Protecting Investors’ Best Interests: It’s Been a Long Journey

On June 21st the Canadian Securities Administrators (CSA) released a harmonized set of proposals that requires investment industry representatives (registrants) to promote the best interests of their clients and put them first, to improve client outcomes. It’s something most clients would expect of their professional advisors; yet there are several investor protection concerns to address.

The CSA, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – together known as the SROs – have committed themselves to these new reforms. By way of background, this all began close to a decade ago with National Instrument (NI) 31-103, which came into force on September 28, 2009 and introduced a harmonized, streamlined and modernized national registration regime.

The Proposed Amendments were developed after an extensive consultation process, beginning with the publication on October 25, 2012, of CSA Consultation Paper 33-403 The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients (CP 33-403). After publishing a status report, the follow up, CP 33-404, was published on April 28, 2016. Next came findings in CSA Staff Notice 33-319 Status Report on CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (SN 33-319) on May 11, 2017. 

The CSA identified certain reform areas that should be given higher priority. After a consultation exercise with stakeholders, key concerns to be addressed:

  • Clients are not getting the value or returns they could reasonably expect from investing: in their suitability analysis, some registrants fail to consider all of the factors relevant to helping clients meet their investing goals.
  • Expectations gap: clients often have misplaced reliance on or trust in their registrants, which can result in sub-optimal investment decisions.
  • Conflicts of interest: the application of the current rules is, in many instances, less effective than intended in mitigating conflicts of interest.
  • Information asymmetry: the current regulatory framework is often less effective than intended.
  • Clients are not getting outcomes that the regulatory system is designed to give them.

As a result, clients were suffering a variety of harms. The CSA noted:

  • Research that shows financial self-interest may inappropriately influence registrants’ recommendations to clients,
  • Persistent findings in compliance reviews of inadequate KYC (Know Your Client) information collection, affecting registrants’ capacity to make sound suitability determinations for clients,
  • The persistence of suitability as a leading source of client complaints.

To address these concerns, the current Proposed Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and to Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations — Reforms to Enhance the Client-Registrant Relationship (Client-Focused Reforms) are proposing specific changes relating to conflicts of interest and suitability:

  • Registrants must address all existing and reasonably foreseeable conflicts of interest, including conflicts resulting from compensation arrangements and incentive practices, in the best interest of the client
  • Registrants must put the client’s interest first when making suitability determinations
  • Restrictions on referral arrangements have been proposed.
  • Prohibitions on misleading marketing and advertising have been strengthened.
  • Relationship disclosure information (RDI) will have to provide information on any restrictions on the products or services a registrant makes available to a client, including situations when the registrant uses proprietary products.  What impact these restrictions have a client’s investment returns, and the potential impact of costs and charges will need to be discussed. A new requirement will require key information to be publicly available.
  • Training of representatives and maintenance of policies, procedures, controls and documentation will need to change accordingly.

Next time: Guidelines on the CSA’s Know Your Clients and Product and transitional requirements.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading national financial education institute and author of a new book in 2018: Essential Tax Facts – How to Make th Right Tax Moves and Be Audit-Proof, Too. Follow her on twitter@evelynjacks.

Additional educational resources: 

Advisors, now that you’ve brushed up on your compliance requirements, enhance your credentials online by enrolling in an online program or course, to help you prepare for the new changes. The Real Wealth Management Program, leading to the RWM certification is focused on the strategy and process required to assist clients with the accumulation, growth, preservation and transition of sustainable family wealth – after eroders like taxes, inflation and fees.

If you prefer instructor-led strategic education, plan to attend the Distinguished Advisor Conference. This will be held in Quebec City, November 10-14.  CE/CPD credits are earned for completing both options, and free course trials are available.

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