CSA puts the brakes on major reforms

However, these updates amount to little more than a pledge to keep pondering the issues. At this point, the CSA is certainly not committing to any reforms. It hasn’t even whittled down the possible options to focus on for one or two potential regulatory responses to the issues raised in these consultations – a move that would at least hint at a path toward a definitive policy position.

The only choice the CSA has taken with these latest reports on the consultations is a decision to link the initiatives, according to a recent announcement: “The similarity of the feedback received from stakeholders demonstrates a connection between the two consultation initiatives and suggests a need for CSA staff to co-ordinate their policy considerations on these initiatives.”

But it’s not clear whether this is a step forward or if conflating the topics will serve just to muddy the waters and prevent progress toward a policy decision.

The lack of headway on these issues is proving to be frustrating for investor advocates. Connie Craddock, chairwoman of the Ontario Securities Commission‘s independent investor advisory panel (IAP), indicates that the IAP is disheartened by the regulators’ performance on these files.

“The IAP has been very disappointed at the glacial pace of urgently needed regulatory reform of our inadequate investor-protection regime,” Craddock says. “We look forward to seeing the CSA turn its words into a meaningful, specific plan of action that puts Canadian investors’ interests first.”

Yet, there is little sign that’s about to happen. For now, all the regulators are promising is further consideration of the issues raised in these consultations: “We anticipate communicating in the coming months what, if any, regulatory actions and/or research we intend to pursue.”

Moreover, Bill Rice, chairman of the CSA (and chairman and CEO of the Alberta Securities Commission), has voiced personal skepticism about the necessity for major reforms to retail regulation. In a speech to an industry conference in December, Rice said that he doesn’t see the particular need for regulators to introduce a fiduciary standard.

Furthermore, Rice suggested that Canadian regulators are considering the question of whether to impose a fiduciary duty on financial advisors only because a similar debate is taking place in the U.S. in the wake of the financial crisis and not because of any specific need for it in Canada.

“I believe that the existing standards of suitability and ‘know your client’ [KYC] are very good standards,” he said. Problems arise, he suggested, because either investors don’t understand the existing standards or advisors don’t adhere to them – but that doesn’t necessarily mean that a completely new standard is warranted.

“If we as regulators could be comforted that the suitability and [KYC] standards were being universally and rigorously applied, I do not believe we would need to be canvassing the application of a wholly new standard,” Rice said, adding that the investment industry could provide that comfort by demonstrating a genuine commitment to enforcing the existing standards and not simply approaching suitability as an exercise in ticking boxes.

Yet, to date, the industry’s record on this count is not particularly good. In fact, in early January, the CSA issued new guidance in the areas of suitability, KYC and “know your product” standards in an effort to improve compliance among firms that are directly supervised by the provincial regulators, such as exempt-market dealers and portfolio managers. The publication of the new guidance was motivated, the CSA explains, by the lack of compliance with the existing standards that has been revealed during reviews.

Although Rice stressed that his views are his own and that he was not speaking for the rest of the CSA, his comments highlight the differences of opinion that often prevail within the CSA and can weigh against decisive policy action. And, from the industry’s perspective, any indecision or delay for a possible new regulatory initiative is almost as good as an outright victory against it.

Next: Advocis lauds CSA
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Advocis lauds CSA

After the CSA delivered its non-committal updates, Advocis lauded the CSA’s path. “This cautious and reasoned approach is the right course because there’s so much at stake,” says Greg Pollock, Advocis’s president and CEO. “A wrong decision could have devastating consequences, so we’re relieved that the regulators are taking the time to consider all the facts.”

In fact, during both consultations (on fiduciary duty and mutual fund fees), opponents to those initiatives argued that regulators should wait to see if existing reforms to various aspects of retail regulation will resolve the concerns that motivated these consultations in the first place.

For example, the industry has only just implemented reforms to suitability, conflict of interest and disclosure rules as part of the first phase of reforms to the client relationship model. And changes to cost- and performance-reporting requirements (known as CRM 2) are to be implemented over the next two-and-a-half years.

The industry maintains that these changes should be given a chance to work before even more fundamental reforms are considered, and also argues that Canadian regulators should wait to see if recent international reforms similar to the ones the CSA is considering – such as measures to introduce fiduciary duties or to ban embedded compensation – work as intended in the countries that have adopted them before plowing ahead with their own versions.

But investor advocates insist that it’s time for action. The IAP is “fully committed to thoughtful, careful analysis and a measured regulatory response, [but] we believe that Canadian regulators need to move beyond issue identification and discussion into the realm of decision-making and reform. The slow pace of reform in Canada is unacceptable.”

These starkly opposing views were made clear to the CSA in both of its recent consultations. To start, industry players and investor advocates fundamentally disagree over whether there is a problem at all. The industry also warns that efforts to impose either higher standards of care on advisors or to interfere with current fund fee structures could have unintended, negative consequences – including higher costs and reduced access to advice and investor choice.

Meanwhile, investor advocates maintain that investor protection is lacking in both respects, and that current and planned reforms won’t do anything to address these issues. This group argues that regulators need to move beyond disclosure-based regulation and toward more intrusive approaches, and suggest that imposing a duty to act in clients’ best interests could solve both problems.

For now, the CSA isn’t prepared to declare a position. Although, in doing so, regulators are implicitly siding with the industry.

Next: Australia’s new government aims to pare back big changes
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Australia’s new government aims to pare back big changes

One of the key inspirations behind Canadian regulators’ efforts to consider retail financial advice reforms, such as the imposition of a fiduciary duty, has been similar efforts in other countries. But one of those jurisdictions already is looking to pare back its recent changes.

To varying degrees, regulators in the U.S., the U.K. and Australia have been grappling with similar issues. In fact, the Canadian Securities Administrators (CSA) has cited these examples as part of its consultations.

Now, the new government in Australia is proposing to revise many of the same changes that helped to inspire the CSA. The new coalition government, which won power in September 2013, says it supports the principles of many of the reforms that were introduced by the previous administration and took effect in July 2013, but they go too far. The new government says that the new rules impose too heavy a burden on the financial services sector, which is increasing the cost of investment advice and reducing the availability of that advice.

This position echoes some of the arguments that Canada’s investment industry, which is resisting similar reforms here, has put forth. In both written submissions to the CSA’s consultations and in roundtables held last summer, industry players have argued that major reforms to retail regulation would raise the cost of advice and price many Canadians out of the market.

However, in Australia, a cost/benefit analysis carried out for the previous government in 2012 predicted that the average cost of advice would decline as a result of the increased transparency its reforms produced and a shift by some investors to less costly “scaled advice.” The analysis also forecasted healthy growth in the provision of advice, driven in particular by an increase in demand for cheaper, less comprehensive advice.

The CSA’s consultation paper on the issue cites Australia as an example where policy-makers introduced a “qualified” best interests standard that includes provisions to ensure that advice doesn’t have to be perfect and that advisors don’t necessarily have to consider all possible products in making their recommendations.

Nevertheless, Australia’s new government now is proposing a series of amendments to those recent reforms, including changes to the “best interests” duty that was adopted to ensure that financial advisors put their clients’ interests ahead of their own.

Australia’s government says its amendments will aim to ensure advisors know they have provided compliant advice to their clients. The administration also has pledged changes to the provision of scaled advice by amending the ban on conflicted remuneration and reducing some of the disclosure requirements, the latter of which the government says are too burdensome and don’t provide much in the way of investor protection.

The proposed changes will save Australia’s industry an estimated A$90 million in implementation costs and will reduce annual compliance costs by an average of approximately A$190 million, according to government estimates.

The Opposition has criticized the planned changes, saying they are “bad news for investors” and will undo reforms designed to restore investor confidence, professionalize the advice business and ensure clients get advice that’s in their best interests.

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