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PDF – Appendix A

 

The Honourable Charles Sousa

Minister of Finance

7 Queen’s Park Crescent, 7th Floor

Toronto, ON

M7A 1Y7

 

Sent via email to: Fin.Planning@ontario.ca

 

RE:    Consultation – Regulation of Financial Planners

 

FAIR Canada is pleased to offer comments on the Ministry of Finance’s consultation paper on the regulation of financial planners (the “Consultation Paper”).

FAIR Canada is a national, charitable organization dedicated to putting investors first. As a voice for Canadian investors, FAIR Canada is committed to advocating for stronger investor protections in securities regulation. Visit www.faircanada.ca for more information.

  1. Executive Summary

1.1     FAIR Canada is of the view that if you wish to reduce consumer confusion, misleading titles, and poor financial planning and/or investment advice, you        must address more than credentials and holding out in respect of financial planning. You must institute a statutory best interest standard.

1.2     FAIR Canada calls on the Ontario government to institute a statutory best interest standard so consumers can rightly and safely expect that their financial advisors and financial planners will provide them with objective, professional advice. We also call on the government to equip the regulatory system with all compliance and enforcement resources necessary to enforce that standard.

1.3     To proceed with meaningful title restrictions, it is essential that the title reflect the ability of the individual financial services representative (and his or her firm) to provide objective, professional financial advice rather than conflicted sales. Therefore, the use of the title “financial planner” (and “financial advisor”) should be restricted to those who have attained the necessary level of proficiency (including the appropriate credential) and who are capable of providing advice that is unbiased and not in conflict with the client’s best interests.

1.4     FAIR Canada therefore recommends that the use of business titles be restricted to the following categories:

  • “Financial Planner” for those who have the necessary proficiency (including credential) and who provide services on a fee-for-service basis (such as hourly or a set fee for a financial plan) and who do not receive any compensation for product sales or referrals;
  • “Investment Advisor” or “Financial Advisor” or “Financial Planner” (if the latter has the appropriate financial planning credential) for those that are subject to a fiduciary duty and a statutory best interest standard (once implemented)[1];
  • “Portfolio Manager” for those licensed to exercise discretionary authority (including robo-advisors) while operating within business models that allow them to comply with the fiduciary duty already required of such registrants; and
  • “Salesperson” for the remaining financial services representatives who do not meet the above restricted categories.

 

1.5     All other business titles should be prohibited.

1.6     FAIR Canada urges you to determine the level of education and proficiencies required to be met before any regulator in Ontario will allow an individual to obtain a certificate or license or registration as a “financial planner”.

1.7     Canada is lagging behind other leading jurisdictions in the area of education and proficiency and oversight of such standards. In Canada, not even a high school diploma is needed. FAIR Canada believes that, at an absolute minimum, a high school diploma with completion of specific grade 12 math courses should be required and recommends that further, more substantial educational requirements be considered and determined.

1.8     We are pleased to see you are seeking information in this Consultation Paper from credentialing bodies and ask that you critically assess them. A critical assessment of existing designations and credentialing entities currently operating needs to be undertaken and an assessment needs to be arrived at regarding what level of qualifications are required to act with the care, skill and judgment of a professional who can act in the best interests of the client.

1.9    We agree with the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives (hereinafter the “Expert Committee”) that financial service providers already regulated by an existing regulator should also have their financial planning services overseen by that same regulator. Consumers are not well-served by the degree of fragmentation that already exists amongst bodies who are responsible for regulating their investments. Existing statutory regulators should regulate the provision of financial advice, including financial planning.

1.10    FAIR Canada recommends that those financial planners who are currently outside the regulatory framework (i.e. not regulated by any regulatory body) should be regulated by the Ontario Securities Commission.

1.11     FAIR Canada believes that an approach to credentialing whereby a designated body(ies) would qualify individuals to provide financial planning with these same bodies having the right to revoke their credentials, may be acceptable so long as it is limited to a failure to maintain their qualification requirements or a breach of their code of ethics. However, existing regulators must oversee and enforce standards of conduct for financial planning and financial advice. The existing regulator must be able to regulate (ensure compliance and discipline) the entire activity of the financial planner and firm.

1.12     A single, free, comprehensive central registry must be created and maintained with adequate resources to provide a one-stop source of information for consumers regarding the licensing and registration status, credentials and disciplinary history of individuals and firms. The current process of conducting a background check is simply too complicated. It requires searching multiple databases and, even if every step is meticulously followed, will not necessarily lead to comprehensive or understandable results.

1.13     Creating another database solely for financial planners in Ontario will only lead to more confusion. As noted by the Expert Committee, there are already up to six databases that a person would have to find and use. We don’t need to create yet another one. Having a database only for financial planners will not let the consumer know who the individual is regulated by, if the person has been disciplined in the past by an existing regulator, or whether terms and conditions are currently imposed on his or her license or registration.

The use of fintech by regulators and governments to produce a single, user-friendly system should be a key priority.

 

  1. A Statutory Best Interest Standard Is the Key Reform Needed to Make a Real Difference

2.1     FAIR Canada is of the view that if you wish to reduce consumer confusion, misleading titles, and poor financial planning and/or investment advice, you must address more than credentials and holding out in respect of financial planning.

2.2     A key reform needed to help protect financial consumers and lead to improved outcomes for financial consumers is the implementation of a meaningful statutory best interest standard. Until Ontarians receive objective, unbiased professional financial advice (including financial planning) they will continue to routinely suffer harms which will significantly impact their financial well-being. We have articulated this concern previously in our previous three submissions on financial planning.[2]

2.3     While many consumers suffer harm as a result of non-compliance with existing rules (such as suitability), they also suffer significant and profound harms when they are dealing with registrants and licensees who are complying with the existing rules. These harms are costing Canadian financial consumers millions of dollars and impacting their ability to save adequately for their retirement, help put their children through university or for their other financial (and life) goals.[3] Harms from product sales that are focussed more on compensation to the advisor rather than the consumer’s best interest are much more widespread than harms from deficient financial plans.

2.4     A person (or his or her firm) should not be permitted to hold themselves out as a professional who provides financial advice (including financial planning) unless they have attained an objective, uniform level of proficiency and they provide advice that is unbiased and not in conflict with the client’s best interests.

2.5     FAIR Canada calls on the Ontario government to institute a statutory best interest standard so consumers can rightly and safely expect that their financial advisors and financial planners will provide them with objective, professional advice. We also call on the government to equip the regulatory system with all compliance and enforcement resources necessary to enforce that standard.

2.6     We certainly hope that a statutory best interest standard is one of the other aspects of the proposed framework that remains under development, as mentioned in the Background section of the Consultation Paper. There has been more than enough time devoted to the study and deliberation of a statutory best interest standard.

3.Restricting Use of the Title “Financial Planner”

3.1     FAIR Canada understands the desire to close the regulatory gap that exists wherein not everyone who holds themselves out as a financial planner is regulated or has the necessary credentials.

3.2     We agree that a person should not be able to call himself/herself a “financial planner” without being registered or licensed and subject to the oversight of an existing financial services regulator. Currently a person in Ontario can hold out as a financial planner without having to be registered or licensed if they do not sell any investment products. This situation permits someone who has no qualifications or expertise to be holding out to the public as a “financial planner” and perform these services. They may provide deficient services and advice. We agree that closing this regulatory gap is necessary. However, it is not sufficient because it still leaves consumers at significant risk of harm.

3.3     Many financial services representatives hold out as a “financial planner” with a valid financial planning credential such as a CFP but their activities involve selling products as a result of conflicted compensation structures in a firm which has a limited product shelf.[4] Therefore, while a consumer may go to a “financial planner” what they end up with are sub-optimal product sales[5] rather than assistance building a financial plan that will help them reach their long-term goals.

3.4     For example, a consumer is at significant risk of harm if they use the services of a “financial planner” but this individual works for a dealer that only sells mutual funds overwhelmingly on a DSC basis. Similarly, an individual registrant at a bank whose pay is derived from a compensation grid that incents the sale of proprietary products and other related banking products would not be able to hold out as a financial planner even if she has met the level of proficiency of a CFP or other accepted designation.

3.5     Currently financial services providers use a bewildering array of unregulated and frequently misleading titles that falsely convey high levels of seniority, experience or executive authority, and do not reflect the standard of advice being provided.

3.6     To proceed with meaningful title restrictions, it is essential that the title reflect the ability of the individual financial services representative (and his or her firm) to provide objective, professional financial advice rather than conflicted sales. Therefore, the use of the title “financial planner” (and “financial advisor”) should be restricted to those who have attained the necessary level of proficiency (including the appropriate credential) and who are capable of providing advice that is unbiased and not in conflict with the client’s best interests.

3.7     FAIR Canada therefore recommends that the use of business titles be restricted to the following categories:

  • “Financial Planner” for those who have the necessary proficiency (including credential) and who provide services on a fee-for-service basis (such as hourly or a set fee for a financial plan) and who do not receive any compensation for product sales or referrals;
  • “Investment Advisor” or “Financial Advisor” or “Financial Planner” (if the latter has the appropriate financial planning credential) for those that are subject to a fiduciary duty and a statutory best interest standard (once implemented)[6];
  • “Portfolio Manager” for those licensed to exercise discretionary authority (including robo-advisors) while operating within business models that allow them to comply with the fiduciary duty already required of such registrants; and
  • “Salesperson” for the remaining financial services representatives who do not meet the above restricted categories.

3.8     All other business titles should be prohibited.

  1. Proficiency and Credentials

4.1     FAIR Canada continues to support the Expert Committee’s recommendation that the education, training, credentialing and licensing of individuals engaged in the provision of financial planning be harmonized and subject to one universal set of regulatory standards.

4.2     Most investors do not seek out an individual “advisor” for a simple sales recommendation that falls within the registrant’s specific regulatory license; they seek out unbiased advice for their particular financial needs. The appropriate minimum level of proficiency must also take into account investors needs and expectations.

4.3     FAIR Canada urges you to determine the level of education and proficiencies required to be met before any regulator in Ontario will allow an individual to obtain a certificate or license or registration as a “financial planner”. We are pleased to see you are seeking information in this Consultation Paper from credentialing bodies and we ask that you critically assess them. A critical assessment of existing designations and credentialing entities currently operating needs to be undertaken and an assessment needs to be arrived at as to what level of qualifications are required to act with the care, skill and judgment of a professional who can act in the best interests of the client.

4.4     We also urge you to study the regime currently in place in Quebec and its educational and proficiency requirements. Quebec’s requirements are such that anyone who provides financial planning services in the province must have: a bachelor’s degree, meet standards set by the Institut québécois de planification financière (“IQPF”), passed the IQPF examination, and must be licensed by the Autorité des marchés financiers (“AMF”). Through legislation that is overseen by the AMF, they are subject to fines and discipline for malpractice and fraud, and they must meet continuing education requirements and comply with self-dealing prohibitions.

4.5     There is a real need to increase the education and the initial proficiency requirements for all registrants. FAIR Canada has examined proficiency standards in other jurisdictions and provides a summary of the requirements in Canada, the United Kingdom, Australia (proposed), and the United States at Appendix A. Proficiency standards in Canada need to be raised.

4.6     FAIR Canada is disappointed that initial proficiency requirements for financial services representatives are not addressed in the Consultation Paper given the work that has been done by regulators on the issue.[7]

4.7     FAIR Canada has consistently called for greater proficiency requirements in Canada. The current proficiency framework was designed, many decades ago, around the sales process, for salespeople. The existing standards are structured around the particular products representatives are permitted to sell, not the overall quality of advice provided to retail investors. The existing proficiency requirements should be raised for financial planners and for those who provide financial product sales or financial advice, regardless of whether the conduct standard is raised to one of best interests, or those set out in the Proposed Targeted Reforms of the CSA, or even if the status quo is maintained.

4.8     Canada is lagging behind other leading jurisdictions in the area of education and proficiency and oversight of such standards. The summary we provide at Appendix A supports this belief. For example, under its Retail Distribution Review the U.K. not only banned embedded third-party commissions but also increased proficiency standards.[8]

4.9     In the United Kingdom, advisors must obtain a QCF Level 4 qualification, which is equivalent to the first year of a university degree. Australia is moving towards requiring a bachelor’s degree along with the passing of an exam that is developed by an industry standards body. In Canada, not even a high school diploma is needed. FAIR Canada believes that, at an absolute minimum, a high school diploma with completion of specific grade 12 maths courses should be required and recommends that further, more substantial educational requirements be considered and determined.

4.10     The level of training (or job experience) required in order to meet the appropriate standard also needs to be reviewed. In the EU, 6 months of training is required. In Australia, it is a minimum of one year’s work experience. Canada currently requires 3 months of on-the-job training.

4.11     We support a requirement for continuing education. Government and regulators should consider the independence and rigour that will accompany proficiency standards and continuing education requirements and should consider the appropriate role of regulators, firms and third parties in developing and overseeing competencies, courses, and examinations.

     5.Who Should Regulate

5.1     We agree with the Expert Committee that financial service providers already regulated by an existing regulator should also have their financial planning services overseen by that same regulator. Consumers are not well-served by the degree of fragmentation that already exists amongst bodies who are responsible for regulating their investments which, in Ontario, includes the Ontario Securities Commission, the Mutual Fund Dealers Association of Canada, the Investment Industry Regulatory Organization of Canada, the Financial Services Commission of Ontario, and the new Financial Services Regulatory Authority. Consumers do not need yet another body that oversees part of the activities of financial services representatives.

5.2     In addition, financial planning services and advice are so closely related to the “financial product advice” or “financial product sales” activity that it would be problematic to try to have a different regulator separately oversee each of these activities when there is a necessary interconnectedness and it is performed by the same person.

5.3     FAIR Canada recommends that those financial planners who are currently outside the regulatory framework (i.e., not regulated by any regulatory body) should be regulated by the Ontario Securities Commission. The FSRA is not yet operational. The existing regulator, FSCO, already has a number of different areas it regulates and a major restructuring is being contemplated for FSCO which will take some time. Therefore, the regulation of these individuals should be given to an existing regulator who will also oversee many registrants in this activity. In addition, when the Capital Markets Regulatory Authority comes into being, it could extend the regulation of financial planners to other provinces and territories that currently do not regulate this activity, thereby closing regulatory gaps in other provinces and territories in an efficient manner.

5.4     FAIR Canada strongly believes that if financial planners (or financial advisors more generally) wish to professionalize, then robust commitments to ethical standards and to serving the public interest are key. Several associations profess such commitment through Codes of Ethics, but the commitments ring hollow where those associations actively oppose introduction of the required standard as a statutory obligation or oppose reforms to reduce conflicts of interest that undermine the provision of objective advice. Likewise, consumer protection is not enhanced by instituting a regulatory regime merely requiring financial service providers to be members of a designated association, though it is very much in the association’s interests for such a requirement to be set.

5.5     Voluntary codes of professional ethics do not provide adequate consumer protection, and thus they really just contribute to the consumer being misled. This is certainly the case where members’ compensation arrangements give rise to conflicts of interest and thereby contradict voluntary codes requiring members to “put the interests of the consumer first.” In any dispute with the consumer, these same financial services providers often argue that only the suitability standard, and not one of best interest, is the applicable standard.

5.6     Existing statutory regulators should regulate the provision of financial advice, including financial planning. To allow trade associations to regulate this activity would simply perpetuate the status quo of inadequate levels of proficiency and conflict-riddled transaction-based sales recommendations that lead to poor consumer outcomes.

5.7     FAIR Canada believes that an approach to credentialing whereby a designated body(ies) would qualify individuals to hold out and provide financial planning and these same bodies have the right to revoke their credentials may be acceptable so long as it is limited to a failure to maintain their qualification requirements or a breach of their code of ethics. However, existing regulators must oversee and enforce standards of conduct for financial planning and financial advice. The existing regulator must be able to regulate (ensure compliance and discipline) the entire activity of the financial planner and firm.

     6.One Central Comprehensive Database Needed

6.1     A single, free, comprehensive central registry must be created and maintained with adequate resources to provide a one-stop source of information for consumers regarding the licensing and registration status, credentials and disciplinary history of individuals and firms. The current process of conducting a background check is simply too complicated. It requires searching multiple databases and, even if every step is meticulously followed, will not necessarily lead to comprehensive or understandable results.

6.2     Creating another database solely for financial planners in Ontario will only lead to more confusion. As noted by the Expert Committee, there are already up to six databases that a person would have to find and use. We don’t need to create yet another one.

6.3     The Consultation Paper indicates that the database will allow the consumer to know if the financial planner holds a recognized credential. But this is not sufficient as it does not let the consumer know who the individual is regulated by, if the person has been disciplined in the past by an existing regulator, or whether terms and conditions are currently imposed on his or her license or registration.

6.4     We recommend that you work with other governments and regulators to provide consumers with a check registrations system that is not a patchwork of old technologies but that functions in a robust manner and allows consumers to use it very easily, even on their mobile devices. The use of fintech by regulators and governments to produce a single, user-friendly system should be a key priority.

We thank you for the opportunity to provide our comments and views in this submission. We welcome its public posting and would be pleased to discuss this letter with you at your convenience. Please feel free to contact Frank Allen 647-256-6693/frank.allen@faircanada.ca or Marian Passmore at 647-256-6691/marian.passmore@faircanada.ca if you wish to discuss the foregoing.

 

Sincerely,

Canadian Foundation for the Advancement of Investor Rights

[1] We recommend that you implement a statutory best interest duty and those that can meet it (given that they operate without conflicted compensation and have a sufficiently wide product shelf) would also be able to hold out as an “investment advisor”, “financial advisor” or “financial planner”.

[2] Our previous submissions can be found on FAIR Canada’s website at https://faircanada.ca/fca_submissioncategory/financial-planning/.

[3] $17 billion is the amount of investor harm caused annually by broker conflicts when working with customers in retirement accounts, according to an Obama administration study. See https://www.dol.gov/newsroom/releases/ebsa/ebsa20160406-0 and the report at https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_coi_report_final.pdf  .

[4] FAIR Canada Consultation regarding Financial Advisory and Financial Planning Policy Alternatives (September 23, 2015), online: <https://faircanada.ca/wp-content/uploads/2015/10/150923-Final-FAIR-Canada-Sumission-to-Expert-Panel-re-Financial-Planning_signed.pdf> at paragraph 1.9 to 1.11.

[5] As fully described in CSA Consultation 33-404 and 81-408, and as discussed in our submissions on Best Interest and Mutual Fund Fee Reform respectively.

[6] We recommend that you implement a statutory best interest duty and those that can meet it given that they operate without conflicted compensation and have a sufficiently wide product shelf) would also be able to hold out as an “investment advisor”, “financial advisor” or “financial planner”.

[7] For example, the OSC in its Report on Statement of Priorities for fiscal 2013-2014 stated under “Best Interest Duty” that “Research was completed on proficiency standards in Canada, the US, the UK and Australia to inform our thinking on potential changes to our standards”, OSC Report on Statement of Priorities For fiscal 2013-2014 at page 5, online: <http://osc.gov.on.ca/documents/en/Publications/rpt-on-sop_fiscal-2013-2014.pdf>. This research was never made public.

[8] See online: <http://www.fca.org.uk/you-fca/documents/policy-statements/fsa-ps11-01>.

 

Appendix A – RETAIL INVESTMENT ADVISOR PROFICIENCY & CONTINUING EDUCATION REQUIREMENTS IN LEADING JURISDICTIONS

 

CANADA
Regulators

Canadian Securities Administrator (“CSA”); Investment Industry Regulatory Organization of Canada (“IIROC”); Mutual Fund Dealers Association of Canada (“MFDA”)

 

Laws/Guidelines

National Instrument 31-103 – Registration Requirements and Exemptions (“NI 31-103”); IIROC Rule 2900 – Proficiency and Education (the “IIROC Rules”); MFDA Staff Notice MSN-0077 – Approved Person Proficiency Requirements (the “MFDA Rules”)

 

Terminology

·         A “registered individual” is an individual who is registered to act as a dealer or advisor on behalf of a registered firm.

·         A “registered representative” is an employee of an IIROC-regulated “dealer member” firm who has been approved by IIROC to trade and advise in securities with the public in Canada.

·         An “approved person” is a person who is registered with the MFDA to trade or deal in securities in respect of a MFDA-regulated “member firm.”

 

Proficiency Requirements

NI 31-103 prohibits individuals from performing any activity that requires registration until the person has the education, training and experience that a reasonable person would consider necessary to perform the activity competently.[1]

 

IIROC

 

To become a registered representative, a person must complete: [2]

 

·         The Canadian Securities Course;

·         The Conduct and Practices Handbook Course;

·         A 90-day training program during which the person is employed with a dealer member on a full-time basis; and

·         Within 30 months of being approved as a registered representative, the Wealth Management Essentials Course (unless the registered representative deals only in mutual funds).

 

MFDA

 

To become a registered representative who deals exclusively in mutual funds (and an approved person), a person must complete one of the following:[3]

 

·         The Canadian Investment Funds Exam; the Canadian Securities Course Exam; or the Investment Funds in Canada Course Exam;[4]

·         Obtain a CFA Charter and have 12 months of relevant investment management experience in the 36-month period before applying for registration; or

·         Receive the Canadian Investment Manager designation and have 48 months of relevant investment management experience, 12 months of which was in the 36-month period before applying for registration.

 

Continuing Education

IIROC

 

Registered representatives must complete a 12-hour compliance course and a 30-hour professional development course each three-year cycle. Registered representatives may take their courses from an external course provider or from a program offered by their dealer member.[5]

 

MFDA

 

The MFDA is currently undertaking consultations on whether to introduce continuing education (“CE”) requirements for approved persons.[6]

Regulator/Firm Oversight[7]

CSI

 

The Canadian Securities Institute (“CSI”) creates and administers all proficiency courses and exams that individuals must take to become registered individuals. CSI develops its course and exam content by working closely with regulators, self-regulatory organizations and members of the investment and banking industries.

 

IIROC

 

IIROC’s Business Conduct Compliance staff monitor dealer members to ensure they implement policies, procedures and controls to ensure compliance with regulations and industry guidelines. IIROC staff regularly reviews registered representatives, focusing on issues such as suitability, client account supervision and due diligence, corporate finance and research, employee activities and internal controls. IIROC staff also examines the firm’s supervision of and internal compliance testing on these activities.[8]

 

Dealer members

 

A dealer member may develop and deliver CE compliance and/or professional development courses within its firm, or may engage an external course provider to do so. CE courses must comply with IIROC guidelines, but dealer members determine their own methods of evaluating registered representatives’ knowledge and course comprehension. Dealer members must certify that their registered representatives have successfully completed their CE requirements, and retain records to this effect.[9]

 

MFDA

 

MFDA’s Enforcement Department investigates situations where member firms or approved persons may have breached the MFDA Rules. It instigates a review after receiving a complaint.[10]

 

AUSTRALIA
Regulator

Australian Securities and Investments Commission (“ASIC”)

 

Laws/Guidelines

Corporations Act 2001 (the “Act”); Regulatory Guide 146: Licencing – Training of Financial Product Advisors (the “Regulatory Guide”);[11] the Corporations Amendment (Professional Standards of Financial Advisors) Bill 2015 (the “Bill”)[12]

 

Terminology

A “financial product advisor[13] or a “relevant provider” is a person authorized by ASIC to provide advice on financial products on behalf of a financial services licensee firm (a “licensee”) to a retail client. Under the new requirements (defined below), only relevant providers can use the titles “financial advisor” and “financial planner,” or terms of similar import or combinations of words that include these terms.[14]

 

Proficiency Requirements

Under the Act’s existing requirements (the “existing requirements”), to become a financial product advisor, a person must complete:[15]

 

·         Tier 1 training standards, which are education courses that must be broadly equivalent to the ‘Diploma’ level under the Australian Qualifications Framework (the “AQF”);[16] and

·         Skill requirements, but only if the person will provide “personal advice” (i.e. advice that is tailored to a client’s objectives, financial needs and situation).[17]

 

Financial product advisors that only provide general advice (i.e. advice that is not personal advice) are not required to complete any skill requirements.[18]

After the Bill takes effect (the “new requirements”), to become a relevant provider, a person must complete:[19]

 

·         A bachelor degree or equivalent qualification that is approved by the “standards body” (which is a company nominated by the Minister of Finance to develop education, training and ethical standards);

·         A year of work, training or both that meets requirements set by the standards body; and

·         An examination approved by the standards body.

 

Transition to new requirements

Under the new requirements, the standards body is required to develop a Recognized Prior Learning framework to assess the value of existing financial product advisors’ prior education, on-the-job training and experience. Financial product advisors will have five years to reach degree-equivalent status (which can be achieved through various pathways, such as approved bridging courses) and two years to pass the standards body’s exam.[20]

 

Continuing Education

Under the existing requirements, licensees are required to implement policies and procedures to ensure that their financial product advisors receive ongoing training to maintain and update the knowledge and skills they require for their professional activities.[21]

 

Under the new requirements, relevant providers have an ongoing obligation to meet the continuing professional development (“CPD”) requirements set by the standards body and to comply with the Code of Ethics (the “Code”).[22]

 

Regulator/Firm Oversight

ASIC

 

Under the existing requirements, ASIC does not mandate any particular course or training provider, and it does not prescribe any particular duration for a training course or method of delivery. It is not involved in assessing education courses: education courses must be approved by an “authorised assessor” (i.e. a registered training organization or professional association), and can thereafter be listed on ASIC’s Training Register.[23]

 

Licensees

 

Under the existing requirements, financial product advisors are not required to undertake a formal diploma course, such as the one listed in the AQF.[24] Licensees can develop their own education courses and have them approved by an authorised assessor. An authorised assessor must assess whether an individual has met the training standards.[25]

 

Licensees are also expected to have adequate policies and monitoring procedures in place to ensure that persons not trained in accordance with the training standards do not provide financial product advice.[26]

 

Standards body

 

Under the new requirements, the standards body is responsible for developing education and training standards and the Code, which sets out the ethical obligations applicable to relevant providers.[27] These ethical obligations go above industry legal requirements and aim to encourage professionalism in the financial services industry.[28]

 

Licensees and professional associations

 

Under the new requirements, all relevant providers are subject to the Code and are covered by a monitoring and enforcement scheme (a “scheme”).[29] Schemes are developed by licensees or professional associations, and must be approved by ASIC.[30]

 

A professional association must directly monitor the relevant providers covered by its scheme for breaches of the Code, and take enforcement action where necessary. A licensee cannot be the monitoring body for its own scheme: it must engage a third-party to monitor on its behalf.[31] A monitoring body must notify a licensee of a relevant provider’s breach, and the licensee must in turn notify ASIC of the breach and the sanctions imposed for it. ASIC maintains a record of all breaches.[32]

 

Sanctions

Under the new requirements, relevant providers can be sanctioned for breaching the Code. Soft sanctions include a warning, additional training requirements or additional supervision. Tougher sanctions include revocation of membership within a professional association or termination of one’s employment with a licensee.[33]

 

 

 

UNITED KINGDOM
Regulator

Financial Conduct Authority (“FCA”) (formerly, the Financial Services Authority)

 

Laws/Guidelines

Financial Services and Markets Act (the “Act”); the FCA Handbook (the “FCA Handbook”)

 

Terminology

·         An “approved person” is a person approved by the FCA to perform a “controlled function” for an authorized firm. The controlled functions include a “customer function, which involves advising retail customers on retail investment products.

·         The FCA Handbook refers to “retail investment advisors,” which fall into one of two categories: “independent advisors” or “restricted advisors.” Independent advisors can consider and recommend any type of retail investment product; restricted advisors can only provide advice on a limited set of products and providers. Independent and restricted advisors must pass the same qualifications and meet the same requirements.

 

Proficiency Requirements

To be an approved person, a person must:[34]

 

·         Pass the “fit and proper test,” which is a FCA-conducted evaluation of whether a person is suitable to perform a controlled function. The test is not an exam, but rather an assessment of a person’s honesty (based on factors such as the person’s openness with self-disclosures, integrity and reputation), competence and capabilities, and financial soundness; and

·         Perform the controlled function in line with the Statements of Principle and Code of Practice for Approved Persons (“APER”).

 

To work at a firm, a person must:

 

·         Obtain the “appropriate qualifications” required to conduct the controlled function. Retail investment advisors are required to obtain the QCF Level 4 qualification, which is equivalent to the first year of a university degree.[35] The appropriate qualifications are set out in the Appropriate Qualification tables;[36] and

·         Undergo the training that the authorized firm considers necessary based on its assessment of the person’s needs at the time of hiring. A person cannot work unsupervised until the firm has determined that the person’s training needs are satisfied.[37]

 

A person that has not been assessed as competent by his or her firm is permitted to provide advice so long as he or she is appropriately supervised at all times. Employees have 30 months from the date they start providing advice (under supervision) to acquire an appropriate qualification. If a person fails to do so within this period, he or she must cease to engage in that activity. [38] Firms may require their employees to attain an appropriate qualification within less time.[39]

 

Transition Provisions

Following the Retail Distribution Review, retail investment advisors that held designated qualifications were not required to complete further examinations, but were required to address any knowledge gaps (based on an assessment against the Financial Services Skills Council’s examination standards), and have their qualification “gap-fill” verified by an accredited body.

 

Continuing Education

Firms are required to continually assess their employees’ competence and to take steps to ensure they remain competent in their roles (the “competent employee rule”). In this assessment, firms should consider their employees’ technical knowledge; skills and expertise; and changes in the market, products and legislation.[40]

 

In addition, firms must ensure that retail investment advisors complete at least 35 hours of CPD every year. Of these 35 hours, at least 21 hours must be spent on “structured CPD activities,” such as courses, seminars, lectures, conferences, workshops, web-based seminars or e-learning. The time not spent on structured CPD activities may be spent conducting relevant research; reading industry or other relevant materials; or participating in professional development coaching or mentoring sessions.[41]

 

Regulator/Firm Oversight

FCA

 

The FCA approves “qualification providers” (such as the Chartered Institute for Securities and Investment), which create their own exams, study materials and appropriate qualifications (such as certificates, courses, designations, degrees and diplomas). In assessing whether to approve a qualification provider, the FCA considers whether the applicant has robust and reliable procedures for assessing exams and preventing conflicts of interest, and adequate financial resources.[42]The FCA oversees the development of qualification providers’ exam standards and reviews them periodically. Before finalizing education standards, it publishes them for comment.

 

The FCA reviews firms’ systems and procedures for complying with the competent employee rule. It uses a data and risk-based supervisory approach, which is based on gathering insights from firm reporting and other intelligence. The FCA’s objective is to ensure that it has a “longer-term view of advisors as they move between firms during their career.”[43]

 

Firms

 

Firms decide how to assess employee competence, both at their time of hire and throughout their employment. Firms must have clear criteria in place so all individuals know when competence is reached and what conduct is required to sustain it.[44] Firms must ensure employees are always supervised, although the level and intensity of supervision depends on a person’s experience and whether they have been assessed as competent.

 

Firms are required to obtain independent verification of retail investment advisors’ qualifications from an accredited body,[45] and to notify the FCA of each retail investment advisor’s professional information. Firms must also notify the FCA if a retail investment advisor loses competence, fails to obtain the appropriate qualification or breaches the APER or Code of Conduct.[46] On an annual basis, firms must obtain written confirmation that each retail investment advisor has completed their CPD requirements and complied with the Code of Conduct or APER.[47] Firms must keep records on everything relating to training and conduct compliance.

 

 

UNITED STATES
Regulator

The Securities and Exchange Commission (“SEC”); Financial Industry Regulatory Authority (“FINRA”)

 

Laws/Guidelines

Investment Advisers Act of 1940 (the “Advisers Act”); Securities Exchange Act of 1934 (the “Exchange Act”); FINRA Manual (the “FINRA Manual”)

 

Terminology

·         An “investment advisor” is a person or firm that is registered in accordance with the requirements of the Advisers Act that provides securities advice to others for a fee.[48]

·         A “registered representative” or “broker-dealer” is a person registered in accordance with the requirements of the Exchange Act and licenced with FINRA as a securities professional, who does not receive “special compensation” for its advisory services.[49]

 

The SEC has acknowledged that investment advisors and broker-dealers routinely provide many of the same services to retail customers, yet are subject to distinct regulatory schemes.[50] Many individuals are registered as both investment advisors and registered representatives.[51]

 

Proficiency Requirements

Investment advisors

 

There are no educational or “fit and proper” requirements for investment advisors under federal law, although state law may require an investment advisor to pass securities exams in the state in which they have a principal place of business.[52]

 

For example, in both New York State[53] and California,[54] to become a state-registered investment advisor, a person must complete:

 

·         The Uniform Investment Adviser Law Examination (Series 65 examination); or

·         The General Securities Representative Examination (Series 7 examination) and the Uniform Combined State Law Examination (Series 66 examination).

 

These exams must be completed before a person provides investment advice to the public, and must be completed within no more than two years prior to applying for registration.

 

Registered representatives

 

To become a registered representative that provides retail advice, a person must pass:

 

·         the Series 7 Exam – General Securities Representative Examination. If the registered representative performs other functions, it must demonstrate proficiency in the relevant areas by passing other qualification exams, a list of which can be found here.

 

FINRA does not offer courses, but provides content outlines of the subject matter covered on exams.[55] FINRA does not mandate training or prior work experience, but some firms provide in-housing training programs.

Continuing Education

Investment advisors

 

Investment advisors are not subject to any CE requirements under federal law.[56] New York State and California also do not impose CE requirements on state-registered investment advisors.

 

Registered representatives

 

The CE requirements for registered representatives consist of two mandatory programs: the “regulatory element” and the “firm element.”[57]

 

(i) Regulatory element

 

The regulatory element consists of periodic computer-based training on regulatory, compliance, ethical, supervisory and sales practice standards. Registered representatives must complete the regulatory element within 120 days of the second anniversary of their initial registration, and every three years thereafter. The content for the regulatory element is derived from industry rules, regulations and widely accepted industry standards and practices. The regulatory element can be completed online. FINRA makes resources, such as content outlines, available to registrants to help them prepare for it.

 

(ii) Firm element

 

The firm element applies to all persons registered with a FINRA “member firm” who directly interact with customers in conducting securities sales, trading or investment activities (“covered registered persons”). Each member firm must maintain a CE program for covered registered persons to enhance their securities knowledge, skills and professionalism.

 

At least once a year, a member firm must evaluate and prioritize its training needs and develop a written training plan, taking into account the member’s size, structure, scope, regulatory developments, and its covered registered persons’ performance in the regulatory element. A member firm must administer its CE programs in accordance with its written plan and maintain records thereof.

Regulator/Firm Oversight

SEC

 

The SEC’s Compliance Office conducts inspections of investment advisor firms that have higher-risk investment advisors, or if it has received a complaint or has other cause to investigate.[58]

 

Investment advisor firms

 

Investment advisor firms must implement policies and procedures designed to prevent employees from violating the law.[59] They must review the adequacy and effectiveness of their policies at least annually.[60]

 

FINRA

 

FINRA develops and administers its exams, and engages and oversees industry committees that assist in developing and updating competency profiles, exam questions and content outlines. Independent training providers also create study materials and courses for candidates seeking to prepare for their exams.

 

FINRA conducts thousands of on-site member firm reviews each year. These reviews are meant to determine whether member firms and their registered representatives are complying with laws and guidelines. It will also review member firms or registered representatives in response to a customer complaint.[61]

 

Member firms

 

Member firms are responsible for designing, implementing and overseeing the firm element of the CE program.

 

 

 

 

EUROPEAN UNION
Regulators

European Securities and Market Authority (“ESMA”); the public authorities designated by each European Union Member State to carry out the duties provided for under law (the “Competent Authorities”).

 

Laws/Guidelines[62]

Markets in Financial Instruments Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments (“MiFD II”) and ESMA Final Report: Guidelines for the assessment of knowledge and competence (the “Guidelines”).[63]

 

Terminology

The Guidelines apply to Competent Authorities and to “firms” that provide investment services. Firms are responsible for ensuring their “staff” members fulfill the Guidelines’ requirements.

 

Proficiency Requirements

For a person to provide investment advice[64] or give information about financial instruments, structured deposits, investment services or ancillary services to clients (the “relevant services”), a firm must ensure that the person has:

 

·         “appropriate qualifications,” in the form of exams or courses that meet the Guidelines’ criteria; and

·         “appropriate experience,” which is a minimum of 6 months’ prior work experience providing the relevant services.

 

If a staff member does not have appropriate qualifications, appropriate experience or both, the staff member can only provide the relevant services under supervision, and this supervisory period cannot exceed 4 years.

The Guidelines grant firms the flexibility to determine how trainees should be supervised within the firm (i.e. it is not necessary for them to be shadowed by a qualified advisor).[65]

 

Continuing Education

At least annually, firms should review staff members’ development and needs; assess regulatory developments; and take action to comply with the Guidelines. Firms must ensure staff maintain and update their knowledge and competence by undertaking CPD or training as well as specific training in advance of the firm offering any new investment products.

 

Regulator/Firm Oversight

Firms

 

Firms are responsible for ensuring that staff know, understand and apply the firm’s MiFID II compliance policies and procedures, and posses the requisite knowledge and competence to fulfil their obligations.

 

On request, firms must submit records to their Competent Authority establishing the knowledge and competence of their staff, which should enable the Competent Authority to verify compliance with the Guidelines.

 

 

[1]     NI 31-103, s. 3.4(1).

[2]     IIROC Rules, Part I, s. 3.

[3]     Ibid, s. 3.5

[4]     Ibid, s. 3.1(1), a person is deemed to have not passed an exam unless the individual has done so within 36 months before the date that the individual applied for registration

[5]     Ibid, Part III.

[6]     The MFDA recently put out a discussion paper on the topic titled Discussion Paper on the Development of Continuing Education Requirements. The paper can be found at http://www.mfda.ca/regulation/bulletins15/Bulletin0644-P.pdf.

[7]     “Regulator/Firm Oversight” refers to the level of oversight exercised by regulator(s) and/or firms to verify the quality of proficiency and continuing education requirements and to ensure that retail investment advisers are meeting these requirements.

[8]     See IIROC’s webpage: http://www.iiroc.ca/industry/industrycompliance/Pages/Business-Conduct.aspx.

[9]     IIROC Rules, Part III.

[10]    See MFDA’s webpage: http://www.mfda.ca/enforcement/enforcement.html.

[11]    Chapter 7 of the Act governs financial product advisers, but the proficiency requirements are set out in the Regulatory Guide, which can be found at: http://download.asic.gov.au/media/1240766/rg146-published-26-september-2012.pdf.

[12]    The Bill takes effect July 1, 2017, with the exception of the provisions relating to the Code of Ethics, which take effect July 1, 2019.

[13]    The existing requirements refer to “financial product advisers.” The new requirements refer to “relevant providers”.

[14]    Bill, s. 1.25.

[15]    Regulatory Guide, 146.10.

[16]    The AQF is a national government system that provides the criteria for qualifications issued by the vocational education and training sector and the school and higher education sectors. The AQF can be found at: http://www.aqf.edu.au/aqf/in-detail/aqf-levels/.

[17]    Regulatory Guide, 146.51 and Appendix B.

[18]    Ibid, s. 146.52.

[19]    Bill, ss. 1.14 – 1.16

[20]    Ibid, ss. 5.3 – 5.7.

[21]    Regulatory Guide, 146.14.

[22]    Bill, ss. 1.18 – 1.1.9, 2.5.

[23]    Regulatory Guide, 146.71-72.

[24]    Ibid, 146.58.

[25]    Ibid, 146.11-13.

[26]    Ibid, 146.32.

[27]    Bill, s. 2.3.

[28]    Ibid, s. 2.8.

[29]    Ibid, s. 2.30.

[30]    Ibid, ss. 2.4 – 2.6.

[31]    Ibid, ss. 2.13 and 2.20.

[32]    Ibid, ss. 2.37 – 2.40.

[33]    Ibid, s. 2.35.

[34]    See the FCA’s The Fit and Proper Test for Approved Persons: https://www.handbook.fca.org.uk/handbook/FIT.pdf.

[35]    The Financial Advice Market Review Final Report, p. 35 (the “FAMR Report”).

[36]    FCA Handbook, TC 2.1.10.

[37]    Ibid, TC 2.1.11.

[38]    The FAMR Report, Recommendation 5, advises the FCA to consider modifying the time limits for employees to attain an appropriate qualification. Some firms would like for employees to be allowed to work for up to four years under supervision before having to obtain the appropriate qualification.

[39]    FCA Handbook, TC 2.2A.1 – 2.2A.4.

[40]    Ibid, TC 2.1.12.

[41]    Ibid, TC 2.1.15 – 2.1.16; 2.1.20 – 2.1.22.

[42]    The FCA has approved approximately 550 qualification providers and more than 300 qualifications.

[43]    Financial Services Authority, Policy Statement 11/1, chapter 4, p. 30.

[44]    See the FCA website: https://www.the-fca.org.uk/firms/training-competence.

[45]    FCA Handbook, TC 2.1.27.

[46]    Ibid, TC 2.1.31.

[47]    Ibid TC 2.1.26.

[48]    Advisers Act, s. 203(a). Since 1996, the Advisers Act has allocated regulatory responsibility for investment advisers between the SEC and the states. Today, most small adviser firms (assets under management < $25 million), mid-sized adviser firms (AUM > $25 and < $100 million), and their employees are subject to state regulation and are prohibited from registering with the SEC (unless the state has not enacted legislation governing investment advisers). Most large adviser firms must register with the SEC, and state adviser laws are pre-empted for these advisers.

[49]    Ibid, s. 202(a)(11). Broker-dealers are excluded from the definition of “investment adviser” if they meet the following requirements: (1) the performance of investment advisory services is solely incidental to the conduct of its business as a broker-dealer; and (2) no “special compensation” is received for advisory services and the broker-dealer does not receive any additional compensation to provide such service to their customers. Thus, income earned by registered representatives is often through commissions from the products they sell.

[50]    “Duties of Dealers, Brokers and Investment Advisers,” The Securities and Exchange Commission, p. 3: https://www.sec.gov/rules/other/2013/34-69013.pdf  (“Duties of Dealers, Brokers and Investment Advisers”).

[51]    “Suitability versus Fiduciary Standard,” Journal of Financial Planning, https://www.onefpa.org/journal/Pages/Suitability-Versus-Fiduciary-Standard.aspx.

[52]    Regulation of Investment Advisers by the U.S. Securities and Exchange Commission (March 2013), p. 20: https://www.sec.gov/about/offices/oia/oia_investman/rplaze-042012.pdf.

[53]    NYCRR Title 13, Part 11, Investment Advisory Services, §11.6 or §11.7.

[54]    How to Register as a California Registered Investment Adviser, Step 5: http://www.dbo.ca.gov/Licensees/Broker-Dealer_and_SEC_Investment_Advisers/pdf/HOW%20TO%20REGISTER%20AS%20A%20CALIFORNIA%20REGISTERED%20INVESTMENT%20ADVISER.v3.pdf

[55]    FINRA Registered Representatives Brochure, p. 4 (the “FINRA Brochure”).

[56]    Duties of Dealers, Brokers and Investment Advisers, p. 63.

[57]    FINRA Manual, s. 1250.

[58]    See Regulation of Investment Advisers by the U.S. Securities and Exchange Commission (March 2013), p. 57-58: https://www.sec.gov/about/offices/oia/oia_investman/rplaze-042012.pdf.

[59]    Advisers Act, s. 206(4)-7(a).

[60]    Ibid, s. 206-7(b).

[61]    FINRA Brochure, p. 16.

[62]    Since MiFID II was adopted into European law on April 5, 2014, the ESMA has been working to create so-called Level-2 legislation across key aspects of the MiFID investor protection provisions. This Level 2 work takes two forms: delegated acts that are drafted by the European Commission on the advice of ESMA; and technical standards that are drafted by ESMA and approved by the European Commission.

[63]    The investor protection provisions set out in the Guidelines, Annex VI, are set to take effect January 3, 2018.

[64]    The Guidelines distinguish between staff that provide investment advice and staff that only provide information on investment products/services. The Guidelines hold investment advisers to a higher knowledge and competence standard. This chart does not outline firms’ responsibilities in respect of staff that only provide information on products/services, but this information can be found in the Guidelines at Annex VI, s. V.II.

[65]    Note: The ESMA qualification standards are similar to those in the U.K., although they afford firms greater flexibility to determine how trainees should be supervised within the firm. The FAMR Report notes that U.K. firms have been dissatisfied with the lack of clarity surrounding training supervisory standards. See FAMR Report, p. 36.