FAIR Canada provided its comments on the Investment Industry Regulatory Organization of Canada’s (“IIROC’s”) draft guidance regarding borrowing for investment purposes (the “Proposed Leverage Guidelines”). FAIR Canada supports the Proposed Leverage Guidelines which clarify the existing obligations and responsibilities of dealer members and their registered representatives and provide best practices.
FAIR Canada is of the view that current requirements and the level of industry compliance do not provide adequate investor protection from unsuitable advice with respect to borrowing to invest in mutual funds and similar products. While the Proposed Leverage Guidelines are a laudable initiative to make clear the obligations and best practices for dealer members and registered representatives, in the absence of further action by the Canadian Securities Administrators (“CSA”), IIROC and the Mutual Fund Dealers Association of Canada (“MFDA”), the Proposed Leverage Guidelines will not be sufficient to prevent more consumers from being put into high risk leveraged situations to which they are not suited.
FAIR Canada wrote to the CSA and MFDA last fall making a number of recommendations in order to better protect investors from unsuitable borrowing to invest recommendations but we have not seen any meaningful response and leverage has become an increasingly urgent problem in Canada. In our comments to IIROC, we set out the motivating factors which often lead to unsuitable recommendations and make a number of recommendations that IIROC and other regulators should consider, including:
- A recommendation to use leverage should be based on adequate and proper analysis along the lines outlined in IIROC’s Guideline on Best Practices for Product Due Diligence (including articulating assumptions which must be objectively reasonable, take the risk of market corrections into consideration and the impact on the client and reflect all the costs, fees and interest expenses); and
- IIROC may wish to consider undertaking reviews of its dealer member firms to obtain empirical data, including the extent and form (i.e. use of margin or off-book) of leveraged investing by the clients of dealer members; the particulars of the relationships regarding off-book loans; the prevalence of unsuitable leverage recommendations; whether clients understood the risks associated with such strategies or the details of the debt servicing obligations that they had taken on by canvassing a statistically relevant survey of leveraged clients; and the degree of compliance by dealer member firms with existing supervisory obligations.
IIROC would then have valuable data on the extent of leveraged investing to inform regulatory action. The action should also include consideration of whether the existing suitability standard is sufficient to adequately protect investors or whether a best interest of the client standard is required.
FAIR Canada’s recommendations are directed at the CSA and the MFDA as well as IIROC.