Canadian regulators are rolling out new national standards governing the relationship between clients and financial advisors — including how conflicts of interest are handled — but the changes, which stop short of imposing a fiduciary or universal “best interest” standard, come as a disappointment to some investor advocates.
The standards for financial advisers, which will introduce new obligations and codify “best practices” governing the suitability of investments and disclosure, will be phased in over two years, beginning in December.
Obligations for handling conflicts of interest deemed “material” will come first, along with relationship disclosure, and will be fully in pace by the end of 2020.
Advisers “will be required to address material conflicts of interest in the best interest of their clients and put clients’ interest first when determining the suitability of investments,” the Canadian Securities Administrators said in a statement Thursday.
“Taken together, these changes mean better protection for retail investors across Canada, and a high and uniform standard of conduct for all registrants,” said Louis Morisset, chair of the CSA, an umbrella organization for the country’s 13 provincial and territorial securities commissions.
The “targeted” reforms are the product of a multi-year consultation that saw regulators in Ontario and New Brunswick push for an overarching, across-the-board best interest standard for all investment advisers, something that was never embraced by the CSA.
Under such a regime, a client’s best interests would have to be paramount in all decisions, similar to the duty of care and conduct adopted in jurisdictions such as Australia and the United Kingdom.
Adviser obligations in Canada’s current system require only that clients are dealt with fairly, honestly and in good faith, and that investment recommendations are “suitable.”
Ken Kivenko, an investor advocate, described the changes coming into force in December as “no more than a touch up” to existing practices.
“This might be called suitability with a tiny plus,” he said, adding that he saw “little of substance, in terms of positive change.”
Regulators adopted a “materiality” threshold that will limit the conflicts of interest that need to be dealt with, and Kivenko said he fears the client-first standard will be applied narrowly to transactions rather than to advice given to clients.
He was also surprised and disappointed to see the removal of an outright prohibition on advisers acting as power of attorney or trustee for clients, which had been proposed earlier in the review.
In the document laying out the reforms, the CSA said some commenters had raised a concern that “common and unobjectionable” industry practices would be inadvertently prohibited if that rule was adopted. Instead, regulators said policies and procedures are in place to identify and avoid or address material conflicts of interest that could be created by an adviser having full control or authority over the financial affairs of a client.
Two of the investment industry’s self-regulatory agencies were active participants in the review of the client-adviser relationship, and the CSA said both would be amending their member rules, policies, and guidance to be consistent with the changes.
One of those agencies, the Investment Industry Regulatory Organization of Canada, issued a statement Thursday saying it is working to ensure a uniform approach.
“As a pan-Canadian public-interest regulator, IIROC believes that the proper management of conflicts of interest is critical to improving public confidence in our capital markets and financial system — and to overall investor protection,” the self-regulatory agency said in the statement.
IIROC said the reforms will set out fundamental obligations for advisers, which will form “an essential pillar” of the regulatory framework that protects Canadian investors.
Copyright Postmedia Network Inc., 2019
