BCSC supports raising the standards of conduct for registrants

VANCOUVER, April 28, 2016 /CNW/ - The British Columbia Securities Commission (BCSC) today announced that it strongly supports taking action to strengthen the client-registrant relationship through a sweeping set of targeted reforms to the obligations that registrants owe to their clients (NI 31-103). Proposed targeted reforms to 31-103 were published for comment today in the CSA's Consultation Paper 33-404: Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Client (the Consultation Paper).

"All CSA jurisdictions agree that we can do better for investors in their existing client-registrant relationship, and improving investor outcomes is a goal we all share," said Nigel Cave, Vice-Chair of the BCSC. "Raising the standards of conduct for registrants is clearly in the interests of investors, and we are convinced that the best way to achieve this is to implement the proposed targeted reforms on their own."

The BCSC believes that the overlay of the proposed best interest standard is not workable in the current regulatory and business environment, and may cause investors to think registrants have an unqualified duty to act in their best interests, not understanding that some conflicts would still be permitted. This may exacerbate one of the investor protection issues identified by the CSA – overreliance by clients on registrants. Implementing only the specific targeted reforms will meaningfully and practically address problems in the client-registrant relationship identified by the CSA, and will provide regulators with the tools necessary to ensure compliance and pursue enforcement action, where necessary.

"We believe the targeted reforms establish clear, practical, and enforceable requirements for registrants to follow and for regulators and courts to enforce, all in a way that will not raise expectations about investor protection that may not be realized," said Cave. "We have concluded that the proposed targeted reforms, combined with the full realization of the CRM2 and Point of Sale initiatives, will achieve the best outcomes for investors and significantly improve investor protection."

The Consultation Paper can be found on CSA members' websites. Comments must be submitted in writing by August 26, 2016.

Background and Timeline

Investor Protection Concerns Identified in Client-Registrant Relationship

Work undertaken by the BCSC and the Alberta Securities Commission (ASC), along with additional research undertaken by other CSA jurisdictions and third parties, identified a number of investor protection concerns within the client-registrant relationship:

• Overreliance by clients, creating an expectations gap that may result in sub-optimal investments;
• Clients not getting the returns they could reasonably expect from investing. Problems include product costs, investment strategies, and investor bias, which can all erode overall savings;
• Clients not getting outcomes that the regulatory system is designed to give them. Problems include opaqueness in the suitability assessment, existing requirements that require more clarity so that they can be more effectively enforced, barriers to obtaining redress for a registrant breach, and lack of effective compliance and enforcement in certain cases;
• Conflicts of interest, where in some circumstances the current required disclosure of conflicts may have the counter-intuitive effect of increased reliance on the conflicted advice; and
• Information asymmetry, as most investors have limited financial literacy and are challenged to avoid biases and apply what financial knowledge they have to their decision making.

Targeted Reforms Proposed in the Consultation Paper

The targeted reforms published for comment in the Consultation Paper will protect investors by increasing standards in the following areas:

• Conflicts of interest, including
  • firms and advisers must have a reasonable basis for concluding the client fully understands the implications and consequences of the conflict
  • responding to material conflicts in a way that prioritizes the interests of clients ahead of the interests of the firm and advisor, including guidance on impact of incentives
• Know Your Client, including that the KYC process results in a thorough understanding of the client, including the client's risk profile
• Know Your Product, including understanding the impact of all fees, costs and charges connected to the products they recommend
• Suitability, including
  • taking into account product costs and investment strategies
  • considering the client's target rate of return and whether the proposed investment meets the client's needs
  • considering not only the suitability of a trade but also of the portfolio on an ongoing basis.
• Relationship Disclosure, including
  • disclosure of the actual nature of the client-advisor relationship
  • disclosure by firms in restricted registration categories or that only offer proprietary products that there may be securities products they don't sell that may be more suitable
• Proficiency, including requiring
  • increased proficiency on product costs and investment strategies that can impact investment outcomes
  • continuing education
• Titles, including limiting the number of titles that can be used. There are three alternative approaches in the paper.

Timeline

Below is a short timeline outlining how the investor protection issues within the client-registrant relationship model were identified:

• October 2012: the CSA published Consultation Paper 33-403 - The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients on the potential introduction of a statutory best interest duty and received 93 comment letters.
• December 2013: the CSA published a CSA Staff Notice identifying key themes that emerged from the October 2012 consultation paper.
• 2015: the BCSC and the ASC reviewed media reports, investment publications, academic journals, and investor advocate publications about the client-registrant relationship, and interviewed experts in this area to assess whether there were issues related to the client-registrant relationship.
• June 2015: the CSA published research by The Brondesbury Group on mutual fund fees.
• September 2015: the OSC, IIROC & MFDA published the results of "mystery shop" of registrants across Ontario.
• October 2015: the CSA published a research paper on mutual fund fees, flows and performance.
• November 2015: the BCSC published the National Smarter Investor Study, which examined client-registrant relationships in Canada.
• November 2015: the OSC Investor Advisory Panel published a report on current practices for risk profiling in Canada and Global Best Practices.

About the British Columbia Securities Commission (www.bcsc.bc.ca)

The British Columbia Securities Commission is the independent provincial government agency responsible for regulating capital markets in British Columbia through the administration of the Securities Act. Our mission is to protect and promote the public interest by fostering:

• A securities market that is fair and warrants public confidence
• A dynamic and competitive securities industry that provides investment opportunities and access to capital

Learn how to protect yourself and become a more informed investor at www.investright.org

SOURCE British Columbia Securities Commission

Media Contact: Richard Gilhooley, Media Relations, 604-899-6713; Public inquiries: 604-899-6854 or 1-800-373-6393 (toll free)