: Federation of Mutual Fund Dealers - Submission

June 17th 2016

VIA E-MAIL ONLY

Expert Committee to Consider
Financial Advisory and Financial Planning Policy Alternatives
c/o Frost Building North, Room 458 4th Floor, 95 Grosvenor Street
Toronto, On M7A 1Z1
Fin.Adv.Pln@ontario.ca

Dear Sirs and Mesdames:

The Federation of Mutual Fund Dealers (the “Federation”) has been, since 1996, Canada’s only dedicated voice of mutual fund dealers. We currently represent dealer firms with over $124 billion of assets under administration and 18 thousand licensed advisors that provide financial services to over 3.8 million Canadians and their families.

We appreciate the opportunity to comment on your current consultation. After some general comments we will address each question in turn.

General

We agree with your assertion that:

  • reforms to the existing regulatory environment for financial planning and financial advisory services are warranted
  • there is a lack of oversight for providers of financial planning who do not sell financial products. We made this argument during the ‘Fair Dealing’ consultations.
  • Providers of financial planning who are regulated for the sale of financial products are only regulated for certain aspects of financial planning. However, this implies none are regulated for all aspects which may not be the case
  • There exists today carrying degrees of proficiency and no consistent accreditation
  • There are too many titles and designations in our industry
  • There is an asymmetry in financial knowledge between providers and consumers. However, this exists with any professional/layman relationship.
  • Given the fragmented regulatory framework for financial services in Ontario, it is difficult for consumers to find relevant information required to make important decisions relating to their financial affairs; and
  • Regulatory duplication could be disadvantageous to all. This would be why this initiative cannot be applicable to Ontario only – the CSA should be engaged to ensure that the resulting policy changes are adopted nationally and applied uniformly.

We disagree that there is an absence of an explicit obligation for providers of financial planning or financial product sales and advice to act in their client’s best interest.

  • This is explicit in Advocis’ ‘Code of Professional Conduct’ as well as the Financial Planning Standards Council’s ‘Standards of Professional Responsibility’
  • MFDA Rule 2.1.4 Conflicts of Interest states that the Member and the AP will address conflicts by the exercise of responsible business judgement influenced only by the best interests of the client and we would argue that the MFDA has this expectation of its Members and their APs generally.
  • In my current work as a compliance consultant with Kegie Consulting Corp., I provide policies and procedures manuals to mutual fund dealers. That manual contains a minimum of 15 references for acting in the client’s best interests.

Preliminary Policy Recommendations

1. Regulation of Financial Planning in Ontario

We agree that regulation or oversight should be required of any individual who or firm that holds our as providing financial planning services.

We are unsure about the recommendation that those providing financial planning whose other activities are regulated by the existing regulatory framework for securities, insurance and mortgage brokering should have their financial planning activities regulated by their existing regulator.

Given that you are recommending the creation of a Financial Services Regulatory Authority (FSRA) to oversee unregistered financial planners, having more than one regulator oversee financial planning would, we believe, make it impossible to accomplish a harmonized approach to the regulation of those individuals.

We are not opposed to those unregulated financial planners having their activities regulated or overseen, but we do not think that the proposed Financial Services Regulatory Authority (FSRA) is necessarily the answer. Another option would be to mandate that anyone holding out as a financial planner, registrant or not, be required to provide proof of certification as such and would therefore be required to comply with the certification organization’s mandate in order to retain their certification. Existing regulators would continue to oversee registrants, the use of titles with regard to services being provided and the sale of product, but the certification organization would oversee the planning function of all. This would further the ‘professionalization’ of the practice.

2. Harmonization of Standards

We agree there should be one set of standards as per the professional model as suggested in 1.c. above.

Education and training should be left to the commercial suppliers so long as their course content, materials and testing standards are approved by the Province/CSA.

3. Statutory Best Interest Duty.

We are disappointed that this Paper does not define “statutory best interest duty”. During the OSC’s consultations a year ago the terms “best Interests” and “fiduciary duty” were bandied about and it was clear that not many in the room really understood their meaning or their practical implications. Here we have introduced a new term with no accompanying definition to assist the reader in assessing the full impact of the recommendation. Therefore, until a definition and description of the practical application is available, we are unable to comment fully.

Fiduciary duty eliminates the ability of a judge to apportion some of the blame for the consequences in a case to the client for not, for e.g. mitigating their losses. We believe this to be unfair to all parties. Would a Statutory Best Interest Duty have the same impact?

We would argue that a ‘best practices’ best interest duty would be more appropriate; this is, in effect, what is applicable today. In court the judge may still be asked to determine whether or not a fiduciary duty was owed, but they would not be constrained in making the apportionment in their judgement if one was warranted.

We want to acknowledge that during the June 2nd public consultation, the Panel clarified that it is their intent to ‘codify’ the industry best interest standard that exists today and we would agree with that intent.

4. Exemptions

We agree with the exceptions as noted i.e. subject to a SBID already; already subject to a professional legal standard of care and fiduciary duty e.g. lawyers, accountants; and, the individual or firm is a mere “order taker”.

5. Referral Arrangements

Recommending that no AP or FP pay a referral fee to a third party unless the other person or firm is regulated as a FP or AP “and owes a best interest duty to consumers”1

We would recommend that referral arrangement requirements mirror existing MFDA Rules as follows:

2.4.2 Referral Arrangements

  1. Definitions. For the purpose of this Rule 2.4.2:
    1. “client” includes a prospective client;
    2. “referral arrangement” means any arrangement in which a Member or Approved Person agrees to pay or receive a referral fee; and
    3. “referral fee” means any form of compensation, direct or indirect, paid for the referral of a client to or from a Member or Approved Person.
  2. Permitted Referral Arrangements. A Member or Approved Person must not participate in a referral arrangement with another person or company unless:
    1. before a client is referred by or to the Member or Approved Person, the terms of the referral arrangement are set out in a written agreement between the Member and the person or company;
    2. the Member records all referral fees; and
    3. the Member or Approved Person ensures that the information prescribed under Rule 2.4.2(d)(i) is provided to the client in writing before the party receiving the referral either opens an account for the client or provides services to the client.
  3. Verifying the Qualifications of the Person or Company Receiving the Referral. A Member or Approved Person must not refer a client to another - 16 - March 17, 2016 person or company unless the Member first takes reasonable steps to satisfy itself that the person or company has the appropriate qualifications to provide the services, and if applicable, is registered to provide those services.
  4. Disclosing Referral Arrangements to Clients
    1. The written disclosure of the referral arrangement required under Rule 2.4.2(b)(iii) must include the following:
      1. the name of each party to the agreement referred to under Rule 2.4.2(b)(i);
      2. the purpose and material terms of the agreement, including the nature of the services to be provided by each party;
      3. any conflicts of interest resulting from the relationship between the parties to the agreement and from any other element of the referral arrangement;
      4. (D) the method of calculating the referral fee and, to the extent possible, the amount of the fee;
        the category of registration of each registrant that is a party to the agreement with a description of the activities that the registrant is authorized to engage in under that category and, giving consideration to the nature of the referral, the activities that the registrant is not permitted to engage in;
      5. if a referral is made to a registrant, a statement that all activity requiring registration resulting from the referral arrangement will be provided by the registrant receiving the referral; and
      6. any other information that a reasonable client would consider important in evaluating the referral arrangement.
    2. If there is a change to the information set out under Rule 2.4.2(d)(i), the Member or Approved Person must ensure that written disclosure of that change is provided to each client affected by the change as soon as possible and no later than the 30th day before the date on which a referral fee is next paid or received.

6. Titles and Holding Out

We agree that there should be a list of approved titles that are descriptive of the regulated activities and that those be the only titles permitted.

We agree that you have to be an accredited financial planner (as described previously) to use the title.

We agree that you can only use professional/academic titles approved by regulators; and

The following was developed to assist dealers in the supervision of their APs. This may now assist you as you contemplate the titles and holding out dilemma.

  • The title Investment Advisor or Financial Advisor is not acceptable for a mutual funds salesperson. An Investment Advisor must be employed by a broker or investment dealer, and be a full securities salesperson specifically registered for that purpose. Therefore, any reference to yourself or your employees as Investment Advisors or Financial Advisors must not be included on your website or elsewhere. For internal communication purposes your dealer may refer to you as an advisor, but not for external communication purposes.
  • The regulators expect that you will operate independently from the influence of any particular mutual fund company, insurance company or bank. However, you must be sure that the regulators do not get the impression that you act independently from the compliance supervision of your dealer. Therefore, we suggest that you revisit every reference to “independent” or “independence” on your website or elsewhere with the foregoing in mind.
  • APs and their staff may NOT hold out in any manner that deceives or misleads a client or any other person as to the proficiency or qualifications of the AP or their staff. The Compliance Officer must approve all titles of APs and their staff.

Account or Sales Executive - Acceptable
Any generic title that does not represent a particular proficiency, registration status, or misleading position within the firm would be considered acceptable.

Approved Person - Acceptable

Broker - Not Acceptable
“Broker” is a recognized category of registration used by members of IIROC.

Consultant - Not Acceptable
Consultant is considered surrogate for “advisor” and is not acceptable unless you hold that designation.

Financial Planner – Acceptable*
*ONLY if the individual has met the minimum proficiency Standards for a financial planner by:
1. Successfully completing the required courses;
2. Being certified/licensed by the appropriate governing body; and
3. Continuing to remain in good standing with that certification body as a financial planner

Independent - Not Acceptable
An individual may not use “independent” as it implies disassociation from the dealer who is responsible for their actions.

Investment Funds Approved Person or Investment Funds Salesperson - Acceptable

Mutual Funds Approved Person or Investment Funds Advisor - Acceptable

President, Vice President, Controller, Secretary, Officer, Director, etc. - Not Acceptable
These titles imply an executive position with the dealership and may only be used by a member of Head Office staff designated with the title.

Securities Advisor or Securities Salesperson - Not Acceptable
This title implies the ability to deal in all securities. This is a specific category of registration and may only be used by a full securities salesperson.

7. Central Registry

Industry participants spent $47m to create the NRD and who knows how much since. We would suggest that this and other existing tracking systems be explored to see whether or not they could be leveraged rather than initiate a new and unnecessary spend. We understand that the CSA intends to commence upon a project to incorporate several systems into one tracking and delivery system. We would hope that this central registry would be incorporated into this initiative.

8. Financial Literacy and Investor Education

You “recommend that financial literacy and investor education of Ontarians be supported and actively encouraged in Ontario by government, etc.” We doubt that anyone would argue with this, however, financial literacy in a national issues and the responsibility of all market participants. There are a plethora of current initiatives and initiatives in the works which have gone some way to improve this state of affairs. Those should be examined before any further projects are launched and resources expended.

9. Issues for Further Consideration

Your items for further consideration while germane to the complaints process and the recovery of a client’s losses, would require changes to our civil laws, provincial and SRO regulation as well as the mandate of OBSI. We are of the opinion that a project to look at this type of process reengineering be considered when the CSA is able to take this on. To go down this road in Ontario only would not well serve the investing public.

We thank you again for the opportunity to provide comments on this important matter. Should you have any questions or wish to discuss this submission, do not hesitate to contact the undersigned.

Regards,

Federation of Mutual Fund Dealers

Sandra L. Kegie
Executive Director

 

1 We note that here you do not say “statutory” and would ask that as we go forward, care is taken with respect to these references. In previous consultations the terms statutory fiduciary duty, fiduciary duty and best interest were used interchangeably, contributing to the general confusion of interested parties.