: Financial Services Commission of Ontario - Submission

REGULATING FINANCIAL PLANNERS AND ADVISORS

Response to the Preliminary Policy Recommendations of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives

June 17, 2016

Attention:
Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives
Fin.Adv.Pln@ontario.ca

EXECUTIVE SUMMARY

In April 2015, the Minister of Finance appointed an independent expert committee known as the “Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives” (Expert Committee). The mandate of the Expert Committee is to provide advice and recommendations to the Ontario government regarding whether and to what extent financial planning and the giving of financial advice should be regulated in Ontario and the appropriate scope of such regulation. The Expert Committee held round table discussions with stakeholders and in June 2015 issued its first consultation paper, which identified specific questions for stakeholder consideration and comment.1

On April 5, 2016 the Expert Committee published its preliminary policy recommendations for comment.2 In subsequent weeks, the Expert Committee undertook in-person discussions on these recommendations throughout the province. Financial Services Commission of Ontario (FSCO) staff attended all of the sessions.

The legislative mandate of FSCO is to provide regulatory services that protect the public interest and enhance public confidence in the industries it regulates. In response to the agency mandate review that is being conducted by the Expert Advisory Panel3, FSCO has also been assessing its mandate and areas of authority in order to identify opportunities to improve the effectiveness of regulation in the financial services sector in Ontario, further reduce costs to the province and align with international regulatory standards and principles for consumer protection. Moreover, through its market conduct oversight, FSCO already oversees the giving of financial advice in its regulated sectors such as through the sale of insurance and mortgage products. For these reasons, FSCO appreciates the opportunity to once again provide input for the Expert Committee’s consideration.

FSCO supports the Expert Committee’s preliminary recommendations. These generally align with FSCO’s positions on how financial planning and advice can best be regulated. There are a few areas in which FSCO believes the Expert Committee can further develop and refine its ideas to ensure that any new regulatory framework will be as effective as possible and meet the paramount goal of protecting consumers of financial planning and financial advisory services.

INTRODUCTION

FSCO is a regulatory agency that falls under the responsibilities of the Minister of Finance. FSCO is responsible for the regulation of five financial services sectors in Ontario, which includes more than 75,000 individuals and businesses as financial services market participants. It is also entrusted with supervisory authority over nearly 7,000 pension plans representing more than four million members and approximately $520 billion in assets, and the province’s credit unions and caisses populaires with $33 billion in total deposits.

FSCO’s approach to regulation is outlined in its Regulatory Framework. It is a consistent and comprehensive approach based on certain principles used to guide FSCO’s regulatory activities and fulfill its mandate to protect the public interest and enhance public confidence in the sectors it regulates. This approach includes applying a risk-based approach to regulatory activities, being proactive to prevent non-compliance, and making evidence-based decisions using research and data to identify high-risk areas of concern or non-compliance.

FSCO’s integrated approach to supervising various but increasingly interconnected financial services industries has provided a series of benefits for the province such as cost efficiencies; modern, risk-based regulation across the sectors; a more comprehensive understanding of the financial services industry; and a single source of market conduct advice for government about financial services.

FSCO’S COMMENTS ON THE EXPERT COMMITTEE’S PRELIMINARY POLICY RECOMMENDATIONS

FSCO is pleased that the Expert Committee’s preliminary recommendations generally align with its own positions as presented in its response to the first consultation paper.4

FSCO agrees that the current regulatory landscape for financial planning and advising in Ontario leaves significant gaps in consumer protection. All who practice financial planning and advising, or hold themselves out as advisors or planners, should be subject to some oversight.

Who Would Regulate

As the Expert Committee has noted, it is believed that most entities currently practicing financial planning and advising are already licensed to sell and advise on financial products.5 It does not make sense to create a new layer of regulation for the relatively small proportion of financial planners and advisors who are currently unregulated. The most streamlined and least costly solution for consumers and the industry is to leverage the proven, effective and efficient frameworks already in place.

FSCO agrees that the most effective solution for those financial planners and advisors who are currently unregulated would be to bring them under an integrated financial regulator – one that would also regulate both the product sales and advice and financial planning activities of a sizeable number of entities. This is a role that FSCO could fulfill.However, the determination of which entity would be best suited for this also depends on the outcome of the review of FSCO’s mandate. If the proposed Financial Services Regulatory Authority (FSRA) comes into being, there would be a good opportunity to coordinate the creation of the new regulatory body with a new regulatory framework for financial planners and advisors.

Who Would Be Regulated

Should a regulatory framework for financial planning and advising be warranted, it should comprise a set of core regulatory activities and requirements to be clearly defined in statute. While FSCO acknowledges that a broad range of financial services should be included, there should be very clear definitions of what constitutes “financial planning” and “financial advice”. Related terms (e.g., “financial plan”) must also be defined to reduce confusion on the part of both industry participants and consumers.

FSCO understands that there may be instances which would warrant certain individuals to be exempt from regulation. While it is true that some individuals may offer limited financial planning services, there is still a risk to consumers within even a limited range of services. Any exemptions should be carefully considered as each runs the risk of diluting the regulatory regime and adding “patchwork” elements back into the framework.

FSCO notes that there does not appear to be a clear understanding of the size of the population of individuals or businesses providing financial planning or advisory services or holding themselves out as financial planners or advisors. Some associations in this sector have characterized the unregulated population among their accredited members as numbering less than 1,000. There should be a different response if the Expert Committee finds this to be accurate than if it were to find, or be of the view, that the number of unregulated entities providing these services is in fact considerably larger.

Use of Titles

FSCO strongly agrees with the Expert Committee’s recommendation that the use of titles by those engaged in the provision of financial product sales and advice and/or financial planning should be prescribed in order to reduce consumer confusion. Moreover, restrictions on use of titles must be harmonized where across regulatory sectors in order to be most effective.

The combined competencies ascribed to the title of “financial planner” or “financial advisor” should be unique and clearly understood by all market participants. FSCO also supports the recommendation that corporate positions or titles not be permitted where they might be misleading (e.g., “marketing titles” that do not reflect an individual’s true position). It should also be evident to consumers where the professional is in fact only able to sell products from a limited number of sources.

Harmonization of Proficiency and Licensing Standards

It is absolutely essential that, as the Expert Committee recommends, the education, training, credentialing and licensing standards for all financial planners and advisors be harmonized.

Industry associations and educators have important roles to play as providers of training and credentialing. FSCO recommends that the standards of the various credentialing organizations be considered and leveraged, where appropriate, when developing harmonized regulatory standards. The current differences in the roles and responsibilities of financial planning and advising professionals contributes greatly to the lack of regulatory consistency and endangers consumers.

Two areas where harmonization between financial services regulators does not currently exist, and which FSCO feels are particularly important for consumer protection, are that of Continuing Education (CE) and Errors and Omissions (E&O) insurance requirements.

CE requirements are a basic standard across most professions and licensing regimes – in fact, it is rare to find a modern profession that does not have CE requirements. These are absolutely essential to ensure that those serving financial consumers have up-to-date knowledge of the marketplace and demonstrate a commitment to continuous improvement in their profession. Today’s changing technologies, innovative products and enhancements to regulatory frameworks demand that individuals are adaptable and equipped to handle the rapidly evolving financial services industry.

Many FSCO’s administered statutes include E&O insurance as a licensing requirement, which must be in a form approved by the Superintendent, with extended coverage for fraudulent acts. In particular, we strongly recommend that E&O insurance requirements for financial planning and advising should be specific to the activity of financial planning and advising. Having E&O insurance under another licence is not sufficient - the policy should be able to cover claims as needed, regardless of the product sold.

It might be worth considering whether a licence to sell and advise on financial products should be mandatory in order to be a financial planner or financial advisor. FSCO is aware that some financial planners and/or advisors prefer to remain unlicensed and refer clients to those licensed in the financial services sector. FSCO does not question the value of stand-alone financial planning and advising. However, if referrals are involved, it raises the question of whether the client truly understands the various services – and fees – involved in the overall service by a financial planning “team” and whether the best interests of the client are being observed.

Regulatory Cohesion and Consistency

The Expert Committee’s recommendation that more than one regulator oversee financial planning and advising activities has given rise to some concern amongst stakeholders about regulatory cohesion and consistency. This is understandable. However, FSCO believes that the regulators can and will work together to achieve a consistent regulatory framework across the current licensing sectors. The harmonization of standards is essential in order to achieve this, particularly as many individuals are licensed by more than one regulator. As we understand the Expert Committee’s recommendations, this would mean that the financial planning and advising activities of such individuals would be subject to the regulatory oversight of all bodies that license the individuals to sell and advise on financial products.

Financial services regulators have already demonstrated a desire and ability to co-operate through increased information sharing and joint investigative efforts. These align with international regulatory principles formulated by the international Joint Forum and the G-20. Today, in addition to working with other insurance regulators across Canada, FSCO has co-operative agreements with regulators in other sectors, such as the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada (MFDA) and the Real Estate Council of Ontario (RECO).

Even where there are information sharing agreements in place, regulators must have the power to act on them in the public interest (e.g., have the authority to recognize sanctions imposed by other regulators on dually licensed individuals). A regulator cannot exceed the authority it has been granted in statute, and any new regulatory regime governing financial planners and advisers should take this into account.

Role of the Industry and Consumers

FSCO strongly recommends that stakeholder consultation take place as new legislation and regulations are developed. The industry, including industry associations providing training and credentialing programs, and consumer representatives have an important role to play in the development and implementation of any new regulatory regime.

FSCO has experience successfully bringing on new regulated sectors (examples include mortgage broking and most recently, health service providers who bill auto insurers directly for specified goods and services). In both cases, FSCO assisted the government in the development of new legislation and regulation and relied on consultation with stakeholders. This stakeholder involvement avoided many potential issues by contributing to a smoother implementation process and increased compliance rates through earlier and more widespread buy-in from the regulated sectors.

Periodic Statutory Reviews

FSCO strongly recommends that a requirement for periodic reviews of the legislation be built in to any statute governing financial planning and advising. For example, the Insurance Act, Mortgage Brokers, Lenders and Administrators Act and Credit Unions and Caisses Populaires Act must be reviewed every five years (with a review every three years for the auto insurance section of the Insurance Act). This would help to ensure that the legislation remains up-to-date and adapts to trends in the marketplace, maintains consumer protection and ensures that outdated legislation does not hamper innovation.

Statutory Best Interest Duty (SBID)

FSCO agrees that a uniform best interest duty, based on a uniform and codified standard of care, should be developed and applied to all those who sell and advise consumers on financial products or who practice financial planning. Having the best interest duty in statute (as an “SBID”) would give regulators the legislative authority to enforce it. As with the recommendation to harmonize proficiency standards, this would ensure that consumers who seek the services of financial advisors or planners are consistently protected, no matter what specific services are offered. An SBID would level the playing field for all financial planners and advisors, many of whom are already subject to a similar duty through existing regulation or the standards of associations of which they are members.

FSCO cautions that the SBID must be clearly defined and applicable to all who provide financial product advice and sales or financial planning. Whether rules-based or principles-based, it should require placing the best interests of clients first. Essential elements of an SBID would include:

  • acting with the skill, due care, diligence and good judgment of a professional;
  • disclosing all material facts including conflicts of interest, in a meaningful and timely manner;
  • avoiding or controlling conflicts of interest wherever possible; and
  • acting in the client’s favour.

Any exemptions to an SBID must be clearly defined and restricted. There can be a lower standard of care only in cases where no advice or planning services are given, and it should be made as clear as possible to consumers by individuals and firms when the SBID does not apply. Otherwise, the same confusion that exists for consumers today will persist regarding the duty owed by planners/advisors to their clients.

The SBID should extend over the span of the relationship between financial intermediary and client – for example, the suitability of financial plans would be periodically reviewed and take into account changes in clients’ circumstances over time.

The regulator(s) must have appropriate authority to enforce the standard of care for financial planning and advising activities, even in cases involving professionals such as lawyers or accountants where some aspects of the advisory relationship may be exempted from the SBID. As with other standards, firms should be required to have oversight and be held responsible for compliance of their financial planners and advisors.

FSCO notes the recent Canadian Securities Administrators (CSA) consultation paper on a proposed best interest standard for securities registrants,6 and recommends that any further refinement of what such a best interest duty would entail for financial planners or financial advisors await the outcome of that consultation. If the Expert Committee’s other recommendations proceed, the duty of care proposed for the securities sector in Ontario will influence the harmonized standard to be applied across all financial planners and advisors.

Disclosure of Compensation

FSCO acknowledges that the Expert Committee has not made recommendations with respect to compensation or its disclosure to clients. We believe that transparency between financial planning and advising professionals and their clients is an important element of consumer protection, particularly with respect to compensation. Although FSCO has no specific recommendations on whether certain compensation structures should be permitted, we strongly believe that wherever possible, customers should have a choice in how they pay for advice. Where there is a choice, there should be disclosure of the difference in fee structures to clients before they agree to use the services of a financial planner or advisor. In all cases, any commissions would be meaningfully disclosed, and an annual disclosure notice provided with all fee and service information for the previous and coming years.

Referral Fees

FSCO agrees with the Expert Committee’s recommendations on referral arrangements. Referral fees should not be paid to third parties for financial planning or financial product sales and advice unless the referral is to a regulated financial planner or advisor, and there should be transparency regarding the terms of the referral arrangement.

This would help to ensure that consumers are able to access the skills and abilities of a team of financial experts, where an individual is not able to provide certain products or advice, while still having full disclosure of the fees involved and any potential conflicts of interest.

Central Registry

FSCO supports the Expert Committee’s recommendation for a single, free, comprehensive central registry for consumers that would contain information on the licensing, registration, credentials and disciplinary history of all entities providing financial product sales and advice and/or financial planning to Ontarians.

Many advisors have multiple designations or certifications. With different oversight bodies involved, consumers do not currently have access to a central source for licensing or disciplinary information. Moreover, those financial planners and advisors who are currently unregulated will not appear on any regulatory database.

A central information registry would also benefit the vast majority of financial planning and advising professionals by providing an additional resource through which consumers could locate and select them. The Expert Committee notes that such a central registry should be adequately funded so that it can be properly maintained; FSCO agrees that this is crucial to the usefulness of any such resource. Outdated or incomplete information would not be much better than no information at all.

The insurance and securities regulators already maintain separate national online resources with varying levels of detail and types of information on registrants (e.g., FSCO’s Licensing Link; the Canadian Insurance Regulators Disciplinary Actions database; the National Registration Database for the securities sector). FSCO would be happy to work with other regulators to leverage its own existing technology as far as possible.

Although Ontario legislation could not compel this, it would be most helpful to consumers if through regulatory cooperation, such a central registry crossed jurisdictions as well as sectors.

Financial Literacy

FSCO fully supports the recommendation that financial literacy and investor education should be supported and actively encouraged. We recognize that as a regulator, FSCO has an important role to play in these efforts. As noted in its September 2015 response, one of the G-20 High-Level Principles is that financial education and awareness should be promoted by both industry players and government, and clear information on consumer protection and the rights and responsibilities of all industry participants should be easily accessible online and on site. FSCO makes constant efforts to educate consumers about its regulated sectors through publications, its website, social media and in-person outreach.

Issues for Further Consideration

FSCO agrees that the issues identified by the Expert Committee for further consideration are extremely important for the fair treatment of customers. It does not necessarily agree that these issues fall outside of the mandate of the Expert Committee; although they are broad-reaching, they are integral to consumer protection within the financial planning and financial advice sector.

There must be access to adequate complaints handling and redress mechanisms that are accessible, affordable, independent, fair, accountable, timely, and efficient. Such mechanisms should not impose unreasonable cost, delays or burdens on consumers. FSCO recommends that this be included in any financial planning or advising legislation. For example, under the Insurance Act, insurers must have robust complaint-handling protocols in place.

Without strong mechanisms for consumer complaints, investigations and restitution, the power of regulators to effectively oversee financial planners and advisors is curtailed.
Any regulatory framework for financial planning and advising should provide an adequate range of supervisory tools so that problems can be detected early and enforcement measures can be easily deployed. The regulator(s) must be able to take enforcement action and intervene when financial planning and advising professionals fail to comply with statutory obligations or when there is actual or potential harm to consumers.

In addition, the power of the regulator to enforce and intervene should be balanced by a fair, transparent and timely hearing process for all participants. As was noted in the Ministry of Finance’s April 2015 mandate review consultation paper, "The FST [Financial Services Tribunal] is an expert tribunal that adjudicates cases involving compliance issues arising in the regulated sectors.”7 This makes the FST an ideal appeals body.

CONCLUSION

FSCO congratulates the Expert Committee on its solid and well-balanced preliminary policy recommendations, and is pleased to note alignment with FSCO’s own principles and the Committee’s key principles of furthering the public interest by protecting consumers, avoiding duplicative regulation, utilizing regulatory efficiencies, and enhancing regulatory cohesion and consistency.

FSCO urges the Expert Committee to consider the comments in this paper, most of which involve refining or expanding on ideas contained in the preliminary report. FSCO would be happy to further discuss these comments.

 

1 Initial Consultation Document; June 24, 2015.

2Preliminary Policy Recommendations of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives; Consultation paper released April 5, 2016.

3 Review of the Mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corporation of Ontario; Consultation paper released April 21, 2015.

4 Regulating Financial Planners and Advisors: Response to the Initial Consultation Document of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives. Financial Services Commission of Ontario, September 21, 2015.

5 Preliminary Policy Recommendations of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives; Consultation paper released April 5, 2016. Page 5.

6 Canadian Securities Administrators Consultation Paper 33-404: Proposals to Enhance the Obligations of Advisers, Dealers and Representatives Towards Their Clients. April 28, 2016.

7 Review of the Mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corporation of Ontario; Consultation paper released April 21, 2015. Page 6.