Personal Finance

Strong investor protection is at the top of the list.
By Steven G. Kelman | 20/06/16

Earlier this month the Ontario Securities Commission released its priority list for its fiscal year ending March 31, 2017. The document lists the regulator's goals, which include championing investor protection, delivering "effective compliance oversight" and pursuing "fair, vigorous and timely enforcement." Expanding investor education is also on its list.

About the Author
Steven G. Kelman is president of Steven G. Kelman & Associates Limited. His company provides specialty publications and training for the mutual fund industries. Steven is the author of several personal finance books and is author or co-author of courses offered by the Investment Funds Institute of Canada, including the Ethical Conduct and Behaviour continuing education course and the Labour-Sponsored Investment Funds course. He received a B.Sc. from McMaster University, an MBA from York University and holds a Chartered Financial Analyst designation.

I equate the tasks facing the OSC and other regulators to cleaning the Augean Stables. There is simply too much resistance to change. Indeed, the OSC recognizes that various stakeholders are not on the same page. For instance, the document states, "Where successful achievement of investment objectives is not a shared goal between advisors and investors, investor trust and confidence in the financial system is lost."

It goes on to say, "The OSC is committed to achieving better alignment between the interests of investors and their advisors" and "We will continue to seek improvements to the culture of financial services businesses, including the incentive structures they use. Weak compliance systems in combination with poor compliance cultures at firms can result in inappropriate advice and unsatisfactory investor outcomes."

Good luck on accomplishing those improvements in this decade. I expect that the OSC will move forward on its goals when, and if, it and other regulators impose on advisors a "best interest" standard -- the obligation to act in the best interests of their clients when providing advice to them -- or a fiduciary duty in dealing with retail investors. Right now advisors are only required to provide "suitable" advice, but that's not always the case, and many investors sincerely believe that their advisors will always make recommendations that are their best interests as opposed to the advisors' best interests.

The reality is that a best interest standard has been around for decades in the various codes of conduct used by professional organizations and industry bodies. It just isn't part of securities law, and that means that advisors who aren't obligated to follow such codes may consider it optional.

The Conduct and Practices Handbook course that every representative registered with an investment dealer must successfully complete has a "priority of client's interest" clause. Chartered Financial Analyst (CFA) candidates and charterholders are obligated to abide by the CFA Code of Ethics and Professional Standards, which includes the requirement that CFA members and candidates work in the client's best interest no matter what the job function. The Advocis code states that a member "shall act in a client's best interests" while the Financial Planners Standards Council's code states a "CFP (Certified Financial Planner) professional shall always place the client's interests first."

So while many but not all advisors have codes to follow, it seems that the onus is on investors to protect themselves. For instance, the OSC wants investors to check the registration of the person or firm they are dealing with as well as looking up any disciplinary proceedings against individuals and firms. Most investors would do this if they knew how, according to the Canadian Securities Administrators 2016 Investor Education Survey released earlier this month.

One problem I run across in my consulting business is that not everyone involved in the sale of investments is registered. There are what are called referral agents who direct potential investors to dealers, issuers or other registrants in return for a payment. The provincial regulators should in my opinion require that anyone acting as a referral agent be registered with each regulator of the province where he or she operates. Furthermore, in my opinion, each referral agent and the company paying should be required to disclose the relationship and payment details in writing to the client at the time the agent approaches the potential investor. This will close a loophole that allows non-registered individuals to perform such activities.

Of course registration with a securities regulator is no guarantee that the registrant is a saint who acts in the best interest of his or her clients. The proof is in the lists of disciplinary actions on the websites of the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association (MFDA) and the securities commissions.

As to educating individual investors, I believe a major problem is reaching the people who will benefit from investment education. A Google search for "Investor Education Canada" provides dozens of links to website belonging to regulators, industry organizations, major dealers and even one from a provincial teachers' federation that provides lesson plans to teachers. The information is there, but is it being used by the people who will benefit most? I doubt it.

Maybe the educational efforts of the regulators hoping to limit fraud and unsuitable investing would be better spent on industry training and education.

I suggest that when the regulators eventually get around to imposing a best interest or fiduciary duty standard they require all registrants to successfully write an ethical practices examination every five years. The course material would consist entirely of disciplinary decisions by the various regulatory provincial securities and insurance regulators as well as IIROC and the MFDA. That material is published online by the regulators so that dealers and advisors can see the standards expected of industry participants. No one should object to being tested for knowledge they should already know.

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