With 2016 drawing to a close and a new year imminent, FAIR Canada has drafted a wish list of investor protection initiatives it would like to see implemented in the upcoming year:
1. Implement a best interests standard
There is a distinct expectations gap between what is required of “advisors” and what is expected by consumers. Consumers are led to believe that advisors make recommendations in their best interest, but no such standard is actually in place. Often, consumers are unaware that the financial services providers that they receive “advice” from are simply salespeople pushing high-cost financial products. When things go awry, advisors’ defense is that the investments were “suitable”, which is a much lower standard. FAIR Canada wishes that “advisors” were required to provide advice that is in the consumer’s best interest, in line with consumer expectations.
2. Ban all forms of third-party embedded commissions (particularly trailing commissions) and encourage real price competition between mutual funds
Trailing commissions carry serious potential for conflicts of interest and present high, opaque costs to consumers. Conflicts of interest are structural and systemic, harming not only investors but the market itself, as demonstrated by Professor Cumming’s research. FAIR Canada wishes that securities regulators would take action and ban trailing commissions.
3. Have one statutory, national ombudservice with the power to make binding decisions
FAIR Canada wishes that steps would be taken to have a single, national, statutory ombudservice in Canada with the power to make binding decisions for any investment complaint. FAIR Canada believes this is vital to the integrity of the Canadian financial services market and the protection of Canadian consumers. Consumers deserve to have a process where there is a level playing field and where there are fair outcomes.
4. Protect consumers from leveraged speculation in investment products
FAIR Canada is concerned about systemic risks presented by leverage in retail customers’ investment accounts. We are concerned that some financial institutions irresponsibly promote borrowing to invest as an investment strategy despite the fact that in the vast majority of cases it is not appropriate for the consumer and despite the fact that Canadians are already heavily indebted. We have raised with securities regulators the issue of inappropriate practices and relationships between banks who provide investment loans (including related institutions) and registrants, where consumers may be encouraged to take out loans while they are still in their advisor’s office. FAIR Canada wishes that regulators would address the issue of inappropriate recommendations of leveraged investing to retail consumers in order to provide an adequate level of protection by immediately prohibiting the receipt of commissions or fees in respects of amounts borrowed to invest based on a leveraging strategy. Firms and their registrants should not benefit from recommending that the client borrow to invest given the inherent conflict in doing so.
5. Implement a national, comprehensive, consumer-friendly registration check
Securities regulators tell investors to check the registration of anyone selling investments and to only deal with registered representatives. However, we do not think that regulators appreciate the difficulty consumers encounter in conducting a proper registration check. Regulators need to provide a single, national comprehensive background check that Canadians can easily use to check the background, registration status, proficiency and disciplinary history of registrants. The system should also include self-regulatory organization membership information and should cover all financial services registrants and licensees regardless of whether they are in the insurance, securities or banking sectors. The current system is very complicated and necessitates the search of several databases. FAIR Canada wishes for a simplified, comprehensive, national one-stop source for registration and disciplinary information for consumers.
6. Create a Fraud Compensation Fund
FAIR Canada wishes that governments and regulators consider establishing a fund to compensate victims of fraud when dealing with any licensed or registered financial service provider. Consumers who have suffered losses through fraud should be compensated in a manner similar to that used in Quebec with the Fonds d’indemnisation des services financiers or the UK’s Financial Services Compensation Scheme. Recent high profile cases involving fraud and related insolvency often do not result in investors receiving meaningful compensation through existing mechanisms such as the courts or through CIPF coverage.