The financial crisis has accelerated the trend throughout the developed world to re-examine the relationship between investors and their advisors.

• The U.K.’s Financial Services Authority has proposed banning sales commissions for financial representatives, moving to a fee-based model for advisor compensation, and greatly increasing advisor training. 
• In the U.S., the Obama administration called for creating a Financial Consumer Protection Agency and imposing uniform fiduciary duty obligations on all financial salespeople, requiring them to put their clients’ interests first.
• The European Union, Australia and other countries have implemented or are in the midst of major and far-reaching initiatives.

Canada had been a pioneer examining a complete overhaul of the client/advisor relationship, dating back to the Ontario Securities Commission’s Fair Dealing Model (FDM) proposals in 2004.  Sadly, the FDM was never implemented; its original proposals have been carved up.  The Canadian Securities Administrators (CSA) are addressing registration reform and the complaints handling process.  Self-regulatory organizations for the investment dealers (IIROC) and the mutual funds (MFDA) proposed rules about relationship disclosure, conflicts of interest, suitability of investments, client reporting and communications, and performance reporting.

FAIR Canada responded with submissions to IIROC and the MFDA with the following recommendations:

Relationship Disclosure:  FAIR Canada calls for a single relationship disclosure opening document collecting all of the information important to an investor.  At the very least, the main disclosure document should include a summary in plain language of any documents incorporated by reference.

Conflict of Interest Management/Disclosure:  FAIR Canada supports the proposed new conflict management and disclosure rules.  Much more is needed, particularly regarding the question of fiduciary responsibility and the conflict of interest between the client, the advisor and the firm.  We call on the regulatory authorities to study international best practices regarding advisor compensation and fiduciary obligations to ensure that Canadian investors have the same protection as investors in the U.S., the U.K. and other leading financial markets.

Suitability:  FAIR Canada endorses the suitability proposals as important steps to monitor clients’ accounts.   We look for tight supervision and enforcement of these suitability rules, with significant deterrent punishments in the case of violations, to ensure that firms and advisors have compelling incentives to comply with the rules.
 
Performance Measurement:  The current IIROC and MFDA proposals do not go far enough.  IIROC, the MFDA and the CSA should require calculating and reporting client portfolio returns at least annually, if not more frequently.  The regulators should also mandate the inclusion of the returns of the relevant benchmarks.
 
CONCLUSION:  FAIR Canada is generally supportive of the IIROC and MFDA proposals.   These steps represent incremental improvements in the Client Relationship Model.  However, they do not move far enough towards the necessary complete overhaul of the relationship between the client and the advisor.  We call on the CSA, IIROC and the MFDA to undertake a review of regulatory initiatives around the globe to ensure that Canadian investor protection keeps up with international best practices. 

Click here to view FAIR Canada’s submission to IIROC and MFDA Request for Comments