Why the investment industry should prepare for tougher regulations


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This article is the fourth in Globe Advisor’s series on client-centric reforms that will put investors’ interests at the forefront of their dealings with financial advisers and brokerage firms and have a significant impact on advisers and brokers. the investment sector.

Investment industry firms and financial advisors should work proactively to update their client relationship policies and procedures in order to stay abreast of anticipated future changes beyond new client-centric reforms ( CFR) which are expected to come into effect later this year, experts say.

Under the current set of CFRs that the Canadian Securities Administrators are putting in place, companies have until June 30 to comply with the new conflict of interest rules and until December 31 to meet the requirements. other Know Your Customer (KYC) requirements. and Your Product Knowledge Documents (KYP), among other changes.

However, CFRs do not include several other proposals that have been discussed in recent years, such as a more rigorous KYP and investment suitability processes and restrictions on referral terms, which many in the industry believe. to be coming.

“Just look at the continuing upward trend of increased accountability, transparency and professionalism that is happening in other jurisdictions around the world, which are further advanced than we are here in Canada,” says Jason Pereira. , partner and senior financial consultant. at Woodgate Financial Inc., a financial planning firm under the umbrella of IPC Securities Corp. in Toronto. “The question is not whether this will happen, it’s how quickly it will happen.”

For example, he says there is a “gaping hole” in the way referral fees are managed in the industry and that he believes should be fixed. Proposals to cap referral payments, prevent the payment of referral fees to unregistered parties and restrict the period during which they can be made have been excluded from the changes coming into effect this year.

Mr Pereira believes referral fees should be checked annually to ensure there is continuous service, or that customers should be allowed to re-approve fees on a regular basis.

He would also like to see the elimination of integrated compensation.

“The idea of ​​underground trailers has to die,” he says, believing it will happen “eventually” as more advisers adopt a pricing structure and investors start demanding more transparency as they go. have done with other consumer products. “A fully transparent report is something that will happen, it’s just a matter of when. “

Ken Kivenko, investor advocate and chairman of Kenmar Associates, describes CFRs as “a gradual step forward”.

As such, he says that “a lot of good ideas have been killed, watered down, postponed or moved into directions, [which is not enforceable]. “

Mr Kivenko would like to see more aggressive changes in the future, including the elimination of deferred sales charges and updating what he sees as an inefficient and outdated investor complaint system, among other measures.

“Most retail clients don’t have the skills to spot significant conflicts on their own,” he says. “Progressing towards a fiduciary standard is the end goal. “

Mr Kivenko also believes governments need to become more involved in promoting change on behalf of investors and encourages regulators to work more closely with investors and advocacy groups to better understand the issues they face.

Stan Buell, president of the Small Investor Protection Association, believes that some fundamental issues are not being addressed in regulatory changes.

“The key issue is fiduciary duty,” he says. “It is difficult to rely on ‘fit’ as fit is variable and not the same for everyone. Representatives with a fiduciary duty should be able to select appropriate products and provide appropriate recommendations.

Mr. Buell adds that self-regulation does not provide effective protection for investors.

“A regulator that regulates an industry and is also responsible for protecting customers faces an inherent conflict of interest,” he says.

Dan Richards, managing director of Clientinsights and an instructor at the Rotman School of Management at the University of Toronto, believes another potential change could be a move towards mandatory financial planning for investors buying investments from their advisers.

“This is something that you could very well see happen in five years or sooner … and something that advisers will have to prepare for,” he said. “Because some clients don’t see the value of financial planning, you can’t force it unless regulators require it. “

Mr. Richards also expects counselors to need to continually upgrade their credentials through more education and training.

Michael Thom, CEO of CFA Societies Canada, believes the majority of companies across the country are working on CFR adoption and understand that there are likely other regulatory developments to come.

For example, additional clarity and action on CFR title reform provisions, designed to remove misleading titles in the investment industry, will also come sooner rather than later. “Progress has been slower than some would like,” he says.

One example is the widespread use of titles such as vice president, which implies a corporate officer position when this may not be the case in some companies. “This will cause a lot of adjustment across the industry,” said Thom.

He also expects to see changes in product selection and recommendation processes, with an additional focus on value-added services such as portfolio management and financial planning rather than just transactional advice.

“I think there is room for gradual differentiation there,” he says.

Mr Thom also hopes that more work will differentiate and reconcile the difference in rights and requirements between investment products and products regulated by insurance.

“I’m concerned about the potential for regulatory arbitrage and the impact on the customer experience there,” he says.

He suggests that companies not only implement the minimum CFR requirements, but also “embrace the spirit” of the changes.

“I encourage companies to seize this opportunity, as it is not already integrated into their business practices, to reorient themselves towards their customers and the interests of their customers in everything they do,” says- he.


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