FAIR Canada strongly believes that Canada urgently needs to implement reforms so that dealers and their individual registrants (“financial advisors”) have a statutory duty to act in their client’s best interests and to ensure that they will be able to meet their obligations to do so. FAIR Canada strongly believes this requires enactment of a statutory best interest duty. The Proposed Targets Reforms will not suffice. They are inadequate because they do not effectively address conflicts of interest and other problems that can, and frequently do, exist at the heart of the relationship between dealers, financial advisors and their clients. We agree with the CSA that the status quo will not suffice given the multitude of problems governing the relationship between dealers, financial advisors and their clients. A statutory best interest standard that results in professional, unbiased, objective advice focused on what is best for the investor is urgently needed.
The Content of a Statutory Best Interest Standard:
FAIR Canada recommends that, to be meaningful, the statutory best interest standard should require dealers and their individual registrants to:
FAIR Canada believes the best interest standard must be articulated clearly and unequivocally in legislation governing both dealers and their advisors so that it will be fully enforceable and so that it will be understood to govern firms and individual registrants in all aspects of their relationship with their clients.
Necessary Reforms to Accompany a Best Interest Standard:
In order to meet a best interest standard, certain fundamental reforms are needed to ensure unbiased, objective financial advice is provided. The required reforms are:
FAIR Canada recognizes that some investment firms and their financial advisors are unable to operate on a conflict-free basis because of the very nature of the business models they utilize. For example, firms with intimate ties to issuers, approved shelves containing only proprietary products or sales limited to one kind of product (ie mutual funds) lack the objectivity required to formulate advice based on their clients’ best interests. We would prefer to see these business models abolished. However, if registrants are going to be allowed to continue using these business models, FAIR Canada believes the activities of those registrants should be strictly confined to product sales (with associated reforms to suitability, know-you-client and know-your-product requirements and rules prohibiting conflicted remuneration including embedded third party commissions). These registrants should be prohibited from providing financial or investment “advice” and they should be prohibited from portraying themselves as advisors.
Strict Rules on Business Titles:
Business titles should be limited to three categories:
FAIR Canada believes this straightforward nomenclature will allow consumers to distinguish between financial advice, which can be relied upon as being professional in nature, and sales pitches, which may be informative but which should be viewed guardedly and with some skepticism. All three categories of registrants should remain fully bound by know-your-client, know-your-product and suitability obligations (except to the extent exempted in discount brokerage (also known as “order execution only”) situations) and FAIR Canada believes certain targeted reforms that can strengthen those obligations should be adopted.
The Proposed Targeted Reforms Are Inadequate:
FAIR Canada is strongly of the view that the Proposed Targeted Reforms are not adequate to ensure adequate and effective investor protection. The Proposed Targeted Reform on conflicts of interest does not result in professional, unbiased and objective advice and is, therefore, deficient. Some of the other Proposed Targeted Reforms are helpful (KYC and suitability in particular) while others are too vague and tentative (proficiency) while others only work if the best interest standard is implemented with such a reform (titles, relationship disclosure). Therefore, FAIR Canada would not be supportive of an approach in which the Proposed Targeted Reforms would be implemented first and a best interest standard left for a later date.
FAIR Canada, shares the CSA’s view that the status quo is not acceptable, but we maintain the response required is not one of incremental steps. Such an approach would be woefully inadequate. Instead, the opportunity should be seized now to institute a profound shift to a statutory best interest standard that will ensure Canadians receive the objective, professional financial advice they need and expect. With the implementation of a statutory best interest standard as set out above, the trust placed in the advisor will be appropriate as will the degree of reliance.
Other leading jurisdictions have implemented reforms in this area – including best interests duties, banning conflicted remuneration, banning inducements (both monetary and nonmonetary) and increasing proficiency requirements for advisors while also providing investors with summary disclosure about different types of investment products. These reforms are yielding greater protection for investors in those jurisdictions. Canadians deserve no less.
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