Securities regulators are getting set to take another crack at a challenge that has long thwarted them — imposing some minimum qualifications and parameters on financial planning.

The mutual history of regulators and financial planning is a long and tortuous one. The fact that anyone can pronounce him- or herself a financial planner without meeting a minimum qualification, then carry on that activity without any meaningful oversight, has long bedevilled those worried about consumer protection.

In Glorianne Stromberg’s seminal industry report in 1995, the then-commissioner with the Ontario Securities Commission recommended the registration of financial planners, the imposition of proficiency standards and experience requirements, and the scrutiny of possible conflicts between planning advice and product sales. Additionally, in her 1998 report, Stromberg called for the development of a new proficiency standard from first principles, and a non-partisan body to oversee it.

The OSC tackled the issue, proposing a rule in 1999 that would have essentially limited the use of the title of “financial planner” and similar titles to those who had met minimum proficiency requirements. That initiative made its way through the rule-making process and the OSC settled on a final version in 2001, which it sent to the provincial finance minister for final approval. At that point, the initiative was killed, thanks to aggressive industry lobbying.

Officially, the rule was sent back for further consideration by the OSC, but it effectively died. Since then, the provincial regulators have largely ignored the question of regulating planners; the only exception is Quebec, which does provide specific regulation of planners via the Chambre de la securité financière.

Now, however, the Investment Industry Regulatory Organization of Canada, the newly integrated self-regulatory organization, is proposing a rule that will govern financial planning offered by its member firms and their registered reps. Essentially, IIROC seeks to set minimum proficiency requirements and supervision standards for firms whose advisors offer financial planning services.

The rule requires that advisors provide financial planning only through their dealers, not as an outside business activity. It defines planning as the “process of determining how clients can meet their goals through the management of financial resources,” adding that “planning” primarily for the purpose of making investment recommendations is not genuine financial planning.

The proposed proficiency requirement sets out that only “qualified” personnel can provide financial planning services and that dealers must ensure their reps’ proficiency, taking into account their qualifications, accreditations and experience.

The supervisory component demands that dealers develop written policies and procedures for the supervision of their planners, and that dealers approve any software their planners use to provide these services. It does not demand that dealers approve individual plans.

While the proposed IIROC rule, which is out for comment until mid-September, will apply only to its members, it appears the issue is still on the agenda at other regulators.

The OSC indicates that it intends to address the provision of financial planning, possibly by requiring the registration of planners. Nothing is imminent, however, as the OSC first wants to get its new registration regime in place.

“Right now, our focus is on the registration reform project, which will give us a harmonized and enhanced registration regime across the country,” says Susan Silma, director of the OSC’s compliance and registrant regulation branch in Toronto. “However, the registration of financial planners is one area we hope to address once the registration reform project is implemented.”

The other major SRO, the Mutual Fund Dealers Association of Canada, indicates that it intends to see how the proposed IIROC reform works, and will weigh whether something similar is warranted in the fund dealer sector.

Karen McGuinness, director of compliance with the MFDA in Toronto, indicates that the idea of imposing proficiency requirements is probably one that will appeal to the MFDA. But the “hot button issue,” she suggests, is whether advisors should be required to conduct their planning activities through their dealers.

The MFDA is in a very different position from IIROC on this issue, in that the MFDA allows financial planning services to be provided outside of the dealer through a firm, or person, that is either regulated by another SRO or government regulator, or subject to the rules of a “widely recognized professional association.”

These approaches reflect the distinct histories of the investment dealer and fund dealer channels. Traditionally, investment dealers were allowed to organize only in employer/employee relationships, which made it easy to require that everything go through the dealer. The fund dealer world, on the other hand, was largely populated with independent contractors who put different parts of their businesses through different firms — making it harder for securities regulators to assert sole jurisdiction over something not strictly in their purview.

@page_break@IIROC found it necessary to develop its new rule only once it began allowing firms to use principal/agent structures in 2003. This model still requires advi-sors to put all “securities-related” business through an IIROC dealer, but some dealers have questioned whether financial planning should be considered a securities-related business. IIROC has determined that planning does constitute such a business. So, it began developing this rule to establish a framework for the regulation of financial planning among investment dealers.

The MFDA world is more of an open-architecture model. Its treatment of financial planning is designed to provide dealers with flexibility, while also ensuring that clients have an avenue of redress regardless of whether planning activity is conducted inside or outside the rep’s mutual fund dealer.

For the MFDA to change this set-up and follow IIROC’s approach of requiring the business to go through the dealer, McGuinness says, the MFDA would have to demonstrate why that was necessary: “We would have to have some sort of justification as to why [the existing rule] is not working, and why [financial planning] should have to go through [an MFDA member].”

When the existing approach was first adopted, the treatment of financial planning was one of several contentious issues the fledging MFDA had to resolve to the satisfaction of both provincial regulators and prospective members (who were generally opposed to the new SRO and many of its rules).

This was around the time the OSC was proposing its ill-fated financial planning rule. McGuinness recalls the industry’s opposition to a securities regulator claiming authority over an activity that involves more than securities — for example, insurance, banking, and tax and estate planning. So, when it came time for the MFDA to decide how it would regulate financial planning, the securities commissions agreed to a more open approach.

Looking ahead, McGuinness says the MFDA could impose proficiency requirements without ordering the financial planning business to go through the dealer. And, she notes, the MFDA would likely lean toward the approach taken by IIROC, which requires the dealer ensure a planner is qualified but leaves it somewhat open to determine what constitutes qualification — rather than prescribing specific courses or experience requirements.

In the meantime, the MFDA is reforming its rules to remove the provision that allows reps to conduct planning through an outside firm that is supervised by a professional association. As McGuinness explains, no professional association really has enough clout to be effective in that role; as there isn’t an association that can meet the MFDA’s approval, the SRO is eliminating the provision. That proposed change is also out for comment until mid-September.

Of course, the MFDA won’t be the only ones watching the IIROC proposal. Previous efforts to regulate financial planning have proven contentious because there are so many self-interested factions involved. The variety of education providers and industry associations with a vested interest in the matter naturally provoke disagreement as they seek to protect their turf. Moreover, efforts to impose some restriction on business activities that haven’t previously been regulated inevitably inflame resistance.

However, according to Julia Dublin, a lawyer with Aylesworth LLP in Toronto who led the OSC’s doomed financial planning proficiency rule when she was at the OSC, the proposed rule shouldn’t be controversial: “Unlike the [OSC’s proposed] rule, which was based on a holding-out test, thereby promoting truth in advertising, the IIROC rule applies only to agents of IIROC member firms when they undertake a vaguely described advice process not in connection with a product sale. It requires that they have one of the mainstream proficiency designations and essentially adhere to one of the mainstream practice codes.”

But, Dublin stresses, “It does nothing about the alphabet soup of competing proficiency designations and does nothing to advance the interests of investors who believe they are receiving comprehensive objective financial advice tailored to their personal circumstances but may not be, due to inherent conflicts of interest in their advisor/client sales relationship.”

As Dublin notes, the losers in all of this are consumers who cannot be assured of getting objective financial advice — a situation that has been ignored by regulators for years now. IE