to determine whether such a duty is warranted.