Industry players consulted by the Alberta Securities Commission believe the Fair Dealing Model (FDM) proposed by the Ontario Securities Commission is unworkable and unjustified.

In a letter sent to John Stevenson, OSC secretary, on September 16, Stephen Sibold, ASC chairman says the FDM could result in a loss of service for small retail investors, but could also represent a boon to the lightly-regulated insurance industry.

The ASC held meetings with Alberta-based industry participants on June 15, 16 and 18. ASC staff met with approximately 70 individuals representing mutual fund dealers, scholarship plan dealers, investment dealers, investment counsel and portfolio managers to discuss the FDM paper. ASC staff also provided 130 industry participants with questionnaires about the FDM, and received 50 responses.

The ASC found, in general, that industry participants support the key principles set out in the FDM concept paper, namely:

  • clear allocation of responsibilities;
  • transparency in dealings with retail investors; and
  • management of conflicts of interest to avoid self-serving outcomes.

However, Sibold says, “Most industry participants are not convinced that the regime set out in the FDM Concept Paper appropriately addresses these key principles. Most industry participants believe that the current system, with some adjustments, effectively upholds the three key principles.”

Sibolds says that many industry participants “expressed strong concern” about the impact of the proposed regime on retail investors with accounts of less than $100,000. “Ultimately, these participants are concerned that the cost of servicing small retail investors will eclipse any benefit firms will receive from servicing these clients,” he says. “The result may be to push some of these investors out of the capital markets or into self-managed accounts.”

Sibold says that industry participants also worry that advisors who now sell mutual funds may choose to sell segregated funds. “With segregated funds, costs to the client are higher; disclosure, compliance and client protections are minimal; and sales practices are essentially unregulated,” he warns. “Not only would clients not receive the benefits of the Fair Dealing Model principles, they would not receive the benefits of the protections in the current securities regulatory system.”

Other worries that the ASC heard include:

  • the evidence provided in the FDM Concept Paper does not support the proposed overhaul of the entire regulatory system; lack of harmonization;
  • limited detail in the proposals; the shift from a product-based regulatory model to an advice-based model;
  • the FDM’s plan to prescribe relationships; the lengthy and detailed Fair Dealing Document;
  • the cost of providing personalized performance information;
  • the practical demands of providing more security and portfolio risk reporting;
  • that the client education measures anticipated in the FDM are “unreasonable, unnecessary and cost-prohibitive”; and
  • its overall implementation costs.

Sibold notes that some industry participants believe that the regime contemplated in the FDM Concept Paper will be so cost-prohibitive as to be “completely impractical and unachievable”. “Many industry participants noted that the costs of implementation are not generally offset by any increased revenue or cost savings for industry,” he says.

“Most participants expressed grave concern about the OSC proposing this new approach to registrant regulation without consultation with – and the support of – the other securities regulatory authorities. They expressed concern that a move to a Fair Dealing Model by the OSC alone would undermine all of the harmonization advances made by the CSA over the past several years,” he says. “Almost without exception, industry participants believe that any significant changes to the regulatory system must be made in harmony with all of the thirteen securities regulatory authorities and, where possible, with the self-regulatory organizations.”