The Investment Funds Industry of Canada (IFIC) is pushing back feistily against proposed regulatory measures, such as the introduction of a “best interests” standard and the banning of embedded commissions, that will impact the financial services sector heavily.
“What will be prohibited under a ‘best interest’ standard of care that is allowed under the current rules?” asked John Adams, chairman of IFIC’s board and CEO of Mississauga, Ont.-based PFSL Investments Canada Ltd., in his opening remarks at IFIC’s annual leadership conference in Toronto on Thursday. “And how is the industry expected to supervise compliance with such an overarching aspirational rule?”
Regulators, including the Canadian Securities Administrators, need to reconsider several proposed reforms that “are either impractical, unenforceable, or would adversely affect investors’ access to advice and limit their choice of products,” he said.
See: Regulation: Reform opposition lines up
“Regulators should not choose winners and losers among various products or services,” Adams said. “Instead, they should determine exactly what the problem is, how best to resolve it, and minimize unintended consequences to investors.”
Although Adams admitted there are biases that arise out of any compensation structure in any industry, he says regulators must assess how serious these conflicts are before they “cast the industry and investors into uncharted waters.”
Evidence shows investor awareness of the fees and commissions they pay is on the rise as a result of initiatives such as the second phase of the client relationship model (CRM2), and Adams suggested that that competitive pressures, advancing technology and investor disclosure will address some of the concerns regulators have about embedded fees. Already, there have been fee reductions across 6,000 classes of mutual funds, he said, and there are more to come.
In fact, close to one-third of retail funds experienced a reduction in fees across the board or through preferred pricing programs since January 2015, Adams said. In particular, there has been a marked increase in the number of low-fee D-series and F-series funds, providing investors with expanded choice. The end result has been a reduction in asset-weighted management expense ratios for long-term funds to 1.95% in 2015 from 2.04% in 2010.
Regulators need to study the degree to which the newly implemented CRM2 disclosure rules and point-of-sale reforms are changing client and advisor conversations and behaviour before changing the rules on products and services the industry will be able to offer in the future, Adams said.
Regulators could also learn from the “experiences and unintended consequences” of other jurisdictions that have undertaken reforms similar to those being contemplated in Canada, he suggested.
For example, in the U.K, where regulators have banned embedded fees, it has been subsequently found that modest investors are not getting adequate advice, and regulators are now trying to build affordable advice back into the system, Adams said.
In New Zealand, regulators decided not to ban commissions because of the risks that a ban would pose to advice after consultation with the industry and consumers to identify any problems with the country’s Financial Advisors Act.
“It’s critical for the regulatory framework to make investment opportunities available to all Canadians,” Adams said. “In particular, it must not jeopardize access to advice for small investors and the middle class.”
Although Adams said IFIC supports solutions to eradicate any conflicts of interest that exist with current sales options and industry standards, he warned not to “throw the baby out with the bath water.”
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