Regulators face fierce opposition to wealth management reforms

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After a full year of work, provincial securities watchdogs are nowhere near reaching consensus on whether major reforms are needed in Canadian wealth management.

Late in 2012, the Canadian Securities Administrators, the umbrella group for the country's patchwork quilt of provincial regulators, published consultation papers on the standard of conduct for financial advisers as well as the future of mutual fund fees. The studies were meant to help determine whether regulators should crack down on practices that are allegedly unfair to investors.

The questions came at a key moment for the industry. Wealth management has become one of the hottest revenue generating areas for Canadian banks, and the growing dominance of the Big Six in that field has hurt many of the smaller independent firms.

The wealth management world hasn't experienced major reforms in nearly two decades. Some argue the checks and balances established following the last big regulatory review in the 1990s, such as the creation of a self-regulating body overseeing the mutual fund industry, didn't accomplish much.

It's still unclear whether anything will happen this time around. The regulators' update, released Tuesday, noted there is "significant disagreement about whether the currently regulatory framework for advisers adequately protects investors."

Advocates of reform argue that investment advisers currently have no fiduciary obligation to their clients, and can therefore are free to act like salespeople, selling products that improve their own profits through higher fees. Opponents argue that an existing, flexible framework is already in place and that there are already new rules coming from bodies such as the Investment Industry Regulatory Organization of Canada (IIROC), which is implementing rules that force advisers to disclose to clients the exact amount they pay in fees each year.

If there are still problems after the other agencies' new rules are implemented, opponents of reform argue in the CSA consultation papers that "the appropriate regulatory response should be targeted in nature … rather than undertaking a foundational shift of the entire regime which may or may not address the concerns and may lead to negative unintended consequences for investors and capital markets."

Many industry players also advocate a wait-and-see approach. While Canada debates reforms, the United Kingdom and Australia are enacting their own, including banning sales commissions for investment advisers. Some observers fear that these plans could backfire, and that Canadian financial institutions shouldn't rush to copy those countries before the results are in.

"The CSA should take advantage of the fact that the international reforms in the U.K. and Australia are now in force and … we should carefully review the impact on these reforms in those jurisdictions before deciding whether to pursue similar reforms in Canada," the update noted.

There is also pushback from the industry on changes to mutual fund fees, including the elimination of trailer fees, which typically pay advisers 1 per cent a year for keeping their clients in a certain fund. "The vast majority of industry stakeholders express the view that there are no substantive regulatory problems in the industry that warrant the potential reforms," the update said. Rival products such as exchange-traded funds, which come with much lower management fees, now serve as viable alternatives to higher cost mutual funds, increasing competition for investment products.

There is also fierce pushback against the elimination of trailer fees, which typically pay advisers 1 per cent a year simply for keeping their clients in a certain fund. "Overwhelmingly, industry stakeholders think eliminating embedded adviser compensation would be detrimental to all participants in the fund industry, including and especially retail investors."