CSA paper examines “best interest” fiduciary standard

It notes that there has been a movement in this direction around the world in recent years, with British and European regulators already imposing a “qualified” standard on advisors in their country; Australia in the midst of introducing a standard by July 1, 2013; and, the U.S. authorities debating a common standard for broker dealers and investment advisers (in the U.S., brokers are not subject to a fiduciary standard, whereas advisers are).

The CSA has no official position on the idea, the paper stresses, saying, “… no decision has been made whether a statutory best interest standard should be adopted (and on what terms), whether another policy solution would be more effective or whether the current Canadian standard of conduct framework is adequate.” And, if there was a move to adopt such a standard in Canada, there would first be “broad public consultation and discussion”. The CSA sees its consultation paper as the initial step in soliciting public input.

The value of the possible imposition of a fiduciary duty, it suggests, is that it could be the best way to remedy some of the weaknesses in investor protection that afflict current standards. And, the paper spells out five basic concerns, including: the impact on investors of the fact that suitability doesn’t equal best interests; clients already assume that advisors must act in their best interests; the “buyer beware” principle may not be good enough in the unique context of financial services; the current standard may not be enough in view of the generally low level of financial literacy; and, that, in practice, current conflicts of interest rules might be less effective than intended.

However, it also recognizes possible drawbacks, such as the possibility that it could increase the cost of financial advice. It notes that the cost impact would be influenced by the scope of the standard, the way that firms respond to it, and the extent to which costs are passed along to clients (possibly limiting the availability of advice to wealthier investors).

It also suggests that a very broad duty could harm the businesses of firms, such as mutual fund dealers, that are only licensed to deal in one type of product; and, wonders about the impact on the exempt market and the ability to raise capital in that market — suggesting that it would likely have to be tailored to different industry segments.

The paper notes that other countries have, in some cases, adopted a “qualified” fiduciary duty; in other words, not a pure duty. In Australia for example, the duty only applies to retail clients, and it does not mandate advisors to provide “perfect advice”, or to canvass every possible product in making a recommendation.

“The application of such a standard has been the subject of much debate in Canada and internationally, and requires careful consideration to determine the right solution for the Canadian context,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission. “Today’s consultation paper demonstrates Canadian securities regulators’ commitment in examining opportunities to improve the relationship between clients and their advisers and dealers in order to ensure effective protection for Canadian investors.”

The paper indicates that a precise cost-benefit analysis is not feasible as this point, but it nevertheless seeks feedback on the possible costs, and stresses that “the costs to introduce a statutory best interest standard should be proportionate to the regulatory objectives to be achieved”.

The paper is out for an extra-long, 120 day comment period, until Feb. 22, 2013. It can be downloaded by clicking here.