With the financial crisis as motivation, regulators have been wading into all sorts of new areas, clamping down on aspects of the business that previously had been allowed to flourish with little oversight. But the regulatory void around the financial planning business in Canada remains as impenetrable as ever.

From derivatives markets to credit-rating agencies, aspects of the financial services business that have long avoided regulation are now facing much closer scrutiny. A crisis always helps this along, as it both demonstrates a legitimate need for regulation and, more important, provides the sort of political will that’s necessary to allow regulators to interfere with businesses that would prefer to be left alone.

There’s been no such crisis emanating from the Canadian financial planning business, which is perhaps why it has largely managed to avoid regulation for so long (apart from Quebec, which is the only jurisdiction in Canada that regulates it directly). But the fear of increased regulation of financial planning is seemingly never far from the surface, nor is confusion about the rules.

Evidence of that situation has bubbled up again most recently in a comment letter from the Toronto-based financial advisor association, Advocis, on a rule proposed by the Investment Industry Regulatory Organization of Canada earlier this year. Ostensibly, the rule is designed to address conflicts of interest that may emerge when brokers engage in so-called “personal financial dealing” with clients, such as borrowing money from them, or engage in “outside business activities,” which must be reported to the sponsoring dealer and approved by it.

Advocis, in its comment, worries that the proposed rule could be interpreted as requiring dealers to supervise their reps’ financial planning activities taking place outside the dealer. The comment observes that the proposed rule doesn’t explicitly mention financial planning. But, nevertheless, it says that it’s concerned that “a liberal reading of the rule could lead to inappropriate interference by dealers with financial planning activities that are provided by [reps] to clients outside the dealer.”

IIROC has indicated that it doesn’t really understand the concern because it has already determined that financial planning at its member firms must take place within the dealer. IIROC points to a 2003 bulletin from its predecessor organization, the Investment Dealers Association of Canada, that ruled that financial planning is a “securities-related business” — which means it cannot be considered an outside business activity, and that member firms are responsible for its supervision.

Back then, an IDA paper had concluded that “financial planning is a securities-related business in that the nature and extent of any investment recommendations to a client are inextricably tied to the overall plan.” Further, there could be financial plans that don’t lead to investment recommendations, but that this is likely to be “the exception rather than the rule,” and therefore financial planning is to be considered a securities business.

IIROC stresses that the intent of its rule is to codify its existing expectations by imposing an obligation on reps to disclose any outside business activity to their dealer, and to obtain the dealer’s approval. As planning already has to take place within the dealer, as far as IIROC is concerned, this rule doesn’t expand the scope of dealers’ oversight obligations in that area.

But the question of appropriate dealer oversight has never been the central problem with financial planning regulation. Rather, the situation requiring some regulatory intervention in the financial planning sphere is the inability for consumers to determine the difference between who is a genuinely qualified planner and who is just using the title.
@page_break@This long-standing concern traces its roots all the way back to Glorianne Stromberg’s original report on the mutual fund industry, published in 1995. In that seminal report, Stromberg, a former commissioner with the Ontario Securities Commission and now a retired securities lawyer, identified the lack of qualifications and proficiency standards for financial planners as a regulatory concern. In the wake of her initial report, there were efforts to establish a standard, but that exercise soon fell victim to squabbling among various educational bodies, which has never been resolved.

The resulting proliferation of standards and professional designations has only deepened the confusion cloaking the financial planning business.

In the meantime, the list of regulatory concerns has grown. In 1999, a Canadian Securities Administrators committee expanded its list of worries to include: client confusion about planners’ qualifications, and who is providing the service; conflicts of interest that may arise between planning advice and product sales; uncertainty over who is accountable for planning advice; and risks to dealers stemming from the advice their reps may be giving without adequate supervision or insurance coverage.

For planners that work within the self-regulating organization world, some of these concerns are ameliorated by having reps carry out their planning activities within their dealer. But the core concern about the need to establish an objective standard so that consumers know who is qualified to provide planning advice has never been resolved.

This failure is largely due to a shortage of political will. The OSC got very close to establishing a standard in 2001, but the initiative died at the last minute (reportedly due to industry lobbying of the provincial government).

Since then, there’s been no serious effort to resolve the issue. IIROC kick-started the debate once again in 2008, when it proposed a new rule that would attach proficiency requirements to planning activities carried out by its licensed brokers and establish minimum supervisory requirements for the firms that oversee them.

This proposal was primarily intended to try to clear up some of the confusion for dealers about the regulation of planning rather than solve the confusion of clients. When IIROC proposed the rule, it explained that dealers often seek guidance from it about how to handle financial planning; so it decided to “establish a basic regulatory framework for the provision and supervision of financial planning.”

However, that proposed rule, like the numerous other efforts to regulate financial planning that have gone before it, has seemingly fallen into limbo. IIROC says it hasn’t decided whether to proceed with that rule or not.

When that rule was published for comment, it had generated plenty of feedback, so IIROC decided to hold a roundtable on the issue last autumn. As a result of that meeting, IIROC reports that a number of the organizations involved with the financial planning business had “committed to developing a professional [SRO] for financial planning with a number of requirements.”

The Financial Planning Stan-dards Council is one of the groups that had taken part in that round-table, and the FPSC has pledged to be part of an alternative to the IIROC initiative.

“Numerous stakeholders have expressed their concern with [IIROC’s] proposed approach,” notes Stephen Rotstein, the FPSC’s vice president, policy and enforcement, and general counsel.

“Throughout the process, IIROC has shown an openness to alternative solutions. As a result, we have been working with industry stakeholders to find a better way to regulate financial planning.”

As to whether that means a new SRO for planners, Rotstein is non-committal: “We are still discussing a number of different solutions to the issue.” IE