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June 2017
FAIR Focus
FAIR Canada's Monthly Review
Busy Time for Investor Protection Initiatives - But Action is Required Soon

It has been a busy month at FAIR Canada! We have commented on many initiatives that could have far-reaching consequences for investors such as discontinuing embedded commissions, providing effective consumer protection and oversight at the banks, and the Ontario Securities Commission's Statement of Priorities for 2017-2018. The hope is that our comments - and the request for comment process on these initiatives - leads to positive change, with strengthened protections for investors. The dialogue will continue as the OSC will be hosting a roundtable on discontinuing embedded commissions on September 18th. What is really needed is action, as investors have been waiting far too long for regulatory changes that will protect them.  

The Team at FAIR Canada 
FAIR Canada Supports Ban on Embedded Commissions
FAIR Canada has  commented  on CSA Consultation Paper - 81-408 regarding the elimination of embedded commissions. At issue is whether investment funds such as mutual funds should continue to be allowed to be sold that include third party payments from the fund manufacturer to the dealer - payments such as trailing commissions and deferred sales charges ("DSCs").

FAIR Canada continues to support the elimination of third party payments or embedded commissions and other forms of conflicted remuneration. FAIR Canada believes that banning embedded commissions from all investments is an essential step so that Canadians can receive professional objective advice free from damaging conflicts of interest.

FAIR Canada emphasizes in its comments that embedded commissions in investment products produce a system of inherent conflicts of interest that subvert the interests of investors to the interests of dealers, individual registrants and investment fund manufacturers. As a result, Canadians have been receiving product recommendations driven more by payments their advisor and the dealer will receive, rather than what would be best for the consumer. In addition, investor outcomes and market efficiency are harmed. Canadians cannot save what they otherwise would have (at best) or lose their hard-earned capital from accepting the "advice" of registrants (at worst). They are not provided with the advice they need and deserve to receive. This is a concern to all Canadians as our economy and society suffers as a result.

Discontinuing embedded commissions will improve financial outcomes for Canadians. FAIR Canada continues to press for the adoption of a statutory best interest standard and reforms that will prevent or avoid other conflicted compensation arrangements. What is needed is the avoidance of conflicted compensation arrangements rather than the permissive world of "managing" conflicts that firms now inhabit, which allow for the creation of personnel and compensation policies and practices that create conflicts. A focus on this is urgently needed along with effective compliance oversight and enforcement.

FAIR Canada calls for the immediate elimination of embedded commissions from investment products sold at discount brokerages given that IIROC Dealer Member Rules do not permit discount brokerages to provide recommendations. This is an unjust situation that needs immediate rectification.

Read more here.
FAIR Canada Submits Brief to Parliamentary Standing Committee on Finance
FAIR Canada has  submitted a brief to the Parliamentary Standing Committee on Finance regarding consumer protection and oversight in Relation to Schedule I Banks. FAIR Canada has been following the CBC Go Public investigation of improper sales practices at Canada's banks, and like many, is concerned with the allegations made by former bank employees. FAIR Canada's Brief highlights factors that have led to an increasing need for objective advice by Canadians as well as the increasing level of trust placed by Canadians in their financial institutions to help them (in their best interests) meet their financial goals. However, it appears that there are firm-wide practices and compensation structures that prevent Canadians from receiving adequate advice including being sold unnecessary products or unsuitable investments that are not in their best interests.

FAIR Canada makes a number of recommendations including a requirement for a best interest standard that includes acting fairly, honestly, and with a duty of loyalty to the client and avoiding conflicts of interest. A best interest standard would combat the proliferation of harmful products, damaging sales practices and financial incentives not in the client's interest, would remove structural conflicts of interest (notably embedded commissions) and require banks to adapt their business practices so that employees no longer prioritize sales over the interest of the consumer.

Read more here.
FAIR Canada Submits Comments on OSC's 2017-2018 Draft Statement of Priorities
FAIR Canada is pleased to see that the OSC's core mandate, investor protection, is emphasized throughout the 2018 Draft Priorities. Many of the initiatives the OSC offers to prioritize will have a positive impact on investors and help to improve investor protection in Ontario.

FAIR Canada calls on the OSC to articulate specific goals and corresponding steps for the upcoming year. Substantively, there are three key areas that FAIR Canada addresses with respect to the 2018 Draft Priorities: a) Best interest standard and conflicted compensation structures; b) The role of the Ombudservice for Banking and Investments (OBSI); and c) Transition to the Capital Markets Regulatory Authority (CMRA). With respect to a best interest standard, FAIR Canada fears that the OSC's action item of conducting a regulatory impact analysis for a best interest standard will lead to further delays, when a timely regulatory response is required to protect investors.

FAIR Canada also offers brief comments in the submission, on a number of other issues which include: behavioural economics; the establishment of a Seniors Expert Advisory Committee; the OSC whistleblower program; general enforcement matters; fintech and the OSC's LaunchPad initiative; fixed income reform; and syndicated mortgages.

To read FAIR Canada's full submission, click  here.
Protecting Older Investors: A Joint Project of FAIR Canada and the CCEL
Canada is in the midst of a huge demographic shift. By 2024, people aged 65 and over will account for 20 percent of the country's population. This has significant policy implications, from infrastructure needs to health care and community services.

People don't often think about the investment industry as being impacted, but the reality is that financial services firms serve millions of senior investors. As older adults experience dementia or other conditions that affect their cognitive capacity, they can be at higher risk of undue influence or financial exploitation.

In this context, financial advisors may want to take protective action in cases where they believe a client has lost capacity or is subject to undue influence. But in Canada, there is currently no regulator-approved protocol to define what actions financial advisors can actually take.

To address this issue, the Canadian Foundation for Advancement of Investor Rights (FAIR Canada) and the Canadian Centre for Elder Law have launched a joint one-year project funded by the  Law Foundation of Ontario Access to Justice Fund. This  Project will consider the development of a conduct protocol and a practical mechanism for Canadian financial services firms and their investment representatives to take urgent, short-term protective action for the benefit of vulnerable consumers.

Read more here.
Media FAIR in the Media
Blog by Marian Passmore, COO and Director of Policy at FAIR Canada, explains what this project is all about.
James Langton of the Investment Executive reports on FAIR Canada teaming up with the Canadian Centre for Elder Law (CCEL) on a project dedicated to vulnerable investors. The article summarizes key aspects of the project including its purpose, consultation document and timeline for a final report. 
Professor Anita Anand, Special Advisor to the Board of FAIR Canada, writes in the Globe and Mail that the Cooperative Capital Markets Regulator - the current proposal to reform Canada's securities regulatory structure - is not in investor's interests. She concludes that the current proposal as devised is worse for investors than the current regime.

Barbara Shecter, for the Financial Post, quotes Louis Morriset, President and CEO of the Autorité des marchés financiers (AMF) regarding the decision of the majority of CSA jurisdictions to not pursue a best interest standard. FAIR Canada's statement in response to this decision is also cited, in particular FAIR Canada's view that a best interest standard would greatly improve the relationship between dealers, advisors and their clients. The "targeted reforms" alone, which are proposed by all the regulators, "will not properly address the problems associated with conflicts of interest and conflicted compensation structures," FAIR Canada says.

Leo Almazora of Wealth Professional reports on the proliferation of trailing commissions by discount brokerages. Marian Passmore, FAIR Canada's Director of Policy and COO, is cited in the article with respect to FAIR Canada's view that discount brokerages should not be allowed to offer series A funds .

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