By Dan Hallett on October 2, 2018
Ontario’s Minister of Finance Vic Fedeli recently issued a statement stating that his government does not support the Canadian Securities Administrators’ (CSA) proposals published on June 21, 2018. The proposals recommend – in a nutshell – banning deferred sales charge (DSC) commissions, terminating the practice of product manufacturers paying trailing commissions to discount brokers, and requiring financial advisors to disclose and resolve conflicts of interest in clients’ favour.
Minister Fedeli’s statement was carefully-worded, saying that he doesn’t support the proposals “as drafted”. I reached out to the Minister’s office twice asking for specifics, but I was simply referred back to the brief public statement. If the government actually shoots down this proposal, it leaves more questions than answers in my view.
Is This Motivated by Politics or Investor Protection?
The Minister’s press release characterized the proposals as resulting from a “process initiated under the previous government”. That point alone suggests that this is politically-driven and indicates a lack of understanding of the full background. The process was initiated in 1999 when the CSA’s committee on financial planning proficiency standards – originally focused on credentials – cited conflicted advice as a major worry.
Related to this, the Ontario Securities Commission’s (OSC) then-Chair David Brown established a committee to address the investment industry’s product-focus at a time when many firms were promoting trusted advice. That committee led to the 2004 publication of the Fair Dealing Model concept paper, which proposed, among other things, to eliminate most investment product commissions to address concerns over conflicted advice.
But this can be justifiably traced back to 1995 when Glorianne Stromberg published the first of two research papers on tightening mutual fund industry regulations to address the conflicts of interest that she uncovered in her investigation, as a result of commissions paid to advisors.
This is not tied to partisan politics. But since Minister Fedeli brought it up, the NDP party was in power (in Ontario) in 1995, the Conservatives in 1999, and Liberals thereafter (until Conservatives took over again this year). Concerns over conflicts of interest and the direction of regulations have been consistent over the past 23 years, regardless of political leadership.
If the Proposals Are Killed, Who Will Benefit?
My submission to last year’s consultation on the issue of embedded commissions supported the elimination of virtually all such commissions. I don’t believe that investors will benefit from killing this proposal. And while most have focused on other elements – namely the deferred sales charges (DSC) – the big issue in my view are the trailing commissions paid to discount brokers.
Five years ago, I estimated that mutual fund trailing commissions paid to discount brokers exceeded $100 million. Since a handful of big banks dominate the discount brokerage channel, that’s $100 million split mostly among the big banks.
How Will the OSC and Ontario Government Proceed?
Minister Fedeli’s sudden opposition to the CSA is puzzling on two fronts. First, the CSA is not purely an Ontario body. It is made up of all provincial and territorial securities regulators working together to create harmonized national regulation. Canada is often cited as the odd nation out among developed nations for its lack of a national securities regulator. The CSA and its proposals help push us closer to national rules. The Ontario government has authority over the OSC but not over any of the CSA’s other member regulators.
The Ontario government’s manoeuvre will, at best, delay a process that is nearly two decades in the making or, at worst, further fragment Canadian securities regulation if it cannot agree with other jurisdictions. And perhaps the most puzzling part: the Ontario government is overriding years of research by the very organization it empowers to regulate the investment industry without citing specific concerns. It’s not at all clear how the Ontario government will, as they state, “work with other provinces and territories and stakeholders to explore other potential alternatives to ensure fair, efficient, capital markets and strong investor protections”.
Who Is the Priority – the Industry or Ontario Investors?
Tying the Minister of Finance’s statement opposing the CSA’s proposals to making sure that “Ontario is open for business” implies that the statement is more about making sure businesses thrive than about protecting Ontario investors. Reading these words immediately triggered an association with the weak and misleading arguments I heard at last year’s OSC roundtable discussions on banning embedded commissions.
If Minister Fedeli is listening – or reading – I urge him to consider the sentiment I shared at last year’s roundtable discussion. It is sad to see industry and partisan politics hinder efforts to protect investors. It is more important than ever to refocus on the people most at risk by these rules – the investors that trust the industry with their life savings. Let’s simply focus on what investors and clients need and deserve and direct all efforts at inventing feasible and efficient ways of making it happen. In other words, it’s time for the government and the investment industry to start acting like true fiduciaries.
HighView is an experienced fiduciary portfolio management firm committed to investor transparency. We would be happy to discuss our goals-based investment approach with you and your professional advisors.
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