Canadian regulators are fundamentally at odds over the question of whether to introduce a codified requirement for financial advisors to act in the “best interest” of their clients – a disagreement that has serious implications and even threatens the prospect of national regulation in Canada.
On May 11, the Canadian Securities Administrators (CSA) quietly issued a notice setting out its members’ divergent views on a critical consultation paper that was published in April 2016. The recent notice indicates that although the regulators generally agree that a series of “targeted reforms” to the rules governing advisors are a good idea, they are deeply divided on the issue of formally implementing a best interest standard (BIS). Ontario and New Brunswick continue to be in favour of the BIS, but Alberta, Manitoba and Quebec have joined British Columbia in explicitly rejecting such a standard.
“All CSA jurisdictions want and expect those registered as dealers, advisors and representatives to act in the best interest of their clients, and all [regulators] want to see positive outcomes for investors,” says Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers (AMF). “However, we [at the CSA] currently disagree on how to achieve those positive outcomes.”
The Ontario Securities Commission (OSC) remains convinced that a BIS is needed. “We have been clear all along that we support a best interest standard and are prepared to demonstrate leadership here. [A BIS] is what investors expect and deserve,” says Grant Vingoe, vice chairman of the OSC. “This is about doing the right thing – and fulfilling one of our greatest responsibilities as a regulator: delivering effective investor protection to the public we serve.”
The regulators that are not adopting a BIS argue that the CSA’s “targeted reforms” will be good enough to improve investor outcomes. These regulators worry that introducing a BIS as well could cause clients to lean too heavily on their advisors.
Morisset says he believes that the CSA will be able to reach consensus on the details of the targeted reforms, which will include revisions to a variety of existing rules, including those dealing with conflicts of interest, Know Your Client/Know Your Product and the titles that advisors use. (The CSA is putting off changes to proficiency requirements as a separate project.) These reforms, he says, “will meaningfully raise the standards of advisor conduct.”
The stark division among the regulators is causing concern about the larger effort to create some form of national securities regulation in Canada. In the wake of the CSA announcement, the Canadian Foundation for the Advancement of Investor Rights (FAIR Canada), an investor advocacy group, dropped its support for the proposed Co-operative Capital Markets Regulator (CCMR), citing concerns that its creation would represent a step backward for investor protection.
FAIR Canada worries that implementing the CCMR would effectively eliminate the OSC, the leading champion for investor protection among Canadian regulators over the past several years. FAIR Canada is particularly concerned about the reluctance of most regulators to pursue a BIS.
According to white paper published by FAIR Canada that outlines objections to the CCMR: “Investors (at least those in Ontario and New Brunswick, the two provinces that have endorsed a statutory best interest duty) may well be better off under the current regime, whereas the move toward a statutory best interest duty has gathered steam and may come to fruition.” (The paper was written for the group by Anita Anand, law professor and academic director, Centre for the Legal Profession and the Ethics in Law program, at the University of Toronto, and special advisor to FAIR Canada.)
Indeed, the BIS has been looming as a tricky policy issue since the OSC and British Columbia Securities Commission (BCSC) first landed on opposite sides in April 2016 – particularly since Ontario and B.C. are the primary provinces participating in the CCMR. (Alberta, Manitoba and Quebec are not part of it). Now that several non-CCMR provinces are aligned with the BCSC in opposition to the BIS, that is stoking concerns about the CCMR project.
Alongside this rising discomfort among investor advocates, the effort to establish the CCMR took a legal hit last month when the Quebec Court of Appeal ruled that the governance mechanism for the proposed CCMR is unconstitutional.
For the foreseeable future, the alternative to the CCMR remains the CSA – which now is fractured over the issue of the BIS. Despite this fundamental fissure, Morisset says, he doesn’t believe that this divide will affect other major CSA initiatives, such as its ongoing consultation on whether to ban embedded commissions.
“I believe all my CSA colleagues are of good faith and we all share the same objectives,” Morisset says, adding that one of the hidden strengths of the CSA is diversity of policy views throughout the country, which have led to “optimal policy outcomes” in the past.
Certainly, these sorts of fundamental policy disagreements are not unheard of within the CSA. In the past, the CSA has been a vehicle for achieving some sort of consensus – or, at least, harmonization – among the provinces.
This time, however, the different factions are prepared to go their own way. “We’ve reached a fork in the road and are taking the route we feel is best,” says Vingoe.
The OSC plans to work with its counterpart in New Brunswick to develop a workable BIS – a process that will involve consultations with the self- regulatory organizations, the investment industry and investors alike.
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