Canada’s securities regulators, under pressure to follow in the footsteps of international regulatory developments, are considering a fiduciary duty on financial advisors and dealers that would require them to act in the best interests of retail clients at all times.
But a former chair of the Ontario Securities Commission says this latest initiative does little to alter the landscape because it is just a tentative re-exploration of ground already covered.
On top of that, a brokerage industry lobby group is against the idea, citing bad timing at the very least.
The Canadian Securities Administrators, the umbrella group for Canada’s provincial securities commissions, published a paper last fall calling for comments until Feb. 22 over a tougher standard that would raise the bar for financial advisors nearly to the same level as doctors and lawyers. The CSA, which has taken no position on the issue, made no promise that it would introduce change following the consultation. But if it does forge ahead, it will need to draft and specific proposals for further comment.
"The paper was disappointing," remarked Toronto lawyer Edward Waitzer, a former chair of the OSC, who is calling for reforms. "It is not particularly accessible, the issues have been addressed many times and presented a lot more simply, it doesn’t take a position, and it doesn’t move the ball down the hill at all. The publication of the paper doesn’t give one cause for optimism that the securities commissions are going to take a leadership role."
The controversial proposition, opposed by the investment industry but commended by investor advocates, would overhaul the statutory regime and put it in line with international developments. After the 2008 global financial crisis, the United Kingdom, the European Union and Australia introduced legislation that strengthened investors’ legal rights while raising the professional bar for investment advisors. The United States also is contemplating making changes. The U.S. Securities and Exchange Commission has recommended that a uniform standard be introduced for broker-dealers and investment advisers.
At present, registered advisers and dealers in Canada are required to deal fairly, honestly and in good faith with their clients, but without a general fiduciary obligation. However, there are four provinces — Alberta, Manitoba, Newfoundland and Labrador, and New Brunswick — that have enacted a statutory "best interests" requirement that applies to advisers or dealers, but only if they have a discretionary authority over their clients’ investments.
The CSA consultation paper points out that there has not been a single court or regulatory decision concluding that the current requirement is the equivalent to a fiduciary duty.
"There is a big gap between what everybody thinks and what the law is," noted Marian Passmore, the associate director of the national non-profit advocacy group Canadian Foundation for Advancement of Investor Rights (FAIR Canada). "Investors believe that investment advisers are already acting in their best interests, and are not aware that that is not the standard."
FAIR Canada, which has been calling for a best-interest standard for years, hopes that the securities regulators act expeditiously, particularly since governments and employers are gradually shifting the burden of providing for retirement on to the shoulders of individuals. "I fear that it will be a slow process because a lot of initiatives that have come out of the CSA have taken a long time to come to fruition," says Passmore.
However, any move towards a fiduciary standard will face stiff opposition from the financial services sector. According to Michelle Alexander, the director of policy for the Investment Industry Association of Canada (IIAC), an industry organization for brokerage firms, the timing is not right to implement a higher duty of care. Alexander argues that the CSA and two Canadian securities self-regulatory organizations — the Investment Industry Regulatory Organization of Canada and The Mutual Fund Dealers Association of Canada — have spent years developing a comprehensive, investor protection regulatory regime that is still being implemented. The regime, called the client relationship model, embodies most of the essential elements of a fiduciary standard, including improved cost and compensation disclosure and performance reporting, says Alexander. The new regulatory regime, approved a year ago and being rolled out in stages, should be allowed to be fully implemented and then be evaluated to determine if there are remaining areas that require further investor protections, adds Alexander.
"At this point the timing is not right to implement a fiduciary standard," said Alexander. "The costs and training that are going on with the client relationship model is huge for the industry — let them grapple with that before going on to something new."
The industry organization also believes that the imposition of a statutory fiduciary standard on advisors would have many negative consequences for both investors and themselves. Besides onerous compliance requirements and increased exposure to risk and liability for advisors, small investors would likely face a fee hike in financial advisory services and reduced access to financial products, contends IIAC in a paper it submitted on the issue last year to the CSA.
That’s because the lower the client’s sophistication, the higher duty of care; small investors would cost advisors more to serve while increasing their exposure to liability. "We’re concerned that those clients would be pushed out of the advice channel and perhaps have to go to the discount brokerage channel," said Alexander.
Vancouver securities lawyer David Mitchell also believes the status quo is working well. He points out that in Canada investment advisors can be held to a fiduciary duty depending on the situation. While there is no such duty for sophisticated retail investors, the courts have recognized that a fiduciary duty exists in cases when unsophisticated retail investors rely exclusively on their investment advisor. The onus of establishing a fiduciary duty, however, rests with the investor.
"The status quo works well right now, other than your unsophisticated retail investor who faces the challenge of establishing a fiduciary duty to obtain relief from the court," said Mitchell. "But I think the system works well for most people. The duties are context-specific."
If securities regulators are "not prepared to take a leadership stance" on a fiduciary standard, there are other actions they can take that will lead to the same result, says Waitzer. Regulating the compensation structures and eliminating commissions for retail investment products as the U.K. and Australia have done "would make a difference," said Waitzer. So too would far more aggressive enforcement. "Instead of spending another 10 years spinning our wheels, let’s move on to something else that regulators would be more comfortable doing," said Waitzer.