Canada’s investor protection framework has long had a reputation for being weak and not particularly well-enforced. Investors are still often paying excessively high fees and hidden charges on investment funds. Advisers are often under no legal obligation to act in their clients’ best interest. And even when an investor has been harmed by their investment dealer, there is no binding dispute resolution system to ensure their losses will be recovered. This is the second explainer of an occasional series examining why the pace of progress in advancing investor rights in Canada has been so painfully slow, and what changes are needed to fill in the gaps. Do you have your own story about a failure of investor protection? Email us at email@example.com.
Nearly two decades of working for the big banks was more than enough for Jane Bolstad. She still believed in her job itself – lots of regular Canadians could use a good financial planner to help meet major goals or map out a retirement plan, she said. And she had her certified financial planner designation – the gold standard for the profession. But she grew uncomfortable with the sales culture that has taken root in the Canadian banking system.
Many branch-based financial planners are paid on a 100-per-cent commission basis, but some are salary-based employees who receive an annual bonus for hitting performance goals, which include sales targets. The rewards are greater for selling products that make your employer more money such as the bank’s own lineup of mutual funds, rather than a guaranteed investment certificate (GIC). The commission earned from selling the bank’s products may be five times higher than on a GIC, for example. In this way, the system always incentivizes the sale of funds with higher fees, even when a GIC might be a better fit for the client.
Most bank advisers and planners are evaluated on whether they hit sales targets. Top performers are celebrated with galas and prizes. Underperformers are shamed and held back from promotions. “There is just extreme pressure on people to meet quotas, right from the tellers up to what they would call a financial planner,” Ms. Bolstad said. “It’s an obsession.”
In 2018, she decided to go off on her own, charging clients fees for service rather than earning commissions on transactions. “I just kept looking for a place in the banks where I could do real financial planning without being a salesperson and it doesn’t exist.”
Gone are the days when Canadian bank branches were largely based on processing transactions for customers. In its place is a model that revolves around sales. Branches have become more like “stores,” selling advice and investments, the Financial Consumer Agency of Canada (FCAC) said in a 2018 review of the sector.
There are dangers inherent with that kind of system. There may be a higher risk of Canadians being sold unsuitable products, and banks are not doing enough to prevent that from happening, the report said.
Last December, for example, Bank of Nova Scotia admitted that advisers at its securities arm used improper transactions and unsuitable investments to boost their own performance figures. Nearly 50 advisers were involved, exposing more than 10,000 client accounts to potential losses. The bank paid a fine, fired some advisers and said it addressed its supervisory lapses.
But to the critics who have lobbied for regulatory change for decades, the incident was a byproduct of the flaws at the heart of the sales-based model of financial advice. “‘Advice’ is really the wrong term,” said Jason Heath, a fee-only financial planner at Objective Financial Partners in Toronto. “At the bank branch level, you’re generally not getting investment or financial planning advice. You’re getting a sales pitch masquerading as financial advice.”
It’s a system the banks have fought to keep in place. Investor-friendly initiatives tend to get watered down, delayed or thwarted in the face of industry lobbying, said Andrew Teasdale, an economist and independent financial consultant who has spent 15 years pushing for changes to Canadian securities regulation.
Progress in recent years has generally focused on making things clearer for customers. Disclosure of fees and conflicts of interest have been improved, and there have been attempts to clean up the use of professional titles. But sales practices have been largely untouched by regulators.
There are just too many problems associated with a system of financial advice based on commissions and sales, Mr. Teasdale said. Advisers are motivated to put clients into expensive, actively managed strategies over cheaper index funds. “There’s a kind of cultural submission to this model in Canada,” he said. “I find it difficult to understand why it’s allowed to persist.”
Since the start of the COVID-19 pandemic, demand for financial help has been growing. At one point, Google searches for financial advice were up 88 per cent. Part of that surge was owing to the spike in Canadians’ cash savings – with billions of dollars sitting in bank accounts. But it was also driven by anxiety about the economy – a concern that has not dissipated with the growing fear of a recession.
In response, banks have pushed their advice services more aggressively to forge stronger ties to clients, promoting themselves as trustworthy confidantes. “Everyone in financial services has realized that the stickiest and most sustainable form of connection is around advice,” said Kendra Thompson, a partner at Deloitte in Toronto.
Trust is a big part of the big banks’ image these days. Marketing campaigns have mostly moved past pitching financial products, and instead frame the banks as the place to get good unbiased advice. “Maybe it’s time for a different kind of advice,” says the voiceover in a Scotiabank ad campaign launched last year. “Advice that comes from getting to know you, not trying to sell you.”
But a few months after the launch, an internal investigation at Scotiabank revealed a pattern of adviser misconduct. From 2017 to 2020, the bank found instances in which employees manually adjusted their own sales results in its tracking system, set up and quickly cancelled preauthorized contribution plans for clients without their approval and improperly processed clients’ requests to switch between mutual funds as fund redemptions and new purchases. All of those moves counted toward employee sales targets, while harming some clients in the process.
In a settlement agreement with the Mutual Fund Dealers Association of Canada, Scotiabank admitted to supervisory lapses and agreed to pay a $1-million fine, as well as up to $10.8-million in compensation to clients.
“To mitigate future incidents, as outlined in the settlement agreement, we have proactively implemented ongoing educational campaigns, ongoing communications about proper processes and procedures and introduced system enhancements,” Scotiabank said in an e-mail to the Globe.
The incident was not a one-off.
In 2017, all five of Canada’s largest banks settled with regulators after it was found they had overcharged customers for investments – “excess fees” that amounted to tens of millions of dollars. In some instances, banks sold investment funds that had an embedded yearly trailer fee for the adviser, even though the customers were fee-based clients who were already paying a fixed annual fee to have their investments managed.
In other cases, clients who had a high-enough account size were not notified when they became eligible for lower-fee versions of investments.
In all five cases, the banks repaid millions of fees to clients.
And while the banks have reported they have cleaned up their procedures that did not detect the excess fees, the incentives built into the financial advice system remain largely the same.
Bank advisers are still subjected to sales targets, which can put their own interests at odds with the client’s. “Nothing will change unless the compensation methods change,” said Scott Plaskett, chief executive of Ironshield Financial Planning. “When your compensation comes from sales and not from the delivery of advice, there is always the potential for problems.”
The industry has consistently argued against the idea that there are major gaps in the regulatory framework. “The issues raised have all been subject to extensive reforms introduced by securities regulators and provincial financial services regulators,” the Canadian Bankers Association (CBA), which represents about 60 domestic and foreign banks, said in an e-mail to The Globe and Mail.
The client-focused reforms, for example, require firms to address material conflicts of interest in the client’s best interest. Yet some investment firms are not complying with the new rules, according to a report released in March by the Canadian Investment Regulatory Organization (CIRO), a new group of merged regulators that oversees all investment dealers in Canada. Some big banks have even resorted to stripping their product shelves of independent mutual funds, raising more doubts about what the reforms have accomplished for investors.
A branch-based adviser at a Big Six bank is typically a salaried employee who holds a mutual-fund sales licence. Those advisers are not permitted to sell stocks and bonds. But securities legislation allows them to also sell exchange-traded funds (ETFs), which typically have much lower fees than mutual funds.
Even so, the banks have moved at a snail’s pace to provide branch advisers with access to trading platforms for a product that has spiked in demand because of its lower fees. To date, only two banks – Toronto-Dominion Bank and Royal Bank of Canada – provide limited access for branch clients to buy proprietary ETFs.
However, despite the similarity in licensing rules, there is no uniform set of requirements across the major banks for providing investment advice. Nor is there much commonality to the titles these employees use. They may be called banking advisers, financial advisers, personal banking associates or mutual fund sales representatives. (A review by the Ontario Securities Commission in 2015 found advisers using no fewer than 48 different titles.)
Impressive-sounding titles are known to give customers the wrong impression about the credentials and motivations of the bank rep sitting across from them. Whatever it says on their business cards, bank advisers are typically paid an annual bonus for hitting performance goals, which include sales targets, and they are limited to selling proprietary products such as the bank’s own mutual funds and GICs.
Until recently – outside of Quebec, which has its own rules – anyone could call themselves a financial planner or adviser, regardless of certification, designation or educational background. After more than three decades of pressure from financial planning groups, several provinces are finally looking to tighten up the rules to protect investors from unqualified individuals.
In Ontario, the financial services industry voiced its concerns early on in the process. The CBA told regulators the proposals would duplicate proficiency and conduct requirements that are the same for a securities licence or a mutual-fund licence. The association began to lobby for an exemption for anyone who holds either licence, which would include the bulk of advisers working in the industry – more than 100,000 people.
CIRO has asked for the right to grant credentials. That means offering a designation that would allow its members to use the financial adviser title, even if they are only allowed to sell mutual funds.
Investor advocates raised the alarm. Mutual-fund representatives, who complete an entry-level course to become licensed, should not be presented to consumers as sophisticated advisers, said Jason Pereira, president of the Financial Planning Association of Canada. “These are sales reps for the bank who are in most cases selling 100-per-cent proprietary product. Now, this framework creates the veneer of credibility that the consumer should be able to trust these people.”
Say you walk into a bank with a little money to invest. Chances are high that you will be urged to buy mutual funds from the bank’s own lineup. Should you expect the adviser that sells you the funds to be legally obligated to act in your best interest?
Many investors would be surprised to learn that the answer is no. With few exceptions, advisers are not held to a formal legal fiduciary standard in Canada. A fiduciary must put the client’s interest ahead of their own.
Instead, advisers are held to a “suitability” requirement based on the investor’s broad circumstances. But while an investment might be suitable for an investor’s portfolio, it may not necessarily be the cheapest or best-performing option. For years, this has allowed advisers to sell proprietary funds that might pay them a higher commission than lower-cost third-party products.
“Most people just assume their adviser must act in their best interest,” said Kelly Rodgers, a Toronto-based consultant who has spent the last 30 years advising individuals and foundations on their portfolios. “And look who has been arguing the hardest against advisers being held to a fiduciary standard? The banks.”
Regulators have floated the idea of a fiduciary or best-interest standard for Canadian advisers for years, similar to what is in place in Britain, the European Union and Australia. But the Canadian fund industry has consistently fought against the concept, claiming the status quo works just fine.
“One could easily argue that there is no evidence of a systemic issue or regulatory gap involving the provision of advice to retail clients,” Scotiabank wrote to regulators when they revisited the best interest standard in 2012. Even if such a gap existed, the bank argued, “the adoption of a statutory best interest duty could unintentionally harm retail clients by creating uncertainty, reducing access to products and services, and raising the costs of investing.”
After 20 years of consultation and debate, the push to heighten the duty owed to investors culminated with the client-focused reforms, the first of which took effect in 2021. These changes were “narrower, more complicated and would allow systemic conflicts of interest to continue,” Ontario’s Auditor-General Bonnie Lysyk wrote in a 2021 report. She found evidence that intense industry lobbying helped weaken the ultimate policy, and that many people in the industry were “pleased at how watered down” the client-based reforms were in their final form.
Scotiabank spokesperson Andrew Garas told The Globe the bank monitors and enhances its business practices on an “ongoing basis” to support employees in “putting the needs of customers at the forefront of what they do.” Royal Bank of Canada also reviews its sales practices and compensation structures annually to ensure that “product neutrality” is maintained, said spokesperson Kathy Bevan.
“RBC has a strong culture of always doing what is right for our clients and we have reinforced this by embedding ‘put client needs above our own, whatever our role’ into our Code of Conduct and sales practices,” Ms. Bevan said in an e-mail. “We also adhere to the spirit and requirements under the client focused reforms.”
Yet even when rule changes are put in place, the industry may at times find a way to sidestep the regulators’ intentions. The client-focused reforms, for example, require advisers to have a deeper knowledge of the investment funds they sell to clients. Rather than adapt to that rule through employee training and enhanced monitoring of investment funds, several banks responded by simply halting the sale of third-party funds altogether.
RBC, TD and Canadian Imperial Bank of Commerce notified all clients in their financial-planning businesses that advisers will no longer sell third-party funds for any investment portfolios. (The changes do not apply to any of the banks’ full-service brokerage accounts or to their do-it-yourself investing clients.)
That move sparked an outcry from investor advocates, industry associations and regulators, who said the new rules were not meant to create less choice for investors. “The reforms are there to increase professionalism in registrants and give them more in terms of tools to do a better job with their clients,” said Louis Morisset, who was chair of the Canadian Securities Administrators at the time but has since stepped down. “If that boils down to reducing what they can sell, then we have a big problem.”
At the same time, Ontario Finance Minister Peter Bethlenfalvy commissioned a review of the banks’ removal of outside investment funds – a report the Ontario Securities Commission (OSC) submitted to his office in February, 2022. The report has not yet been made public. Earlier this year, the Finance Minister’s office told The Globe that the six-page document was still being reviewed.
In 2017, the big banks’ sales practices came under intense public scrutiny. A series of CBC stories quoted unnamed current and former employees at Canadian banks who claimed to have bent the rules or ignored clients’ best interests under pressure to meet aggressive sales targets. Bank executives were summoned to testify before a parliamentary committee. A federal consumer watchdog, the Financial Consumer Agency of Canada (FCAC), struck a review.
About a year later, the results were published. The FCAC said that the sales culture at the banks may give rise to the “mis-selling” of unsuitable products. It also concluded that “governance frameworks do not manage sales practices risk effectively,” and that “controls to mitigate the risks associated with sales practices are underdeveloped.” Despite those issues, the FCAC said it “did not find widespread mis-selling.”
The CBA said it was “encouraged” by the findings. “Banks devote considerable time, effort and resources to help ensure customers are provided products and services that are appropriate for them and which they have consented to receive,” the association said in a recent e-mail to the Globe.
The FCAC later admitted that a draft of the report was shared with the big banks for review prior to publication. “The banks get to have input into a number of these kinds of reports,” Mr. Teasdale, the independent financial consultant, said. That influence helps to ensure that ambitious regulatory change is held in check, he added.
Attempts to modernize the system end up merely clarifying and refining the sales-based advice model, rather than moving past it. “The industry has far too much of a say in what happens with regulatory policy,” he said.
Editor’s note: An earlier version of this story mentioned that only Toronto-Dominion Bank provides access for branch clients to buy TD-branded exchange traded funds. The story has been updated to reflect that two banks – TD and Royal Bank of Canada – offer branch clients access to their own proprietary ETFs.
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