IFIC Calls for Measured Practical Approach to Regulatory Reforms
Toronto, ON – September 20, 2016 – In a submission filed today with the Canadian Securities Administrators (CSA), The Investment Funds Institute of Canada (IFIC) calls on regulators to focus on enforcing rules already in place and on changes that would improve the investment process, while avoiding reforms that attempt to regulate investment outcomes. The submission was made in response to CSA Consultation Paper 33-404: Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients.
“The industry reiterates its long-standing support for placing the interests of the client ahead of the interests of the registrant, where those interests may conflict,” states IFIC president and CEO Paul C. Bourque. Expressing support on behalf of the industry for a regulatory framework that evolves in response to changing standards in investor protection and market developments, Bourque cautioned against: “adopting measures that are unclear in their application and may misalign client-adviser expectations.”
“We urge regulators to ensure that the regulatory framework continues to make investment opportunities available to all Canadians and that reforms to that framework do not jeopardize access to advice for middle-class investors,” says Bourque.
IFIC’s submission identifies several factors it considers essential to avoiding unintended consequences. Most notable is the consultation paper’s acknowledged exclusion of ‘findings related to the benefits that registrants may provide to their clients, for example, with respect to increased savings’. Making the case that a broader examination of the evidence is needed to inform the CSA’s proposals, Bourque says: “Requirements should be designed considering their impact on the full scope of the client-advisor relationship.”
Also missing from the consultation paper is recognition of the impact that CRM2 and Point of Sale reforms are having, and will continue to have, on registrant and client behaviour, along with the way in which market forces are transforming product and services offerings, distribution and pricing. IFIC urges the CSA to consider the impact of CRM2 and POS reforms as it considers additions to the regulatory framework, noting that additional reforms introduced now will skew the multi-year research project just launched by the CSA that is intended to “measure outcomes (of CRM and Fund Facts) related to investor knowledge, attitude, and behaviour, registrant practices, and fund fees and product offerings.”
Commenting on the proposed targeted reforms, IFIC agrees that there is room for improvement to the KYC and suitability requirements and argues that any enhancements should give firms the flexibility to develop fit-for-purpose needs analyses and solutions that meet investors’ needs. IFIC finds that the suitability requirements proposed by the regulators may create the expectation that firms will provide financial planning services to all clients, regardless of the client’s actual needs or size of account – significantly increasing costs and potentially making it uneconomic for firms to service most accounts with less than $50,000.
IFIC expresses similar concerns with the practical implications of the paper’s KYP proposals, noting that requiring firms to only offer for sale and recommend the product ‘most likely to meet the investment objectives of its clients’ will put the regulator in the position of deciding on the investment products that will meet each individual client’s needs. IFIC recommends that the CSA instead strengthen the national instruments to mirror the more onerous requirements that the SROs already have in place.
Responding to the paper’s proposal to introduce a regulatory best interest standard of care, IFIC asks for greater clarity as to what is being proposed. It notes that existing SRO rules and CSA guidance already require the firm to put the interests of its clients ahead of the firm’s in the resolution of any conflict of interest. Citing strong reservations expressed by several regulators, IFIC questions how the industry would be expected to supervise such an overarching aspirational rule. IFIC identifies a fundamental question that the paper does not answer, i.e., “What would be prohibited under a best interest standard of care that is permitted under the current rule to act ‘honestly, fairly, and in good faith’?”
Other issues highlighted in IFIC’s 9-page summary submission include support for:
- Strengthening the CSA national instruments on conflict of interest rules to align with existing SRO rules and their enforcement;
- Enhanced proficiency standards, mandatory continuing education, and limits on titles for both firms and advisors; and
- Clarifying the roles and improving proficiency requirement for Ultimate Designated Persons and Chief Compliance Officers.
IFIC’s submission includes a workbook with detailed responses to the CSA’s 68 questions, as well as a research addendum that analyses limitations of the evidence used to inform the CSA’s proposals and provides summaries of six recent studies that quantitatively address the value of advice.
The Investment Funds Institute of Canada is the voice of Canada’s investment funds industry. IFIC brings together 150 organizations, including fund managers, distributors and industry service organizations, to foster a strong, stable investment sector where investors can realize their financial goals. By connecting Canada’s savers to Canada’s economy, our industry contributes significantly to Canadian economic growth and job creation. The organization is proud to have served Canada’s mutual fund industry and its investors for more than 50 years.
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