: Chartered Professional Accountants of Ontario - Submission

VIA EMAIL: Fin.Adv.Pln@ontario.ca

September 21, 2015

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

Dear Sirs/Mesdames:

Re: Consultation on regulation of financial advice and financial planning

We are pleased to provide the preliminary comments of Chartered Professional Accountants of Ontario (CPA Ontario) in response to the consultations on the regulation of financial advice and financial planning announced by the Ontario Ministry of Finance on July 2, 2015.

About CPA Ontario:

CPA Ontario is the self-regulatory organization and professional association for Ontario’s 84,000 Chartered Professional Accountants (CPAs) and 20,000 CPA students. CPA Ontario fulfils its statutory mandate to protect the public interest by ensuring its members meet the highest standards of expertise, integrity and ethical conduct. Over 1,000 Ontario CPAs participate in the dispensation of financial advice to the public, either through public accounting practices, or as registered/licensed employees of financial services industry participants. Anecdotal evidence indicates that this number continues to grow.

General Comments:

We support the Ontario Ministry of Finance’s efforts to strengthen the regulatory framework for individuals who offer financial advice and financial planning services to Ontario consumers. We are of the view that consumers may be confused by the variety of advice and services offered by participants in the financial services industry. However, we note that there are longstanding and rigorous regulatory regimes in place for many, if not most, individuals providing financial advice to consumers today and believe it to be important that any new regulatory initiatives should address specific and identified harms as opposed to duplicating existing requirements or resulting in the “layering on” of additional rules on individuals already subject to rigorous and focused regulation.

We are also aware of and support in principle the submissions made to you by the American Institute of Certified Public Accountants and the Canadian Advocacy Committee of the CFA Institute. We join them in submitting that an important step forward in increasing protection for Ontario consumers is to ensure that existing regulatory regimes applicable to financial services participants, particularly those involved in the provision of financial advice to individual consumers, should include a “best interests of the client” standard of care, particularly in situations where potential and actual conflicts of interest arise, either from the advisor/client relationship or industry structural issues like the payment of commissions by third parties.

Ontario’s CPAs are consummate professionals. Each has successfully completed post-secondary education and/or pre-certification training in many of the disciplines that comprise financial planning including, at a minimum: personal taxes, financial instruments and business law and estate planning. In addition, CPAs are subject to CPA Ontario’s rigorous Bylaws and Rules of Professional Conduct (Rules). These require, inter alia, that CPAs (1) attain and maintain professional competence in each area in which they may choose to practice, (2) comply with CPA Ontario firm registration requirements (including prohibitions on the limitation of liability and mandatory errors & omissions insurance coverage) for practices offering advice and services directly to the public, and (3) comply fully with any other regulatory requirements attaching to their various business activities. For example, CPAs engaged in the distribution of mutual funds or life insurance products must comply with Mutual Fund Dealers Association of Canada (MFDA) membership requirements and rules or Financial Services Commission of Ontario (FSCO) licencing requirements. As will be discussed in more detail below, CPAs also have a stringent Rule requirement to manage or avoid situations of conflict of interest.

CPA Ontario maintains ongoing oversight of CPA firms through a mandatory practice inspection program and a well-resourced complaints-driven professional discipline process.

Specific Responses to Questions raised in the Initial Consultation Document:

1. What activities are within the scope of financial planning? Is the provision of financial advice different from financial planning? If so, please explain the distinction.

“Financial planning” comprises the process of determining a client’s financial goals, developing strategies to achieve those goals and the recommendation/provision of advice and/or services/products or allocation of resources to implement those strategies. Goals may be long or short term, and may change over time.

Financial planning approaches may be “modular” – e.g. intended to address only one or two areas of need such as “investments”, “tax planning”, or “retirement savings”; or “comprehensive” – where the planner applies the process in respect of many or all aspects of the client’s financial picture. Either approach may result in the production of a formal written plan or not. Regardless of the approach, the financial planning process generally includes an element of periodic review and adjustment of goals and implementation strategies.

Given the breadth of activities and advice subsumed within financial planning, we do not believe it is useful to distinguish between “financial planning” and “financial advice.” All financial planning involves financial advice. All financial advice could form part of a modular or comprehensive financial plan. We hold the view that consumers of financial advice and/or products would neither make, nor readily understand any distinction and, accordingly, submit that seeking to artificially create one, perhaps with different standards of competence and conduct attaching to each, would increase the regulatory compliance burden unnecessarily and could contribute to further consumer confusion.

2. Is the current regulatory scheme governing those who engage in financial planning and/or the giving of financial advice adequate?

The current regulatory scheme governing those engaging in financial planning comprises effectively two separate but similar product-focused regimes – one for securities and another for insurance products. Despite its complexity, this bisected regulatory regime appears to us to function relatively well overall. Individuals who provide financial products to consumers are subject to, in the case of securities, the provincial securities regulators and national recognized self-regulatory organizations (SROs). Together, these entities have created and imposed comprehensive, evolving standards of competence, service and responsibility, backed up by oversight, dispute resolution mechanisms, and contingency trust funds. Similar standards and mechanisms are in place to govern those licensed to distribute insurance-based products. Although focused on distribution, each regime also covers advice provided to consumers both before and during the sales process, and afterwards during the period that the particular product is held in the consumer’s portfolio. We believe that the majority of individuals offering financial advice or planning services today are already subject to one or both of these regulatory regimes.

Similarly, we submit that most individuals engaged in the provision of advice only, be they investment counsel, portfolio managers, lawyers or CPAs, are also subject to similar, stringent competency requirements and oversight - either through securities regulatory requirements specifically targeted to “advisers”, or through professional requirements like the Rules.

Accordingly, other than a relatively small cadre of individuals who provide financial advice that does not attract a securities registration or insurance licensing requirement, – many of whom do hold professional designations (like CPAs) or specific educational credentials, or belong to professional/industry associations that themselves impose educational, ethical and other oversight requirements – there appear to be few unregulated avenues through which Ontario consumers could face widespread harm.

In addition, the requirement of implementing financial planning advice relating to securities or insurance through the agency of registered/licenced participants provides an additional check on the advice itself as these agents must also meet the various, applicable “know your client”, “suitability” and/or “best interest” requirements.

3. What legal standard(s) should govern conflicts of interest and potential conflicts of interest that may arise in financial planning and the giving of financial advice?

Rule 210 of CPA Ontario’s Rules of Professional Conduct require CPAs to actively identify and avoid situations of conflict of interest. When CPAs cannot avoid conflicts, they are required to consider and implement conflict management techniques, disclose conflicts and proposed management techniques to the affected client, and obtain the client’s express consent to continue to provide services. Conflicts are broadly defined as, inter alia, any situation where a reasonable observer would conclude there is a conflict. In the event that a CPA cannot implement adequate conflict management techniques, the CPA is required to terminate the relationship/services giving rise to the conflict regardless of client consent.

We believe that this approach could be adopted in many areas of the financial service industry. However, we are aware that certain compensation structures in widespread use cause significant, institutional conflicts of interest between advisor and client. We are aware that the securities regulators are reviewing these structures, and submit that, for the time being, a “best interests of the client” standard coupled with enhanced disclosure could go some considerable distance to reduce/mitigate these conflicts were the approach to be adopted for all financial advisors. We are also aware of the ongoing Client Relationship Model (CRM) initiatives being promulgated by the Ontario Securities Commission (OSC) through the recognized SROs and support this work.4. To what extent, if at all, should the activities of those who engage in financial planning and/or giving financial advice be further regulated? Please consider the following in your response:

(a) Licensing and registration requirements;

As noted above, Ontario CPAs who engage in distribution of financial products already comply with, in many cases, multiple regulatory regimes. As we do not see the utility in drawing a distinction between financial advice and financial planning per se, we submit that the current Ontario regulatory regimes, be they government-sponsored or profession-based are sufficient to ensure the competence and client-first focus of the vast majority of financial advisors.

(b) Education, training and ethical responsibilities;

Current regulatory regimes applicable to securities, insurance, and the professions, encompass proficiency requirements. In most cases, continuing education requirements are imposed and monitored. Should the current agencies responsible for such regimes determine that additional proficiency requirements are necessary for financial advisors (see, for example, the September 4, 2015 proposal by the MFDA to require additional qualifications for certain MFDA Approved Persons), then we urge such regulators to take an inclusive rather than restrictive approach. As discussed above, CPAs participating in the provision of financial advice and planning services are highly trained and subject to professional obligations to attain and maintain professional competence. Accordingly, Ontario CPAs should be granted the same standing as individuals who hold the financial planning designations referenced in the MFDA proposal or exempted from any new requirements to obtain other financial services designations.

Ethical responsibilities are also beginning to be addressed and upgraded through initiatives like the CRM. Adoption of a “best interest” standard of care, as discussed above, would, in our view, also be a significant step forward.

(c) Titles and designations of individuals who engage in financial planning and/or the giving of financial advice;

As noted, we do not see the utility in drawing a distinction between “financial advice” and “financial planning” and submit that attempting to do so will merely add to consumer confusion. The overlap between financial “advice” and financial “planning” on the continuum of services Ontario consumers receive from their advisors is significant. It is virtually impossible to say where “advice” ends and “planning” begins. - The range of services offered to a client under the guise of financial planning will differ from client to client as well. This could be due to different client needs or resources, and may also be limited by the advisor’s registration or licence restrictions and the providing firm’s available products and services.

(d) Specific activities that should be included or excluded in a regulatory scheme;

We believe that the activities of Ontario CPAs and other regulated professionals should be excluded from any new requirements that would duplicate rules (professional or government) to which such professionals are already subject.

Other than an extension of jurisdiction of the Ontario securities and/or insurance regulators on some basis to include individuals in Ontario who are not currently subject to any Ontario professional or government regulatory regime, again we submit, a relatively small group, we cannot comment further on specific activities that should be included.

In the alternative, should the Expert Committee recommend that additional regulatory provisions are necessary, we are of the view that organizations and regulatory bodies whose members are involved in the provision of financial planning services (including, without limitation: CPA Ontario, the Law Society of Upper Canada and/or Ontario Bar Association, the Financial Planning Standards Council, the CFA Institute, the MFDA, the Investment Industry Regulatory Organization of Canada (IIROC), FSCO, and any similar financial services bodies should be extensively consulted and perhaps assisted to work together to assist with the development of appropriate minimum standards and the consistent application thereof.

CPA Ontario, through its national association – CPA Canada - participates in the Global Accounting Alliance (GAA). This alliance of leading accounting professional bodies in significant world capital markets, including Canada, has recently begun to examine and identify alternatives for oversight of financial planning in GAA member countries. This work is in early stages, but we would be pleased to provide any results to you as and when they become available.

(e) Costs and other burdens of regulation;

Any additional oversight should take into account the requirements and compliance costs associated with existing professional and applicable government regulatory regimes. Professionals who already meet any proposed minimum qualifications should be excepted from such new requirements so as not to face duplicative or unnecessarily layered (and costly) regulation.

(f) Regulation of compensation;

CPA Ontario Rules regulate certain compensation practices including acceptance of commissions and referral fees. We are undertaking a review of certain of these Rules. We are also aware that the provincial securities regulators are studying certain financial services compensation practices. Other than our above comments with respect to conflicts of interest and the imposition of a “best interests” standard of care for financial advice-giving, we do not propose to comment on regulation of compensation at this time.

(g) Complaints and discipline mechanisms;

We are aware of the Ombudsman for Financial Services and Investments (OBSI) and other industry/SRO-sponsored mediation and arbitration schemes. In our view, these mechanisms, together with professional regulatory organizations and the civil courts, are adequate to protect Ontario consumers.

5. What harm(s) and/or benefit(s) do consumers experience in the current environment? Please provide specific evidence to support your views where available.

Other than outright fraud, which is difficult, if not impossible for a regulatory regime to pro-actively counter, our knowledge of harm to consumers caused by financial advisors is restricted to (1) issues of suitability of investment products (whether caused by advisor incompetence or conflict of interest arising out of compensation models); (2) issues of scope/adequacy of insurance coverage; or (3) client service issues. To the best of our knowledge, the current regulatory structures in place for the professions and financial services industry participants provide consumers/clients with significant protection from these harms. In terms of recovery of financial losses, we particularly note OBSI, recent decisions in the civil courts and the contingency trust funds operated for clients of MFDA and IIROC members.

6. Should consumers have access to a central registry of information regarding individuals and entities that engage in financial planning and the giving of financial advice including their complaint or discipline history?

CPA Ontario maintains a publicly-accessible record of the discipline history of members who have been found guilty of professional misconduct and supports the establishment of such a central registry for other financial advice-givers. We note, however, that reputations are important to those who depend on client trust and caution against maintaining a public record of complaints that have not resulted in formal disciplinary proceedings.

Thank you for the opportunity to provide our comments on this important matter. Please contact the undersigned directly at 416-969-4200 or cwilding@cpaontario.ca should you require additional information or wish to discuss our submissions.

Sincerely,

Chartered Professional Accountants of Ontario

By: Carol Wilding, FCPA, FCA
President & Chief Executive Officer