“We know from our experience in conducting firm reviews that there is room for improvement in how firms identify and manage potential conflicts that relate to compensation,” said Andrew Kriegler, chief executive officer at IIROC.
Industry regulators are taking a closer look at how investment firms are managing conflicts of interest when it comes to how financial advisers are compensated for the products they recommend to investors.
In a notice released on Wednesday, the Investment Industry Regulatory Organization of Canada (IIROC) stated that during a compliance review, it found most investment firms lacked a meaningful process to identify, deal with, monitor and supervise compensation-related conflicts.
For example, most firms did not have mechanisms in place to identify advisers who recommend products that yield higher fees and bonuses, when there are other suitable but less expensive alternatives available.
Also, most firms did not have a process in place for implementing additional monitoring of advisers approaching compensation thresholds based on the amount of revenue generated, IIROC said in the notice.
"Although most [investment firms] responded that they always put clients' best interest first, we found little supporting documentation as far as compensated related conflicts were concerned," IIROC said.
As a result, the regulator says it will immediately enhance its compliance test procedures to include closer examination of compensation grids, stronger supervision of advisers who recommend products with high commissions and improved monitoring of advisers who are close to compensation thresholds.
"We know from our experience in conducting firm reviews that there is room for improvement in how firms identify and manage potential conflicts that relate to compensation," said Andrew Kriegler, chief executive officer at IIROC. "That's why the steps we're taking are concrete and specific and engage the industry."
The regulator, which overseas 174 investment firms in Canada, said the recent examination indicates firms can and should improve the way they supervise and address existing and potential conflicts of interest.
"To strengthen compliance by our dealer members with our requirements concerning conflicts of interest – in particular compensation-related conflicts – we are enhancing our compliance examination program to focus on these conflicts and will consider whether further rule and/or guidance changes are required," IIROC wrote.
The notice comes on the heels of a new fiduciary rule announced on Wednesday in the United States by the U.S. Department of Labour. The rule is expected to to be fully implemented by 2018 and will require investment advisers providing retirement advice to serve as fiduciaries and place their clients' interests ahead of their own.
The rule is designed to reduce conflicts of interest for financial advisers working with 401(k) and individual retirement accounts. (U.S. 401[k] accounts are a type of retirement-investment account similar to Canada's registered retirement savings plan.)
In Canada, the discussion around implementing a "best interest standard" has been an ongoing topic among industry groups over the past several years.
Currently, throughout most of Canada, no general legal framework exists to regulate the activities of individuals who offer financial planning, advice and services. That means that in every province (excluding Quebec), any individual can call him/herself a financial planner – regardless of certification, designation or educational background. As a result, an industry group – the Ontario Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives – was established and recently announced recommendation that a statutory fiduciary duty to put clients interests first should be implemented for financial planners.
The Canadian Securities Administrators (CSA) announced its intentions last week to publish its own consultation paper on a best-interest standard later this month. The paper will provide proposals to the industry on how to enhance the obligations of advisers toward their clients.
"Regulatory action is required to better align the interests of registrants to the interests of their clients, to improve outcomes for clients and to clarify the nature of the client-registrant relationship for clients," the CSA said in a note.
Clare O’Hara