Efforts to secure adoption by Ontario’s securities industry of a ‘best interests standard’ to protect investors – especially small retail ones – have fallen short but have resulted in some improvements in expected sales practices, concludes the just-released 2018 Annual Report of the Ontario Securities Commission’s Investor Advisory Panel.
The panel reported, however, that “incorporating best interest principles into targeted reforms would be no substitute for adopting an overarching best interest rule.”
The 9-member panel, formed by the OSC to obtain expressions of the needs and concerns of Ontario investors, said it believes a ‘best interest standard’ is “necessary to provide foundational clarity and interpretive guidance to fill the gaps that inevitably will arise in situations not envisioned or anticipated by the targeted reforms’ specific provisions.”
However, the panel noted Canadian Securities Administrators, an umbrella organization of Canada’s provincial and territorial securities regulators, proposed provincial regulators adopt some principles identified with a ‘best interests standard’ to effect regulatory reform concerning the advisor-client relationship, including expectations around know-your-client and -product, suitability and conflict-of-interest-mitigation.
The panel wants the industry to stop considering conflicts of interest of financial advisors and their firms with those of their clients’ to be treated as normal and disclosure of conflicts to be considered a substitute for putting their clients’ interests first.
The report highlighted the Ontario government’s recent refusal to support CSA’s proposal to ban trailing commissions for transaction-oriented mutual fund dealers that offer no service or advice and to ban mutual funds from charging deferred sales charges.
“We remain confident that the CSA’s proposals constitute ‘smart’ regulations …,” the report said. “Rather than adding a regulatory burden, they create opportunities for new, more consumer-centric business models to evolve, compete and thrive.”
The report highlighted, as well, the panel’s recommendations concerning:
- Risk profiling
- Misleading Titles
- Financial advisor proficiency
- Investment costs disclosure
The panel was critical of the lack of adequate investor protection and investor-focused governance features, including an Investor Office, in the design of the Cooperative Capital Markets Regulator, an initiative of the governments of British Columbia, New Brunswick, Ontario, Prince Edward Island, Saskatchewan, Yukon and Canada to create a common regulatory administrator for their capital markets. Other provinces have yet to join the CCMR.
“We remain dismayed by the continued lack of an Investor Office in the design as well as the absence of a mechanism for retail investor policy input in the form of an investor advisory body similar to ours,” said the panel. “This does not encourage optimism about the future of securities regulation in Canada and the potential for a national regulator appropriately focused on a mandate to protect investors and foster market integrity.”
The panel similarly highlighted the lack of investor representation in the governance of the Ombudsman for Banking Services and Investments, which provides third-party dispute resolution to investors in conflict with investment firms.
The IAP conducts its activities without direction or influence from the Commission. It reported meeting a dozen times in 2018, developing 9 submissions to the OSC and CSA. It reported consultations with 8 external organizations during the year. 10 branches of the OSC were consulted to discuss:
- Behavioural Insights
- Best Interest Standard
- Client Focused Reforms
- CSA Staff Notice 81-330 Status Report on Consultation on Embedded Commissions and Next Steps
- IIROC Oversight Report
- Investor Research
- Seniors Strategy
- MFDA Oversight Report
- OSC Staff Notice 33-749 Compliance and Registrant Regulation – Annual Summary Report for Dealers, Advisers and Investment Fund Managers
- Proposals on Non-GAAP and Other Financial Measures
- Women on Boards