Time to break down regulatory silos, says IAP

The IAP submission reiterates the group’s call for a “best interests” standard of care for financial advice, calls on regulators to police the titles that advisors use, and recommends that regulators intervene with advisor compensation.

The IAP submission also argues that the silos between different aspects of the investment industry need to be eliminated so that consumers are equally protected regardless of which industry segment they are dealing with.

“Any change must start with the consumer in mind,” the IAP submission states. “The current regulatory approach is industry and product-focused, built on a series of archaic and outdated silos. Investors do not typically understand what their rights are and those seeking holistic advice on investments, insurance, and tax planning are poorly served by the current approach.”

Specifically, the current system suffers from gaps in investor protection and allows for regulatory arbitrage, the IAP’s submission notes.

“For example, regulators are introducing CRM2’s new cost and account performance disclosure. If they also move to eliminate compensation incentives like mutual fund embedded commissions, which bias advisor product recommendations, it is reasonable to believe that regulatory arbitrage will become even more prevalent,” the IAP submission warns. “It is already happening — there have been reports of a significant increase in segregated fund assets, a product not under OSC oversight or OBSI dispute resolution.”

The IAP submission argues that it’s time for policy-makers to break down the regulatory silos and harmonize regulation: “The goal must be to have the same rules for comparable services and products. And to ensure consistent compliance and enforcement of the rules, a single independent regulatory organization is required.”

Within this harmonized system, advisors should be required to provide advice that’s in clients’ best interests, the IAP submission says.

“There is simply no room for conflicts of interest in the giving of financial advice or the execution of a financial plan. Caveat emptor has no place in a relationship as important to Canadians as their relationship with their financial advisor or planner. The standard should be the same as for doctors and lawyers, namely a fiduciary standard that requires the advisor to always act in the client’s best interest,” the IAP’s submission says.

“A best interest standard that extends across all areas of financial advice and financial planning would also eliminate concerns over regulatory arbitrage because the sale of products such as mutual funds and segregated funds would be held to the same fiduciary standard,” it says.

In addition, the IAP’s submission recommends that titles be regulated “so that they clearly indicate what advice and products a registrant is qualified and permitted to recommend”; and that advisor proficiency requirements need to be set independently of the industry and in the best interests of investors.

The IAP submission also recommends that compensation be regulated: “To the extent that persons other than their clients compensate advisors and planners, there will be a conflict of interest. It is true that he who pays the piper calls the tune. At the same time, clients should only have to pay for services received; advisors should not be permitted to simply charge an annual fee, based on the size of a client’s portfolio to cover advisory services. Such a fee would be nothing more than a direct substitute for embedded commissions or similar charges that are not clearly and directly related to the provision of a service.”

“While the IAP is pleased to see the Ontario government undertaking this initiative, we believe regulators have for years neglected their responsibility on the question of advice and planning. It’s time to change that,” the IAP’s submission concludes.