Media Backgrounder: Global Trends in Financial Services Regulation
Updated May 2018
As Canada’s financial sector regulators increasingly look abroad for examples of best practices, it has become important to understand the measures undertaken by regulators in other countries. The Investment Funds Institute of Canada has produced a report that summarizes both the approaches taken by financial services regulators around the world to improve investor protection and the reasons behind them.
The report, Global Regulatory Developments in Investor Protection (May 2018), focuses on key measures implemented in 16 countries1, including whether to: impose a statutory best interest or fiduciary duty on advisors; enhance transparency and disclosure; introduce targeted reforms; or ban embedded commissions.
The report reveals considerable differences in the types of products being regulated, with some jurisdictions only imposing restrictions on investment products, while others cover virtually all deposit, insurance, investment, mortgage and other commission-driven products.
The jurisdictions have also approached the issue of potential conflicts of interest in different ways, reflecting their unique market characteristics and suggesting that there is no single regulation that effectively addresses these concerns in their entirety. However, the analysis reveals a number of significant trends:
1. Few jurisdictions have banned embedded commissions
The option of banning embedded commissions has been evaluated by securities regulators in many jurisdictions. Only four – Australia, the Netherlands, the United Kingdom (U.K.) and South Africa – have opted to proceed. In three of these countries, the decision to ban embedded fees was triggered by unique local circumstances. In both the U.K. and the Netherlands, a commission ban was introduced following a number of mis-selling scandals in the insurance and mortgage sectors. The Australian reforms were established in reaction to the collapse of three major financial firms.
Securities regulators and governments in other countries, including Denmark, European Union, Germany, Hong Kong, India, Ireland, New Zealand, Singapore, Sweden, Switzerland, and the United States (U.S.), have examined this option and explicitly ruled out a total ban on embedded commissions. Many other countries have examined regulatory responses to conflicts of interest more broadly and have decided to continue to allow for the use of embedded commissions.
While Europe proposes to prohibit independent advisors from accepting commissions, the summary notes that the independent advice channel is one of the smallest channels in the European funds industry, representing just 11% of assets. The vast majority of fund sales are made through banks, where the prohibition does not apply.
In all, only 13% of total worldwide mutual fund assets of $49.3 trillion are covered, or slated to be covered, by a ban on embedded commissions.
2. Few jurisdictions have created a fiduciary or best interest standard
Australia is the only country that has adopted a broad statutory best interest standard for advisors in the sale of retail funds.
In the U.S., the Department of Labor adopted a rule that expands the definition of “fiduciary” under the Employee Retirement Income Security Act by requiring investment advisers who provide advice to retirement accounts, including broker-dealers and insurance agents, to abide by a fiduciary standard. The rule was partially implemented in June 2017, but not enforced, with the balance scheduled for implementation in July 2019. It is currently facing serious legal challenges.
3. Enhanced disclosure is the favoured regulatory option in most jurisdictions
The majority of markets has made enhanced disclosure a key element of newly-developed financial principles and policies. Enhanced disclosure initiatives have been implemented in every country reviewed except the U.S. The majority of disclosure has come in the form of detailed information on fees and commissions to improve transparency.
4. Early evidence tells a cautionary tale
Most of the foreign regulatory changes are recent with little independent research available to evaluate their impact. However, early evidence can serve as a guide to regulators that are considering similar changes. In the U.K., for example, while the quality of investment advice is considered to have improved, there is strong evidence of an advice gap without any clear evidence of a reduction in mis-selling incidents or a reduction in total costs to investors.
For more information:
Lisa Hall, Senior Manager, Communications and Public Affairs (email@example.com | 416-309-2317)
1 The 16 markets studied in the report are: Australia, Canada, Denmark, European Union, Germany, Hong Kong, India, Ireland, Japan, Netherlands, New Zealand, Singapore, South Africa, Sweden, United Kingdom and United States.