: Public Interest Advocacy Centre - Submission

June 16, 2016

Expert Committee to Consider Financial Advisory
and Financial Planning Policy Alternatives
c/o Frost Building North, Room 458
4th Floor, 95 Grosvenor Street
Toronto, Ontario
M7A 1Z1

To Members of the Expert Committee:

The Public Interest Advocacy Centre (PIAC) is pleased to have the opportunity to comment upon your Preliminary Policy Recommendations released April 5, 2016. PIAC welcomed your input into the policy debate surrounding those issues the committee chose to address in the Preliminary Policy Recommendations Report. As well, PIAC was pleased to participate in the public consultation sessions scheduled in Ottawa and Toronto.

As a result of these developments, PIAC has the following comments regarding the Preliminary Policy Recommendations Report.

1. Regulation of Financial Planning in Ontario

We recommend that Financial Planning in Ontario be regulated as follows:

a) Regulation should be required of any individual who or firm that provides Financial Planning services either expressly or implicitly through Holding Out by way of titles, described services or otherwise;

b) Individuals who and firms that provide Financial Planning and whose Financial Product Sales and Advice activities are regulated by the existing regulatory framework for securities, insurance and mortgage brokering should have any associated Financial Planning activities regulated by their existing regulator or regulators for those who have more than one licence; and

c) Individuals or firms performing Financial Planning activities outside the current regulatory framework should have their Financial Planning activities regulated by the proposed Financial Services Regulatory Authority (FSRA).

Commentary:

PIAC is generally supportive of what is proposed by the Expert Committee under this section of the Preliminary Policy Recommendations Report. PIAC’s initial concern with this proposal is the establishment of a new regulatory agency called the Financial Services Regulatory Authority (FSRA). It is PIAC’s understanding the FSRA, as proposed, intends to create a separate ‘Office of the Consumer’ to consider the perspective of consumers in all of its policy-making and actions.1 PIAC is concerned the ‘Office of the Consumer’ may benefit Ontario consumers during the policy making process but it does little to protect consumers from abusive practices that may not fall under the fraud compensation fund discussed in a November 2015 preliminary position paper proposing FSRA.2 However, this concern is partially addressed by the Expert Committee under the heading “Issues for Further Consideration.”

2. Harmonization of Standards

We recommend that the education, training, credentialing and licensing of individuals engaged in the provision of Financial Planning be harmonized and subject to one universal set of regulatory standards.

Commentary:

PIAC concurs with the assessment of the Expert Committee. However, in the Expert committee’s rationale, it recommends Regulators work cooperatively to develop a harmonized set of regulatory standards (including, if necessary, approving appropriate credentials) that apply consistently to all providers of this activity. PIAC is concerned leaving this task in the hands of the Regulators may lead to unnecessary delays due to further consultation processes that inadvertently result in consumer harm. PIAC suggests that, if possible, the “one universal set of regulatory standards” be created in a process creating the legislative framework implementing the Expert Committee’s policy recommendations (i.e. regulations). Obviously, Regulators would be encouraged to collaborate with drafters of regulations to ensure as much harmonization as possible and address outstanding issues.

3. Statutory Best Interest Duty

We recommend that a Statutory Best Interest Duty (SBID) be adopted and applied to all individuals who and firms that provide Financial Product Sales and Advice and/or Financial Planning in Ontario. This SBID should be based on a uniform and codified standard of care.

Commentary:

PIAC concurs with the assessment of the Expert Committee. In fact, PIAC encourages the Expert Committee to articulate a SBID for further discussion or use by the Ministry of Finance, if required. Although PIAC was not able, at this time, to propose specific SBID language, we would be interesting in developing such language in consultation with the Expert Committee, other stakeholders or the Ontario Ministry of Finance. PIAC contends the Expert Committee’s recommendation would be more effective in meeting the expectations of many Ontario consumers than the current “suitability” standard.

4. Exemptions

We recommend that the only exceptions that should apply to the proposed universal SBID are as follows: a) The individual or firm is already subject to a SBID by virtue of his, her or its licensing and registration requirements (e.g. as in the case of portfolio managers); b) The individual or firm is already subject to a professional legal standard of care and fiduciary duty, and the advice being provided is solely incidental to his, her or its principal business or profession which is also regulated (e.g. as in the case of lawyers and accountants); and c) The individual or firm is a mere “order taker,” and no financial advice is being provided to the customer, and the individual or firm is exempt from suitability requirements (e.g. as in the case of discount brokers).

Commentary:

PIAC agrees in principle to what has been proposed here by the Expert Committee. However, PIAC wishes to ensure those affected under the exemption as proposed remain subject to any disciplinary constraints applied by regulators and self-regulating bodies. For example, PIAC is concerned instances where the individual or firm is a mere “order taker” may leave Ontario investors vulnerable to transaction activity that is not in their best interest.

The rationale for this concern stems from other policy research conducted by PIAC where evidence was uncovered suggesting those with an existing fiduciary duty were effectively evading responsibility due to their professional status. For example, in All Along the Watch Tower: A Review of the Canadian Consumer Debt Collection Industry, PIAC concluded that it remains an open question whether law societies are well positioned to take disciplinary action for problematic behavior in the field of debt collection.3 Evidence suggested there may be few guidelines for lawyers operating as collection agents in most of Canada. PIAC’s research indicated the possibility that, in instances where an appropriate standard of care is not met by lawyers, lawyers may face little to no consequences in comparison to other debt collection agents.

As a result, PIAC suggests that if an exemption to the SBID is created if an individual or firm is already subject to a professional legal standard of care and fiduciary duty, it coincide with a mechanism to ensure those individuals remain subject to any disciplinary regime applicable to individuals who and firms that provide Financial Product Sales and Advice and/or Financial Planning in Ontario. If designed properly, this mechanism will ensure an individual or firm will be unable to simply neglect their responsibility due to the laxity of other professional bodies to create or enforce guidelines for questionable behavior regarding the provision of financial product sales and advice and/or financial planning.

5. Referral Arrangements

We recommend that no individual who or firm that provides Financial Product Sales and Advice or Financial Planning be permitted to pay a referral fee to a third party for the referral of a customer or prospective customer who is to be provided with Financial Planning or Financial Product Sales and Advice, unless the other person or firm receiving the referral fee is regulated as a provider of Financial Product Sales and Advice or Financial Planning and owes a best interest duty to consumers. There must also be full transparency with respect to the referral arrangement, including compensation.

Commentary:

PIAC offered no comment on the subject of referrals during the Expert Committee’s initial consultation. However, PIAC is supportive of the Expert Committee’s recommendation.

6. Titles and Holding Out

We recommend that the use of titles by individuals and firms engaged in the provision of Financial Product Sales and Advice and/or Financial Planning be prescribed in order to reduce consumer confusion. Specifically, we recommend that:

  1. Regulators work together to develop a circumscribed list of approved titles that are descriptive of the regulated activities and that these are the only titles permitted to be used by individuals and firms in their Financial Product Sales and Advice and/or Financial Planning activities;
  2. Use of the title “Financial Planner”, whether explicitly or by Holding Out that this service is being provided, is circumscribed to individuals regulated as outlined in Recommendations 1 and 2 above;
  3. Individual designations, qualifications, and credentials (other than professional, academic qualifications, and those approved by the Regulators) are not permitted; and
  4. Those engaged in providing Financial Product Sales and Advice and/or Financial Planning are not permitted to use corporate positions or titles given the consumer confusion that results and can result from the use of such titles

Commentary:

PIAC supports this recommendation by the Expert Committee and looks forward to the occasion to provide comment during regulator consultation to determine a circumscribed list of approved titles.

7. Central Registry

We recommend that a single, free, comprehensive central registry be created and maintained, with adequate resources to provide a one-stop source of information for consumers regarding the licensing and registration status, credentials and disciplinary history of individuals who and firms that provide Financial Product Sales and Advice and/or Financial Planning to Ontarians.

Commentary:

PIAC would consider the creation of such a registry a positive development. In addition, we suggest non-registration should be an offence and any such requirement must prohibit any operation in these endeavours without registration. This responsibility also should be extended to individuals in the insurance industry selling similar products to those usually found in the financial services industry (e.g., segregated funds). This form of regulatory arbitrage should be addressed in any measure recommended by the Expert Committee.

8. Financial Literacy and Investor Education

We recommend that financial literacy and investor education of Ontarians be supported and actively encouraged in Ontario by government, regulators, public and private schools (through their respective curriculum bodies and school boards), non-profit organizations and the financial services industry.

Commentary:

PIAC acknowledges the Expert Committee’s call for greater support for financial literacy and investor education of Ontarians. However, we compel the Expert Committee to consider taking the further step of calling for a fund similar to the Education and Good Governance Fund (EGGF) administered by the Autorité des marchés financiers (AMF) in the province of Québec. The EGGF allows Community and public organizations, consumer associations, seniors groups and university researchers to have access to research funding that consumers in general, and consumers of financial services in particular.

9. Issues for Further Consideration

  1. The need for simplified complaint and restitution mechanisms for consumers of Financial Planning and Financial Product Sales and Advice;
  2. A simplified approach to the investigation, prosecution and adjudication of consumer complaints related to regulatory offences in the provision of Financial Planning and Financial Product Sales and Advice;
  3. A consumer-friendly process for recovery of financial losses by consumers.

Commentary:

While PIAC is generally supportive of the comments made by the Expert Committee, we regret these important consumer issues were outside of the Expert Committee’s mandate. That said, PIAC contends any future complaint and discipline mechanism should be larger in scope than just a complaint-driven scheme. The entity should have an investigative capacity to ensure compliance. Moreover, the manner in which complaints and disciplinary action are disclosed must also be addressed with results beneficial to Ontario consumers.

PIAC believes “a consumer-friendly process for recovery of financial losses by consumers” should include provisions to provide binding restitution to investors if they experience significant financial loss due to inappropriate activity. Funding for these losses should be provided by member firms in advance by contributions to a funding mechanism similar in nature to the Ontario Travel Industry Compensation Fund. The presence of such a fund would avoid the embarrassing scenario where individuals who and firms that provide Financial Product Sales and Advice and/or Financial Planning to Ontarians are found guilty of offences, ordered to provide restitution, then fail to provide the funds ordered. Recent enforcement reports from various SRO’s reveal a disturbing trend. For example, in 2015 IIROC collected 84% of the fines assessed against firms.4 However, IIROC only collected 13.2% of the fines against individuals across the country, and only 19.8% of its fines against individuals in 2014.5

The Financial Product Sales and Advice and/or Financial Planning industry was put on notice by the Small Investor Protection Association (SIPA) in April 2016 when an investigation discovered almost $900 million in fines issued but uncollected by Canadian regulators and self-regulatory bodies.6 For instance, the British Columbia Securities Commission (BCSC) was specifically cited for collecting less than 5% of the monetary sanctions it has issued since its incorporation in 1995.7 Moreover, the collection rate for the BCSC in 2015 was 0.58%, according to the SIPA analysis.8

In May 2016, the Ombudsman for Banking Services and Investments (OBSI) released an Annual Report noting the recommendation of $4.66 million in compensation.9 However, the OBSI report fails to mention the success rate of getting compensation funds into the hands of retail investors. Moreover, the report noted there were six cases where firms did not agree to compensate their clients. This brings the running total of firms who refuse to compensate investors to 27 since 2012.10

As noted by PIAC in our initial submission to the expert panel, the challenge with an investor raising a complaint with the OBSI is the non-binding nature of the process. In PIAC’s view this is becoming a barrier to the OBSI’s effectiveness since participants in the scheme are becoming more likely to ignore an OBSI recommendation.

That view was shared by the Ontario Securities Commissions’ Investor Advisory Panel in its 2015 Annual Report and by Deborah Battell, former New Zealand Banking Ombudsman.11 Ms. Battell led an independent evaluation of the OBSI’s operations and practices for investment-related complaints. The evaluation’s findings, released in June 2016, include the observation that OBSI is unlike other comparable international financial sector ombudsmen in that it does not have the authority to bind firms to comply with its compensation recommendations. This drives its operating model and prevents it from fulfilling the fundamental role of an ombudsman, securing redress for all consumers who have been wronged.12

For instance, the OBSI independent evaluation noted in 2015, 18% of non-backlog complainants who OBSI considered should receive compensation, received less than OBSI recommended (on average $41,927 less); including 3.5% who were at risk of receiving nothing.13 Evaluators concluded OBSI’s current mandate “tilts the playing field in favour of firms.” Moreover, the report concludes the capacity for the OBSI to name and shame has, “in fact, been counter-productive: publicising refusals has served to reinforce OBSI’s limitations and undermine public confidence in both the resolution system and the investment market.”14

Simply put, governments, regulators, self-regulatory organizations, investment firms and some of those providing financial product sales and advice and/or financial planning have each been partially responsible for the questionable effectiveness of the current complaint and restitution mechanisms for consumers of financial planning and financial product sales and advice. Provincial regulators do not appear to be courageous enough to address this challenge head-on. Case in point - the OSC Investor Advisory Panel felt compelled to basically beg the OSC to put the issue of restitution back on its list of priorities in the IEP’s comments to the regulator on the OSC’s Statement of Priorities during 2015.15 PIAC contends the people of Ontario deserve more than restitution mechanisms where fines are issued but not collected; where firms are found guilty but walk away from responsibility without consequence, and where the views of advisory bodies are routinely cast aside.

PIAC further contends the people of Ontario want to invest with confidence - confidence in their financial services professional and in the knowledge a regime will be there to protect them in instances of improper behavior. PIAC encourages the expert committee to include a model in its final recommendations for the Government of Ontario to address the need for simplified complaint and binding restitution mechanisms for consumers of Financial Planning and Financial Product Sales and Advice.

Conclusion:

PIAC wishes to thank the members of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives for their consideration of suggestions put forward by all stakeholders. PIAC looks forward to participating further in these discussions in an effort to provide insights from the consumer perspective.

If you have questions or require further information on the contents of this letter, please do not hesitate to contact me at your convenience.

Yours truly,

John Lawford
Executive Director and General Counsel
Public Interest Advocacy Centre (PIAC)

 

1 Cooke, G., J. Daw and L. Ritchie, Review of the Mandates of The Financial Services Commission of Ontario (FSCO), the Financial Services Tribunal (FST), and the Deposit Insurance Corporation of Ontario (DICO): Preliminary Position Paper, (November 2015) para. 21.

2 Cooke, G., J. Daw and L. Ritchie, Review of the Mandates of The Financial Services Commission of Ontario (FSCO), the Financial Services Tribunal (FST), and the Deposit Insurance Corporation of Ontario (DICO): Preliminary Position Paper, (November 2015) para. 23.

3 Bishop, J. All Along the Watch Tower: A Review of the Canadian Consumer Debt Collection Industry, (PIAC: 2015), p.31-34.

4 IIROC, 2015 Enforcement Report, (2016), p. 25.

5 IIROC, 2015 Enforcement Report, (2016), p. 25.

6 McFadden, D., Unpaid Fines: A National Disgrace, (SIPA: April 2016), p. 1.

7 McFadden, D., Unpaid Fines: A National Disgrace, (SIPA: April 2016), p. 9.

8 McFadden, D., Unpaid Fines: A National Disgrace, (SIPA: April 2016), p. 9.

9 Ombudsman for Banking Services and Investments, 2015 Annual Report, (May 2016), p. 5.

10 Ombudsman for Banking Services and Investments, 2015 Annual Report, (May 2016), p. 31. See also, Public Interest Advocacy Centre (PIAC) Submission to the Expert Committee Considering Financial Advisory and Financial Planning Policy Alternatives, (September 2015), p.22.

11 Ontario Securities Commission Investor Advisory Panel, 2015 Annual Report, (April 2016), p. 5-6, <http://www.osc.gov.on.ca/documents/en/Investors/iap_20150420_2015-annual-rpt.pdf>.

12 Ombudsman for Banking Services and Investments, “Independent Evaluation of the Canadian Ombudsman for Banking Services and Investments Released,” (June 2016), Newsletter, <https://www.obsi.ca/en/news-and-publications/e-news-archive/2016-obsi-independent-evaluation>.

13 Ombudsman for Banking Services and Investments, “Independent Evaluation of the Canadian Ombudsman for Banking Services and Investments Released,” (June 2016), Report, p. 1, <https://www.obsi.ca/assets/2016-Independent-Evaluation-Investment-Mandate-1465218315-e9fa5.pdf>.

14 Ombudsman for Banking Services and Investments, “Independent Evaluation of the Canadian Ombudsman for Banking Services and Investments Released,” (June 2016), Report, p. 1, <https://www.obsi.ca/assets/2016-Independent-Evaluation-Investment-Mandate-1465218315-e9fa5.pdf>.

15 Ontario Securities Commission Investor Advisory Panel, 2015 Annual Report, (April 2016), p. 5, <http://www.osc.gov.on.ca/documents/en/Investors/iap_20150420_2015-annual-rpt.pdf>.