The majority of Canada's financial regulators are abandoning a "best-interest" standard that would have strengthened the obligations financial advisers owe to their clients.
The Canadian Securities Administrators posted a bulletin on Thursday morning stating that all provincial regulators, excluding the Ontario Securities Commission and the Financial and Consumer Services Commission in New Brunswick (FCNB), will no longer be looking at implementing a mandatory best-interest standard that would have required a registered dealer or registered adviser to act in the client's best interests – in a higher standard than the current model.
Often referred to as a "fiduciary duty" – the initiative would have helped strengthen relationships between Canadian investors and their financial advisers.
"The ongoing problem of the lack of clarity regarding the duty of care that an adviser has to a client remains – we had an opportunity to clarify and sadly this opportunity is being passed by for most of the provinces," says John De Goey, a portfolio manager with Industrial Alliance Securities Inc.
The topic of financial advisers acting in the best interest for clients has been on the table for a number of years. The CSA first published a paper in 2012 and then a second consultation paper in 2016 titled "Proposals to Enhance the Obligations of Advisers, Dealers and Representatives Toward Their Clients." The paper sought comment on proposed regulatory action aimed at strengthening the obligations that securities advisers, dealers and representatives owe to their clients.
In addition to the best-interests standard, the paper also included several " target-reform" proposals to the industry, including the regulation of conflicts of interest, the know-your-client and know-your-product requirements, the suitability obligation and the use by registrants of business titles.
If approved, these potential proposals were intended to better align the interests of registrants – advisers – to the interests of their clients.
Thursday's announcement means that regulators in Quebec, Alberta, Manitoba and British Columbia will not be doing further work on the proposed regulatory best-interest standard. But they will continue to look at the other reform proposals.
"The OSC and FCNB expressed their support for a regulatory best-interest standard that would act as a guiding principle in the consultation paper, while the British Columbia Securities Commission (BCSC), Alberta Securities Commission (ASC) and Manitoba Securities Commission (MSC) expressed strong concerns about the benefits of introducing a regulatory best-interest standard over and above the targeted reforms," according to the CSA.
"We want advisers to act in the best interest of their clients. However, we believe that the better route to achieve this is to enhance the existing standards to focus on the areas of greatest concern," said ASC spokeswoman Alison Trollope.
"For example, the targeted reforms will require registrants to deal with conflicts in a manner that prioritizes the interests of the client ahead of the interests of the registrant."
The bulletin states the OSC and the FCNB will continue to work to articulate a regulatory best-interest standard and will carry out further consultation with stakeholders and self-regulatory organizations.
In an e-mailed statement, OSC vice-chair Grant Vingoe said, "We have been clear all along that we support a best-interest standard and are prepared to demonstrate leadership here. It's what investors expect and deserve. This is about doing the right thing – and fulfilling one of our greatest responsibilities as a regulator: delivering effective investor protection to the public we serve. There's more work that needs to be done to establish how the best-interest standard would apply across the various business models in the market."
The bulletin further states that both the BCSC and Quebec's Autorité des marchés financiers felt that introducing a regulatory best-interest standard in the current regulatory environment, in which conflicts would still be permitted to exist between registrants and their clients, could exacerbate one of the harms the CSA identified: misplaced trust and overreliance by clients on their registrants.