{"id":435193,"date":"2021-12-03T13:47:51","date_gmt":"2021-12-03T18:47:51","guid":{"rendered":"https:\/\/www.investmentexecutive.com\/?p=435193"},"modified":"2021-12-31T11:51:27","modified_gmt":"2021-12-31T16:51:27","slug":"osc-efforts-undermined-by-lobbying-and-politics-says-audit","status":"publish","type":"post","link":"https:\/\/www.investmentexecutive.com\/newspaper_\/news-newspaper\/osc-efforts-undermined-by-lobbying-and-politics-says-audit\/","title":{"rendered":"OSC efforts undermined by lobbying and politics, says audit"},"content":{"rendered":"

This article appears in the December issue of <\/em>Investment Executive.<\/p>\n

Efforts to enhance investor protection in Ontario have been undermined by a combination of government interference, industry lobbying and regulatory dissonance, according to a review of the Ontario Securities Commission (OSC) by the province\u2019s auditor general.<\/p>\n

Investors have paid a heavy price for these failings, the report suggested. Between 2016 and 2020, Ontario investors paid an estimated $13.7 billion in trailer commissions and deferred sales charges (DSCs) \u2014 embedded fees that are banned in other major markets.<\/p>\n

The bulk of that total, $13.2 billion, consisted of trailers that would likely have been paid some other way, such as charging inves\u00adtors directly for advice. But inves\u00adtors also paid $400 million in trailers to discount brokers that can\u2019t provide advice (for the period from 2016 to 2019, as 2020 data wasn\u2019t available), and another $36 million in DSC fees.<\/p>\n

While regulators have long expressed concern about conflicts of interest, lack of transparency and distorting effects inherent in embedded fee structures, issues may persist even after forthcoming reforms take effect, the AG\u2019s report suggested. Those reforms include the client-focused reforms (CFRs) taking effect at the end of this year, and the bans on DSCs and discount broker trailers as of June 1, 2022.<\/p>\n

\u201cThe new rules continue to allow trailing commissions so long as dealers have implemented complicated controls to identify, document, disclose and address conflicts,\u201d the AG\u2019s report stated. Other efforts using the same approach \u201chave proven ineffective in deterring such conflicts of interest.\u201d<\/p>\n

The report also stated that unlike the straightforward bans on embedded commissions adopted in the U.K. and Australia, Canada\u2019s CFRs are \u201cnarrower, more complicated and would allow systemic conflicts of interest to continue.\u201d<\/p>\n

Investment industry lobbying and political meddling contributed to the weaker protection measures, the AG\u2019s report stated.<\/p>\n

In 2018, after years of study and consultation, the Canadian Securities Administrators (CSA) resolved to address investor protection concerns arising from industry fee structures. Ontario\u2019s recently elected Progressive Conservative government declared its opposition to the CSA\u2019s proposed reforms at the last minute and directed the OSC to consider alternatives to banning DSCs.<\/p>\n

That episode showed the OSC is \u201cvulnerable to political interference, which risks undermining its independence and impartiality,\u201d the AG\u2019s report stated.<\/p>\n

The government\u2019s intervention on DSCs was made without any \u201cnew evidence to counter the weight of reasons and evidence amassed by the OSC and [the other] regulators,\u201d the report stated, and followed industry pressure.<\/p>\n

\u201cIn our interviews, current and former OSC staff described \u2018intense\u2019 lobbying efforts from industry,\u201d the AG reported. Those efforts included \u201csignificant lobbying activities and ministry meetings with key industry stakeholders\u201d in the lead-up to the government\u2019s move in September 2018 to undermine the proposed DSC ban.<\/p>\n

The AG\u2019s report also revealed that a former industry lobbyist serving on the government staff was involved with the decision to oppose the regulators\u2019 policy.<\/p>\n

Political interference went far beyond the DSC incident, the AG\u2019s report said. The government adopted a new \u201cpre-clearance process\u201d for OSC policymaking in September 2018 that required the regulator to provide it with proposed rules before issuing them for public consultation, and again before formally submitting final rules for government approval. The government also demanded an advance look at the regulator\u2019s policy development work.<\/p>\n

This increased political involvement \u201cwas said to interfere and delay action,\u201d the report stated, citing interviews with current and former OSC staff and commissioners.<\/p>\n

The government\u2019s new hands-on approach compromised the regulator\u2019s independence, the AG\u2019s report suggested. While the government has legislative authority to set the commission\u2019s policy direction, the AG found the government\u2019s actions contradicted the requirement that the OSC\u2019s \u201cregulatory and adjudicative decisions \u2018must be made and be seen by the public to be made in an independent and impartial manner.\u2019\u201d<\/p>\n

In particular, \u201clobbying interests overrode OSC evidence-based research in the case of deferred sales charges,\u201d the report stated.<\/p>\n

To ensure the OSC\u2019s independence in cases in which the government disagrees with the regulator on policy, the report called on the Ministry of Finance to publicly spell out the basis of its position, including the input it received from lobbyists.<\/p>\n

The ministry\u2019s response, cited in the report, stated the government would consider the recommendation and \u201cwork with the OSC to ensure that [it] continues being able to respond to capital markets developments and exercise its statutory rule-making authority in an effective and timely manner.\u201d<\/p>\n

Political meddling also extended to the composition of the commission itself. The AG found that \u201cthe government did not follow the established consultative process\u201d for appointing commissioners to the OSC\u2019s board when it named new commissioners in February and April 2019, \u201cresulting in a significant loss of experienced [board] members.\u201d<\/p>\n

The OSC board lost nine members between November 2018 and February 2019, including all its board committee chairs, the head of the adjudicative committee and the board\u2019s lead director. As a result, the board fell briefly below its mandatory nine members until those vacancies were filled with appointees who didn\u2019t go through the established process.<\/p>\n

This left the regulator\u2019s board significantly weaker, the report noted.<\/p>\n

\u201cWe interviewed current and former board members who indicated that there was a perception that the appointment process had been significantly politicized,\u201d the AG reported. \u201cThey indicated that the loss of experienced members and the appointment of new members not following the consultative process had a significant negative impact on the OSC in all three of its roles: regulatory, governance and adjudicative.\u201d<\/p>\n

This, in turn, damaged morale, the report stated, and \u201cmaterially reduced the quality of policy-making and adjudication, and adversely affected the reputation of the OSC.\u201d<\/p>\n

Political interference and industry lobbying weren\u2019t the only factors behind regulator\u2019s failure to adopt effective investor protection measures. The AG also found the fragmented provincial regulatory system played a significant role.<\/p>\n

Policy projects take at least a year longer when they involve the rest of the CSA, the report stated: on average, it takes the OSC 1.7 years to craft a local rule, while the CSA takes 2.9 years to develop a new rule. Projects that involve extensive research take regulators even longer. For example, the work on embedded fee structures took more than 10 years to complete, and the work that led to the CFRs took more than 11 years.<\/p>\n

\u201cDuring these extensive delays, Ontario investors continue to be negatively impacted by these industry practices,\u201d the AG\u2019s report noted.<\/p>\n

The report recommended the OSC act independently of other CSA members to implement rules more quickly \u201cwhere involvement by other securities regulators slows key initiatives significantly.\u201d<\/p>\n

In all, the report made 26 recommendations that include 57 action items. In addition to restoring the OSC\u2019s independence, the report called for expanded legislative authority, better enforcement tools and enhanced IT systems for the commission. The report also recommended the OSC consider tougher investor protection measures if the CFRs and forthcoming fee restrictions prove inadequate. Such measures include an outright ban on embedded commissions and the introduction of an overarching best-interest standard.<\/p>\n

The OSC\u2019s response to the report\u2019s recommendations stated the AG\u2019s findings \u201cwill enhance our ability to regulate Ontario\u2019s capital markets.\u201d<\/p>\n

As for further investor protection measures, the commission stated, it agrees that \u201cadditional and timely action should be considered if these reforms do not serve the best interests of investors.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

Report casts doubt on regulator\u2019s independence<\/p>\n","protected":false},"author":73592,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[3029,3021,3013],"tags":[2814,30574],"yst_prominent_words":[16287,97146,97144,97143,97142,97141,97140,97139,97138,96817,32287,26868,12,6977,6729,6684,6632,6065,2257],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/435193"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/73592"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=435193"}],"version-history":[{"count":4,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/435193\/revisions"}],"predecessor-version":[{"id":436671,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/435193\/revisions\/436671"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=435193"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=435193"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=435193"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=435193"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}