: Financial Advisors Association of Canada - Submission

SEPTEMBER 21, 2015

ADVOCIS SUBMISSION

Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives

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
Email: Fin.Adv.Pln@ontario.ca

Re: Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives

Dear Sirs/Madam,

We are writing in response to the Ontario Ministry of Finance’s initial consultation document of June 24, 2015, entitled Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives. The submission that follows reflects the interests and views of those financial advisors in Ontario who are members of Advocis, and their clients, who are Ontarians from all walks of life.

Executive Summary

The situation in Ontario today – advisors and consumers are ready for reform

Advocis believes that the Ontario government should be commended for its decision to form the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives. This expert committee and its attendant consultation were convened approximately two months after the Ministry of Finance’s publication of its Consultation Paper on the Review of the Mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corporation of Ontario. Oversight of this earlier consultation also resides with an expert committee which, again, was appointed by the Ministry. When the two expert committees are viewed as complements of one another, it becomes clear that the Ontario government is undertaking a truly comprehensive review of the role, structure and efficacy of the regulatory agencies and policies which supervise Ontario’s financial markets. Indeed, the formation of these two committees represents a singular opportunity for the government to launch a meaningful reform of those measures which regulate advisors and protect consumers.1 Consequently, this submission chiefly concerns itself with the regulation of those consumer-facing intermediaries who provide Ontarians with financial products and advice.

Ontario’s financial consumers will continue to need access to a wide array of financial products and services, including advice. Each segment of the province’s population has its own preferences when it comes to financial advice, including distribution channel (e.g., independent advisor or bank- or insurance-employed representative), compensation arrangement (e.g., embedded third-party compensation or fee-based), and method of delivery (e.g., in-person or online). Sound consumer-focused regulation will preserve all of these forms of consumer choice. And truly comprehensive regulation will enshrine the principle that every Ontarian deserves the ability to access advice which, in its breadth of approach and degree of complexity, is tailored to his or her own preferences. Depending on the consumer’s personal financial circumstances, life stage, and retirement goals, this advice may range from the relatively straightforward, such as the selection of a RRSP, to the more complex, such as estates and trusts planning, and for certain Ontarians it may culminate in the design and implementation of highly esoteric wealth generation and management strategies. But regardless of the simplicity or complexity of the advice provided, virtually all of Ontario’s financial consumers remain unnecessarily at risk due to gaps in the existing regulatory structure.

Given the Ministry of Finance’s decision to convene the two expert committees, Advocis believes that our industry now has a rare and real opportunity to properly reform the regulation of financial advice, including planning, by mandating that all financial advisors meet industry-wide standards in knowledge and ethical conduct. In fact, the need to elevate standards across the board is more pressing today than ever before. Ontario is facing the confluence of a number of factors: first, the province is undergoing a demographic shift, with an unprecedented portion of the population nearing retirement age; second, the need for fiscal restraint remains paramount, with all levels of government facing the financial challenge of returning to a balanced budget and with Ontario households still carrying exceptionally high levels of personal debt; and, third, given that income assistance and other social programs are under continuous pressure, Ontarians will have to become more financially self-reliant in order to maintain their health and income in the face of longevity risk. Despite these problems, several recent and persuasive studies demonstrate that a key component of realizing financial self-reliance and security is achievable by working with a financial advisor.2 Given the foregoing, Advocis believes that the government must promote a regulatory framework that will ensure the financial advice all Ontarians receive is professional, proficient and accountable.

To better protect consumers, Ontario must reduce regulatory disharmony across all financial advice sectors

Advocis believes that continuing to reform Ontario’s present scheme of financial regulation through occasional amendments to agency mandates and minor revisions to laws, guidelines and policy statements will simply and finally guarantee more of the status quo: regulatory overreach in some areas and regrettable lack of oversight in others. Certainly, this ad hoc approach is a recipe for additional consumer confusion. If the province’s regulators continue to attempt to regulate the distribution of financial products at one level, the market conduct of retail-facing intermediaries at another level, while simultaneously setting the standards for knowledge, proficiency and ethics on yet another level, then the outcome will always fall short of the regulator’s best intentions. Much-needed consumer protection measures will either never materialize, or, when introduced, they will fail to function across all advice sectors and channels. If Ontario continues to regulate retail intermediaries on a fragmented, intra-sectoral basis, the result seems inevitable: wellintentioned reforms will cash out in practice as mere stop-gap measures, and those stakeholders committed to effective regulation are left with the hope of “well, maybe next year.”

It is difficult not to see most of the recent major reforms in the financial advice sector as confined to a particular aspect of the securities or insurance sectors. True inter-sectoral reform remains elusive. When one steps back to view the province’s existing regulatory structure, one sees an agglomeration of stopgap reform measures tacked here and there onto our framework of regulation – typically long after the regulatory problem first emerged. Ontario’s consumers deserve better – and they deserve the industry’s best efforts to try to minimize if not eliminate altogether problems through both ex ante and ex post approaches.

Advocis recognizes that the task of the regulators is exceptionally difficult. Too much regulation drives up compliance costs and unintentionally limits access to products and services at the retail level, especially for those most in need of affordable professional advice. Striking a proper balance between the costs and benefits of regulation while simultaneously satisfying a range of vocal stakeholders with differing or even competing agendas – and within often constricted budget space – this is the regulator’s dilemma in today’s Ontario.

Professionalization of advisors through the creation of a Delegated Administrative Authority

Despite the regulatory gaps in the framework of Ontario’s regulatory structure, we believe the province is in a fortunate position, for these gaps can be plugged and the overall regulatory regime rendered cohesive – particularly from the consumer’s perspective. Moreover, we believe that such reform can be accomplished with relatively little cost to government. As advisors, our members are not interested in adding additional layers of regulation or increasing their own compliance burden. And advisors know as well as any industry insider that most of the costs of compliance measures end up being borne by the consumer through higher prices – or on occasion the pricing out of existence of a particular product or service. Indeed, the regulatory scheme we propose for Ontario represents a reconfiguration almost solely at the consumer level. To be clear: the underlying purpose of our proposal is to provide comprehensive, efficacious, and cost-effective consumer protection in the financial services sector. We submit that the Ontario government can accomplish this through the creation of a delegated administrative authority (“DAA”) for consumer-facing individual intermediaries. Such a DAA would capture advisors who operate at the retail consumer level, including most prominently those in the mutual funds, securities, insurance, and pension fields.

Today’s patchwork regulation and ongoing consumer risk justify a Delegated Administrative Authority

In the pages that follow, we set out why we believe it is time for a comprehensive new approach to regulatory policy. We identify and describe four major problems with Ontario’s existing regulatory framework at the level of retail financial services:

  1. anyone can call him- or herself a financial advisor and offer financial advice, including planning;
  2. existing regulation focuses on product sales, at the expense of proper regulatory oversight on the critical financial relationship between the advisor and the client;
  3. there is no firm, clear, and universal requirement for advisors to stay up-to-date in their core areas of knowledge; and
  4. there is no effective, industry-wide disciplinary process.

Before any effective and comprehensive reform can be undertaken, it must be acknowledged that the practical reality for consumers and advisors is that financial planning is a component of financial advice. Indeed, advisors who work “in the field” by providing advice to retail financial consumers are always providing a form of financial planning. Whether it is an advisor ensuring that the universal life policy fits with the longer-term goals of the client, as revealed in the mandatory needs analysis, or it is the approved person of a mutual fund dealer making certain that the proposed trade is suitable for the client’s financial goals (goals which may or may not be set out in a formal financial plan), the regulatory reality and the practical reality are identical: financial planning is unavoidably and inextricably a part of the larger practice of providing financial advice. Regulatory reform in Ontario’s financial advice sector cannot and will not succeed unless the foundational nature and importance of advice is formally recognized at the outset of any reform effort.

A DAA model recognizes that financial planning takes numerous forms, is provided in varying degrees of detail, and offered in assorted areas of specialization. Planning in any form is a subset of the larger field of financial advice – indeed, the pragmatic reality is that the regulation of financial planning can never be divorced from the regulation of financial advice whenever the regulatory goal is consumer protection. Accordingly, Advocis begins its exposition of a DAA model of retail financial regulation by defining the terms “financial advice,” “financial advisor” and “financial planning.” Our definitions reflect the realities faced by advisors and clients in Ontario, as well as the multiplicity of needs and requirements presented to them by their retail clients.

We then review sector-based and organizational regulatory approaches to financial advice. This review demonstrates beyond any doubt that Ontario’s regulators and industry stakeholders already and explicitly acknowledge that all of Ontario’s financial advisors engage in some form of financial planning. This is why advisor competency in many of the key components of financial planning has been a long-standing element of an advisor’s licensing requirements. By way of illustration, we show how financial planning is recognized as a required component of financial advice in:

  • the sale of mutual funds and other securities by the OSC, the MFDA, and IIROC;
  • the sale of segregated funds and life insurance policies by FSCO, the CLHIA and provincial insurance councils;
  • best practice guidelines, codes of conduct and designation requirements for industry associations such as Advocis, as well as designation-granting bodies such as the Financial Planning Standards Council and The Institute for Advanced Financial Education; and
  • the filing of the client’s income tax return, as shown in the Canada Revenue Agency’s rules on the deductibility of a mutual fund’s trailing commission or investment counsel fees.

Next, we canvass the structural problems in Ontario’s retail advice sector in their impact on advisors and consumers. We indicate how:

  • the various inadequacies of the current regulatory scheme result in unnecessary and avoidable consumer exposure to fraudsters and advisor incompetence;
  • the needs of consumers and advisors have outgrown the existing, largely product-based model which currently regulates Ontario’s financial services industry; and,
  • Ontario’s current web of regulatory structures and relationships produce unnecessary complexity for all stakeholders – and needless confusion for consumers.

As we will see, the current system is ultimately inadequate to the task of effectively regulating in the consumer interest.

In recognition of these problems, we assert that all Ontarians deserve higher standards in the field of financial advice – not just those who can afford the specialized or niche advisor. In response to these problems, we then assert that the current regulatory scheme can be easily reconfigured using the DAA model. In fact, the proposed DAA model can provide smaller, smarter, and more targeted regulation.3 A properly constituted DAA would be able to set out and enforce effective standards to govern conflicts of interest and potential conflicts of interest and result in removing the silos that currently exist between the regulation of mutual funds, other securities, and insurance at the consumer level, thereby plugging a major gap in Ontario’s regulatory framework.

As well, we provide detailed responses to the Ministry’s questions regarding how a DAA responds to the following specific problems to be found in Ontario’s current regulatory regime:

  1. more effective licensing and registration requirements: through mandatory membership requirement in the DAA and the unified oversight of retail-facing advisors;
  2. education, training and ethical responsibilities, including enhanced education requirements in recognition of the fact that all of the province’s advisors should be subjected to a single, uniform minimum set of industry knowledge and competency standards and substantive continuing education requirements and, in addition, we propose undertaking a realistic commitment to inculcating ethical norms in individual advisors and an ethical culture in their firms through an industry-wide, universal code of professional conduct, a mandatory errors and omissions insurance requirement, and a publicly accessible comprehensive registry of Ontario’s financial advisors;
  3. a resolution to today’s “alphabet soup” problem of confusing advisor titles through regulatory recognition of titles and designations which reflect real acumen in the giving of financial advice;
  4. an outline of those specific activities that should be included (i.e., persons who do not call themselves financial advisors but in practice actively provide financial advice) and excluded (e.i., bank tellers and mortgage brokers), in order to avoid instances of both regulatory overreach;
  5. how a DAA will not represent another “tax” on advisors and their clients and in fact we believe it will mitigate further costs and burdens from future regulation;
  6. the problems arising from narrowly-focused attempts to regulate compensation mechanisms in the advisor-client relationship (as opposed to a DAA’s ongoing, holistic approach to the entire advisorclient relationship), as evidenced by the experience of other jurisdictions; and
  7. suggest how, in contrast to (f) above, the proposed DAA’s complaints and discipline mechanisms, along with the other elements set out in (a) through (e), will combine to produce a DAA model which will ensure promotion of the public interest in the provision and regulation of financial products and services to Ontarians.

The DAA model is a relatively new way of obtaining recognition as a professional body. The transfer of regulatory authority can enable a professional body to oversee all financial advisors, even those who are specialists. Indeed, this form of oversight seems the most efficient, since to allocate the regulation of specialists to a separate oversight body would require introducing additional layers of regulations. Moreover, we recognize that simply adding yet another layer of regulation will not solve the problem of regulatory arbitrage and will leave unaddressed the gaps caused by the silos which separate the insurance and securities sectors at the client/advisor level.

Ultimately, the proposed solution that Advocis puts forward below will:

  • allow for simplification in basic regulatory functions such as registration, the tracking and reporting of disciplinary measures;
  • reduce levels of confusion and frustration for consumers and financial advisors;
  • lessen “red tape” and lower compliance costs for firms, which will result in a concomitant reduction in governmental expenditures through a scaling back in quantity and severity of the exercise of regulatory authority; and
  • preserve where appropriate the regulatory silos that exist on the product development level (e.i., those which delineate insurance products from securities products), but at the same time dissolve those silos where they cause harm – at the level of advice provision and consumption. This erasure of the problematic aspects of the “silo” approach can very likely only be accomplished through the regulation of all financial advisors under a DAA structure.

Regardless of which route to reform Ontario’s government chooses to follow, the province must keep a steadfast focus on the needs of the average consumer.

Part One: advOcis and the need fOr a new review Of regulatOry POlicy

(a). Advocis – who we are

Advocis is the largest and oldest professional membership association of financial advisors and planners in Canada. Through its predecessor associations, Advocis proudly continues over a century of uninterrupted history serving Canadian financial advisors and their clients. Our 11,000 members, organized in 40 chapters across the country, are licensed to sell life and health insurance, mutual funds and other securities, and are primarily owners and operators of their own small businesses who create thousands of jobs across Canada. Advocis members provide comprehensive financial planning and investment advice, retirement and estate planning, risk management, employee benefit planning, disability coverage, and long-term care and critical illness insurance to millions of Canadian households and businesses.

Financial advisors and the advice industry is a vital part of Ontario’s economy, and is crucial to the long-term financial health of families and small businesses. The economic footprint of the small business financial advice industry is very significant. In Ontario it represents $8.4 billion in direct GDP, $2 billion in government tax revenues, and 84,400 jobs.3

As a voluntary organization, one established by an Act of the federal Parliament, Advocis is committed to professionalism among financial advisors. Advocis members adhere to our published Code of Professional Conduct, uphold standards of best practice, participate in ongoing continuing education programs, maintain professional liability insurance, and act in their clients’ best interest. Across Canada, our members spend countless hours working one-on-one with individual Canadians on a gamut of financial matters. In addition, Advocis advisors are committed to educating clients about financial issues that are directly relevant to them, their families and their future. The values and goals of protecting and promoting client service, client education, the client’s freedom of choice, and of affording priority to the client’s interest as it exists in the totality of the advisor-client relationship, represent the principles which inform much of our following analysis and argument. Accordingly, what follows reflects the priorities of Advocis’ members and their clients.

(b). Why we believe it is time for a comprehensive new approach to regulatory policy

Advocis is the only professional association that supports professional financial advisors in both the securities and insurance sectors. Increasingly, the province’s financial advisors are dual-licensed, in order to better meet the holistic needs of their clients who seek financial and risk mitigation solutions that can be tailored to their unique circumstances. Our members intermediate between Canadians from all walks of life and the universe of available financial products and services. They perform this intermediary function by providing the advice and planning needed to help turn clients’ life goals and objectives into sustainable realities. As such, our members are uniquely positioned to provide “on the ground” insights into what works and what doesn’t in the borderland where advisory practice meets regulatory policy head on.

Historically, Ontario, like most jurisdictions in Canada or abroad, has approached regulatory issues within the financial sector on an issue-by-issue basis. Consequently, very few stakeholders – outside of academic settings – have had the opportunity to “take a step back” and scrutinize the framework in which we are identifying problems (real or perceived) to determine if the regulatory model currently being used – and which was largely developed in the 1980s and 1990s – remains appropriate for today’s financial services sector. The current and anticipated regulatory concerns being identified by today’s stakeholders bear little resemblance to concerns of two or three decades ago. For example, we continue to view regulation in the financial sector as exclusively product-based. We believe this model is not sufficient to address the evolution that has taken place in the financial services world and believe that Ontario and Canada have before them the opportunity to be global leaders in developing a modernized regulatory framework that will reduce red-tape, remove unnecessary or inappropriate regulation, bring clarity and simplicity where there is currently confusion and complexity, enhance levels of consumer protection, and reduce regulatory and product costs. We also believe it will assist in more accurately aligning regulatory initiatives and rules with overarching government policy. We therefore support Ontario’s commitment to reviewing policy alternatives for the regulation of professional financial advice, and we look forward to further public consultations, and the final report of the Expert Committee. In sum, we are pleased that the Government of Ontario is seizing this opportunity to examine the regulation of financial advisors and planners, and we propose that this review be taken through the lens of the advisor-client relationship. The successful conclusion to the government’s review and reform will ensure more consistent delivery of high quality advice to consumers and a reduction in red tape.

(c). Problems with the existing regulatory framework

The ad hoc development of the regulatory and legal governance of Ontario’s retail financial sector has, not surprisingly, resulted in a regulatory framework which, while effective and efficient in many aspects, has, like all frameworks, a number in interstitial gaps – areas of financial activity which lack proper regulatory oversight – or, at times, any oversight at all. It is through these gaps that a number of Ontarians’ legitimate financial interests are at perpetual risk of disappearing. While the public should be able to place their confidence in their financial advisor, trusting that he or she meets rigorous standards of professionalism, proficiency and accountability, the reality is that this is not always the case. In fact, the public is exposed due to four major flaws in the existing framework:

1. Anyone can call him- or herself a financial advisor and offer financial advice, including planning

In Ontario, anyone, regardless of their training, experience or education, can hold themselves out to the public as a “financial advisor,” financial planner, investment advisor, or countless other titles. Neither the title of “financial advisor” nor the scope of the work under that title is protected in law, so there is nothing to prevent an unscrupulous, incompetent or merely inexperienced individual from calling themselves a financial advisor and offering what is purported to be financial advice to the public, even if they have no training, experience or financial acumen.

This is an extreme risk which must be addressed; time and again, consumer surveys have shown that most consumers mistakenly believe that titles such as financial advisor are regulated and someone holding themselves out as such has earned the right to do so through education and experience. In professional-style principalagent relationships, consumers routinely put their faith in the title as a proxy for expertise, but unlike doctors, lawyers or architects, anyone can claim to be an advisor or offer financial advice and planning – which leaves the public needlessly vulnerable to incompetence or outright fraud.

2. Existing regulation focuses on products, at the expense of proper regulatory oversight on the most critical retail financial relationship – the ongoing relationship between financial advisors and their clients

Much of our existing regulatory framework does not reflect the daily reality of how most Ontarians access financial advice and planning. This is because existing regulation is often based on the type of product being sold to the retail consumer. For example, insurance products, mutual funds or other securities are regulated by entities including the Office of the Superintendent of Financial Institutions (“OSFI”), the Financial Services Commission of Ontario (“FSCO”), the Ontario Securities Commission (“OSC”) the Mutual Fund Dealers Association of Canada (“MFDA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”). Each regulator has its own standards and requirements, and while they are strong at regulating their member insurance carriers and mutual fund or securities dealers, including regulating the constant product innovation in the industry, they do not have a collective focus on the retail consumer’s overall advice-receiving experience.

Considering the issue from the consumer’s perspective throws the problem into stark relief: many advisors hold multiple licenses which allows them to provide consumers with risk management and wealth solutions from across the insurance, mutual fund and securities sectors. As a practical matter, most consumers do not conceive of the province’s retail financial services industry as structured in such rigid “silos.” Nor should they be expected to understand the legal rules and regulatory processes which have produced Ontario’s “siloed” model. Instead, consumers work with their advisors to develop holistic financial plans which reflect their circumstances, and not a piecemeal delivery of advice which reflects the regulatory happenstance of how our system developed. Above all, Ontarians want assurances that their advisors are professional, knowledgeable and accountable, so that their advisor can provide the complete coverage they need.

Most consumers are not particularly interested in knowing that product x comes from the insurance universe and product y comes from the mutual fund universe – and as product features converge, it is increasingly difficult for consumers to tell them apart. But, in the current regulatory framework which is focused so closely on product sales, it is often the case that the client-advisor relationship is not governed by a single regulatory entity, but by a combination of them. The result is that the protections which consumers do receive vary widely, as they are based on the sector from which the product originates. We have seen the importance of this distinction coming to light if problems arise, leaving consumers confused and disappointed.

We believe that consumers should enjoy the material and psychological comfort and security that comes with knowing that stringent and uniform protective safeguards have been embedded in the rules and principles which help create and govern their relationships with their advisors. Ontarians deserve access to formally professionalized advisor-client relationships which are not dependent on the nature of the underlying products that they purchase to fulfill their financial plans. Underpinning the advisor-client relationship with a level of professional protection is to accord that relationship a level of legal recognition and protection which is much more fundamental than that offered by product regulation. For example, minimum and uniform standards of ethical and professional conduct and other professional safeguards should be in place across all retail-facing subsectors of the province’s financial services industry. There should be an overarching code of conduct and an industry-wide requirement to maintain responsible levels of errors and omissions insurance, neither of which exists today.

This sectoral approach also reveals why the existing regulatory framework cannot effectively regulate today’s holistic advisory relationships. Certain stakeholders may suggest that regulation of financial advisors should fall under the auspices of existing regulatory bodies, and it is true that in recent years, some have given greater attention to the advisory relationship – for example, through the Client Relationship Model reforms of the Canadian Securities Administrators (“CSA”) members. Despite this laudable effort, existing regulators are structurally limited by their jurisdictions of authority; for example, even if FSCO were to completely overhaul its expectations of licensees, those changes would only impact the consumer’s relationship in regard to his or her purchases of insurance products – leaving the consumer’s experience with mutual funds unaffected.

In an ideal world, all regulators would set comparable standards so that the client would be equally protected, regardless of the product’s origination. But a century of experience and general common sense tells us that when you have multiple regulators that were created on the basis of regulating products, not advice, which already have standards that (in some cases) vary widely from each other, coordinating policies on financial advice is nearly impossible. And even if regulators did manage to agree to a uniform set of policies, those policies would do nothing to capture those individuals who are not registered at all, such as a fee-only planner who does not sell product.

3. There is no firm, clear, and universal requirement for advisors to keep up-to-date their core areas of knowledge

One of Advocis’ core membership requirements is that advisors keep their knowledge up to date by completing continuing education courses each year, including courses on professionalism and ethics. But for the same reasons discussed above, the regulatory requirements for continuing education are completely variable based on the product’s sector of origination. For example, Ontario requires that life insurance licensees commit to 30 hours of continuing education every two years, without requiring a minimum learning component on professionalism or ethics. Several provinces do not have any CE requirements with respect to insurance licensees. And while IIROC has continuing education requirements for registered representatives, the MFDA only states that continuing education “should be provided” to its approved persons.4 And those advisors who are not registrants with any regulator have no continuing education requirements whatsoever.

An advisor who does not keep his or her level of industry knowledge current is an advisor who fails to properly serve their clients and very likely puts their clients at risk. Moreover, the fields of knowledge with which an advisor should be adequately familiar are continually expanding. Competition among insurance carriers and distributors and between fund companies and securities dealers is fierce, so product change and innovation is a constant. Therefore, static knowledge quickly becomes obsolete and impedes the ability of advisors to act in the best interests of their clients. Advocis believes that all individuals who offer financial advice and planning to retail consumers should be required to complete continuing education on a regular basis, with an emphasis on education related to professionalism and ethical conduct.

4. There is no effective, industry-wide disciplinary process

The majority of advisory relationships are beneficial to the public, but some inevitably do not work out as anticipated by one or both of the parties. Sometimes, clearly this is the fault of the advisor. Accordingly, the industry requires a strong and effective disciplinary process, one which will ensure that those advisors who have committed misconduct are appropriately disciplined, and which will also protect the public and deter other advisors from similar misbehaviour.

FSCO, the MFDA or IIROC are each empowered to impose a variety of sanctions, including the stripping from an advisor of his or her license or registration. However, the limitations of the existing product-based regulatory framework become most apparent when considering the gaps which open when one considers the practical impact of having three regulatory authorities investigate and act on matters of discipline: each regulator’s enforcement powers are limited to its respective sector. Suppose, for example, an advisor engages in misconduct so egregious in the course of selling a mutual fund that the MFDA determines he/she is unfit to work in the fund industry and, as a consequence of this finding, it revokes his/her registration. In such a case, there is nothing to prevent this same advisor from continuing to provide advice, and sell segregated funds through his or her insurance license.

We believe this sector-hopping represents unacceptable consumer risk. The type of serious misconduct which warrants an advisor’s outright expulsion from one sector, such as fraud or gross negligence, is clearly indicative of that advisor’s inadequate commitment to ethical and professional conduct. This is not a sector-specific concern. It is, rather, an industry-wide concern, which is the same as saying that it is a consumer concern. Permitting such an advisor to continue to offer “advice” to any Ontarian is a disservice to the public. And even if that advisor is eventually identified and removed by other regulators in their respective sectors, that person can simply continue offering advice on an unlicensed basis since the scope of work is not protected: for example, he could “advise” clients to invest in an affiliate’s Ponzi scheme.

Also, currently lacking is an effective, accessible and industry-wide mechanism through which the public may easily verify their advisor’s credentials and disciplinary history. While several regulators, self-regulatory organizations (“SROs”) and industry bodies do maintain websites where the public can search for information on their advisor, the information returned is confined to the particular entity’s sector. As discussed above, the general public does not understand the difference between the various regulatory bodies and is not likely to canvass the registries or databases of each regulator to investigate a potential advisor. In the example above, if a prospective client were to review their advisor’s credentials and work and disciplinary history solely through the insurance regulator’s website, the client would not be informed of the advisor’s expulsion from the mutual funds sector. The client might then mistakenly believe that the advisor’s overall disciplinary history was clean.

Advocis strongly believes that consumers should have a one-stop access point for reviewing a prospective advisor’s complete disciplinary history that is not limited to the domain of one sector’s regulator. It must also capture those individuals who offer advice and planning without the sale of product who are therefore not registered with any existing regulator. That is, rather than being based on today’s ad hoc and largely archaic regulatory structure, this critical consumer tool must be reconceived at the level of the advisor-client relationship, in order to properly ensure regulation is informed by the consumer’s perspective as seen from the practical reality of day-to-day consumer experience.

These four major shortcomings of Ontario’s existing regulatory framework expose consumers to unnecessary and unacceptable risk. They arise from the fact that current regulation does not reflect the modern, holistic and cross-sectoral approach to financial advice and planning that most consumers want, require and receive. Fortunately, these risks are largely avoidable, with minimal disruption to Ontario’s retail financial services sector, if the proper regulatory solution is put in place. It is to such a solution that this submission now turns.

Part Two: Consultation Paper Questions

Advocis believes that before any truly effective and comprehensive reform can be undertaken, it must be acknowledged that the practical reality for consumers and advisors is that financial planning is a component of financial advice. The regulatory reality and the practical realities are the same: financial planning is unavoidably and inextricably a part of the larger practice of providing financial advice. Realistically, this means that any regulatory reform in Ontario’s financial advice sector will fail to reach all of Ontario’s financial consumers unless this foundational reality is formally recognized at the outset of any reform effort.

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.

The activity of financial planning is a subset of the larger practice field of financial advice

Financial planning is a component of financial advice. This is true whether one looks at it from the regulator’s perspective, from the client’s point of view, or from the standpoint of the practitioner. It becomes clearly evident when one reviews the requirements stipulated in the rules, policies, bulletins and notices of the MFDA, IIROC, OSC and FSCO. As well, financial planning and other forms of financial advice is provided by advisors who are members of organizations such as Advocis, and advisors who are employed by insurers subject to the Canadian Life and Health Insurance Association (“CLHIA”). Advocis assists its members in providing financial planning and other kinds of client advice with its code of conduct and best practices manual; the CLHIA issues best practices and guidance notices for advisors with regard to life and health insurance products.

“Financial advisor” is a term freely used by the public and is generally understood to refer to an individual who provides consumers with financial planning and other forms of financial advice. The term has evolved in response to the evolution that has taken place in the industry. Originally there were very clear distinctions between the various financial sectors – between insurance, mutual funds and other types of securities, for example – and indeed this fact remains evident in the language employed by the various regulators to identify the individual intermediary and the activities he or she offers to consumers. The MFDA refers to a financial advisor as an “approved person,” FSCO refers to him or her as an “agent,” and IIROC as a “registered representative” or “investment representative.” But the consumer’s reality is that it is the same advisor who holds multiple licenses who is providing them with holistic financial advice. It is not at all surprising, therefore, that consumers relate to the title of “financial advisor” much more readily than to the terminology employed by regulators. It is the confusion over industry nomenclature which is helping to motivate financial advisors and their clients to join with the Ontario Ministry of Finance and spearhead the next stage of structural evolution that is taking place in regulation.

Given this emerging regulatory reality, it is Advocis’ view that proper definitions and protections must be put in place to ensure that consumers know that they are dealing with proficient professionals who are appropriately registered and regulated.

Defining financial advice to reflect the realities of the practitioner and the needs of the consumer

For the purposes of our submission, therefore, Advocis has developed the following definitions that have been crafted from existing regulatory requirements established by FSCO, the MFDA, IIROC, and the OSC. Working from these definitions will assist in illustrating the path that Advocis believes is necessary to ensure that appropriate regulation is developed by an appropriate regulator to ensure that the advisor-client relationship operates at its peak efficiency. “financial advice” means the process of engaging in the business of advising others with respect to the planning and/or the execution of advice in respect of selecting, purchasing, or selling financial products to meet investment, risk management, or risk mitigation objectives.

“financial advisor” means any person who engages in the business of providing financial advice to others, including the collection and analysis of information about a person or business:

  1. to identify needs and risks;
  2. to establish financial objectives;
  3. to establish strategies to address identified needs and risks, and achieve the established financial objectives; and
  4. to continuously monitor the needs and risks and the progress toward achieving the established financial objectives which would include any one or a combination of the following:
    1. the monitoring of cash flow management;
    2. capital needs assessment;
    3. education planning;
    4. retirement planning;
    5. investment planning;
    6. taxation and estate planning;
    7. insurance planning;
    8. business succession planning; or
    9. employee benefits planning.

Clearly the scope of these activities is such that any financial advisor registered or operating under the rules of the MFDA, IIROC, OSC or FSCO will be caught by this definition. We are not asserting that all financial advisors are engaged in financial planning at the same high standards as those who have attained specialized designations. But the proposed definition does delineate the basic parameters regarding the minimum actions that a financial advisor must perform and the minimum standards to which he or she must adhere. The definition also affirms that an advisor, whether or not he or she also has a financial planning designation, must meet the de minimus standards of the Know Your Client (“KYC”) and Know Your Product (“KYP”) rules, as well as the various prescribed suitability requirements, all of which are key components of financial planning.

“financial planner” means a financial advisor holding a recognized specialist designation, including:

  1. Certified Financial Planner® (CFP®), sponsored by the Financial Planning Standards Council;
  2. Personal Financial Planner (PFP®), sponsored by the Canadian Securities Institute;
  3. Certificate in Financial Planning (Planificateur financier [Pl. fin.] designation), sponsored by Institut québécois de planification financière (IQPF);
  4. Chartered Financial Consultant (CH.F.C.®), sponsored by Advocis, the Financial Advisors Association of Canada;
  5. Chartered Life Underwriter® (CLU®), sponsored by Advocis, the Financial Advisors Association of Canada; and the
  6. Registered Financial Planner® (R.F.P.®), sponsored by the Institute of Advanced Financial Planners

As we will demonstrate below, these definitions reflect the daily reality of the advisor and consumer, and will
allow the same professional body to oversee all financial advisors, even those who are specialists. Indeed, this
form of oversight seems the most efficient, as to do otherwise would require adding additional regulatory layers
and complexity. Moreover, another layer of regulation will not solve the problem of regulatory arbitrage and
will leave unaddressed the gaps caused by the silos which separate the insurance and securities sectors at the
advisor-client level.

From the consumer perspective, all of Ontario’s financial advisors engage in some form of financial planning

It is crucial to understand that, from the perspective of the consumer, all of the province’s financial advisors conduct financial planning, as required under the regulations of the OSC, FSCO, MFDA and IIROC. Within the broad pool of financial advisors, there exists industry-developed designations which enable a financial advisor to further specialize in the more detailed aspects of the various dimensions of advice giving, such as taxation, estate planning, and health insurance, for example.

The reality of Ontario’s financial advice sector is reflected in Figure 1. In Ontario, all financial advisors (the largest of the Venn circles) must possess the basic skill level to engaging in client-appropriate financial planning. Within the total advisor population, we see the ongoing development of more stringent specializations with respect to certain sub-fields of the advice process. These sub-groupings reflect specializations which go beyond the benchmark of skills which the average financial advisor would be required to meet. These specializations are useful to many consumers – and at times are necessary for those clients who present to their advisors with more complex advice and planning goals and objectives.

So, within the family of financial advisors there is the presence and opportunity of smaller subgroups of specialists who wish to operate in advanced areas of planning. Such specialization is common in established professions; indeed, it is analogous to the medical profession, where all doctors must meet a minimum standard to be called a medical doctor or MD. But within the field of MDs we have smaller groups of MDs who have specialized. Every member of the profession is a doctor, but only those who have completed additional training and course work are allowed to use designations which identify their specialization, such as cardiologist and oncologist. To further the analogy, consider a proposal to regulate only the subgroup of advanced specialists, as opposed to the entire group of medical doctors. Such an option would be a wholly inadequate policy response: the risk to consumers would be overwhelming if anyone could hold out as a doctor and operate largely or completely unregulated. Similarly, to regulate only financial advisors who have completed a specialized designation program would be a wholly inadequate policy response, as this too would expose consumers to risk. Yet this is what some within the financial advice community are suggesting be implemented as a program of policy reform.

Figure 1. A depiction of the interrelationship between the total population of Ontario’s financial advisors and prominent specialist subgroups. For example, advisors who are CLU®, CH.F.C.® or CFP® designation holders are members of specialized groups within the larger population of financial advisors. Overall, the field of financial advice in Ontario is populated with a range of designations, including a number of popular, long-standing financial planning designations.

Financial planning is recognized as a necessary component of securities advice

Financial planning is a necessary component of providing financial advice or making a recommendation on a security – regardless of whether it is a bread-and-butter money market fund or a sophisticated exempt market security.

The CSA

For example, National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), requires a registrant to take reasonable steps to ensure that, before it makes a recommendation to, or accepts an instruction from, a client to buy or sell a security, or makes a purchase or sale of a security for a client’s managed account, the purchase or sale is suitable for the client.5 In addition, the related Companion Policy 31-103, in section 3.4 [Proficiency – initial and ongoing], states that an individual “must not perform an activity that requires registration unless the individual has the education, training and experience... including understanding the structure, features and risks of each security the individual recommends.”6

The MFDA and IIROC

At its two Roundtable Sessions entitled Investigating the Merits of More Tailored Regulation of Financial Planners in Ontario, the Ministry of Finance was explicit that individuals holding out as financial advisors or as financial planners were to be the chief subject of the review. In its submission to the Ministry after the Roundtables, the MFDA stated that part of what its regulated members do for their clients is in fact financial planning. In its submission the MFDA notes that it regulates “81,184 Approved Persons (partners, directors, officers, compliance officers, branch managers, employees and agents of the dealer who are subject to the jurisdiction of the MFDA)” and then observes that many of these persons in fact conduct financial planning activities on behalf of their clients:

MFDA Regulation of Financial Planning Activities

In the course of providing advice to clients, many Approved Persons of MFDA Members engage
in activities that may be considered financial planning in nature. These activities are often
incidental to the advice or recommendation provided to the client and may include general asset
or portfolio allocation advice, tax planning, estate planning or a comprehensive needs analysis.
Many Approved Persons of MFDA Members also hold financial planning designations such as the
CFP, PFP and RFP.

The jurisdiction of the MFDA is not limited to product regulation. The MFDA regulates the
advice provided by Members and their Approved Persons to clients in relation to their accounts.
Suitability requirements under MFDA Rules apply not only to the product but also to the advice
and recommendation to the client. Similarly, know your client information, which is required to
be collected under MFDA Rules by Members and their Approved Persons, is not intended to
apply solely to the sale of the product and is used more generally to assess the suitability of the advice and the investment strategy. The MFDA regulates the financial planning activities of
Members and their Approved Persons that are provided as part of this comprehensive advice
process.7 (emphases added)

MFDA Policy No. 2 Minimum Standards for Account Supervision, MFDA Rule 2.2.4 Updating Client Information, MFDA Member Regulation Notices Know-Your-Product (MSN-0048) and Suitability (MSN-0069) all provide further guidance on these ongoing obligations for securities registrants.

IIROC, like the MFDA, requires that its members engage in the same level of basic planning activity in the sale of securities to clients. For example, IIROC Rule 1300 Supervision of Accounts, IIROC Rule 2500 Minimum Standards for Retail Account Supervision, and IIROC Guidance Note 12-0109 Know Your Client and Suitability, all require that the dealer member or its registered representative maintain compliance with IIROC’s various KYC obligations and investment suitability requirements. For example, IIROC Guidance Note 12-0109 requires that KYC information be collected and assessed and product suitability obligations be fulfilled. IIROC Rule 1300 requires that the dealer member, when accepting a client order, when providing a recommendation to a client, or when certain triggering events occur, use due diligence to ensure that the order, recommendation or account position is suitable for the client “based on factors including the client’s current financial situation, investment knowledge, investment objectives and time horizon, risk tolerance and the account or accounts’ current investment portfolio composition and risk level.”8

Financial planning is recognized as a necessary component of insurance advice

FSCO

FSCO has in recent years placed a special emphasis on providing regulatory oversight and guidance for the province’s insurance-licensed financial advisors (and their clients) with regard to the suitability of product recommendations, the disclosure of conflicts of interest, and the ability of consumers to make informed decisions.

From 2013 to 2015, FSCO engaged with industry stakeholders in the conduct of its comprehensive Life Insurance Product Suitability Review (Point-of-Sale). This was a comprehensive review of how effectively advisors are ensuring product suitability for clients when engaged in the process of recommending life insurance products. This stakeholder review was undertaken with a special focus on “practices in the field,” on determining the level of product knowledge possessed by the average consumer, and on how best to address any information deficits on either side of the advisor-client relationship, including through enhanced product disclosure and by ensuring professional-level advice is consistently provided through the use of best practices to ensure that advisors ask clients the correct questions to gather the necessary data for a proper needs analysis so the insurance advice will meet the client’s financial needs and objectives. In sum, FSCO was acting to ensure that advisors were meeting de minimus standard of proficiency when providing planning advice prior to a product sale. In its Life Insurance Product Suitability Report of September 2014, FSCO set out the findings of the review and affirmed that its recommended “best practices are largely being followed i.e. the actual practices do reflect the needsbased sales practices described in The Approach: Servicing the Client Through Needs-Based Sales Practices.9

The CLHIA

Financial planning is also inherent to the process of providing advice on life insurance products and on insurance products which have an investment component, such as individual variable insurance contracts (“IVICs”), more commonly known as segregated funds. For life agents, the needs-based sales practice product suitability requirements are set out in the industry guideline entitled The Approach: Serving the Client through Needs-Based Sales Practices (January 2015) from the CLHIA. Segregated funds have a wealth of guidance documentation which is explicit about the financial planning aspect of providing advice or making a recommendation about a segregated fund. Ontario Regulation 132/97 (Variable Insurance Contracts), issued pursuant to the province’s Insurance Act, incorporates by reference CLHIA Guideline G2 – Individual Variable Insurance Contracts Relating to Segregated Funds. Among other things, CLHIA G2 Guideline establishes industry standards for advisors to follow with regard to disclosure in point-of-sale IVIC documents and contracts.

In addition, the CLHIA Reference Document of February 2013 entitled IVIC Suitability Needs-Based Sales Practices sets out the three steps for advisors to follow: fact-finding, needs assessment and recommendations and advice. The document is explicit about the nature of the practices the advisor is expected to carry out:

The task of the advisor is to identify the financial needs of the consumer to ensure the IVIC product is suitable for them in light of their particular circumstances and then assist the consumer in understanding how the product meets his or her financial needs.10

The CLHIA document further notes that:

Each of these steps requires skill and judgment on the part of the advisor. As noted in The Approach, the specific questions the advisors should ask will vary depending on the circumstances of the individual client and the complexity of the products being considered... the advisor must decide on an appropriate level of inquiry and choose an approach that will effectively elicit the information required to identify the client’s needs. The process of assessing needs... requires that the advisor make judgements about the priorities of the client and differentiate between wants and needs.11

The CLHIA is explicit about the planning entailed in providing advice to a client with regard to product suitability; the advisor is expected to ask “More detailed questions following the preliminary assessment focus on acquiring a better understanding of the client’s needs to help determine whether or not an IVIC can form part of a suitable product allocation”12 (emphasis added).

As for CLHIA Guideline G2: Individual Variable Insurance Contracts Relating to Segregated Funds (January 2011), it requires that the segregated fund’s “Fund Facts should, in section 7, state “in plain language for the average retail consumer” who the fund is for:

Item 7 – Who is this fund for? Provide details regarding the type of investor the segregated fund would be suitable for stating the advantages and any necessary cautions or warnings. Suitability should be tied to the fundamental investment objective of the fund and risk category assigned in Item 5 above.13

Finally, the CLHIA’s consumer brochure, Key Facts About Segregated Funds Contracts, sets out quite clearly the nature of this financial planning the consumer should expect from his or her advisor:

Your advisor will provide you with written disclosure about the companies he/she represents, any conflicts of interest and how he/she is paid. The insurance advisor’s professional qualifications permit him/her to help you analyze your retirement income planning, estate planning and insurance needs, make recommendations that meet those needs and provide ongoing services, such as beneficiary changes, reviewing and updating your investment strategy and rebalancing your portfolio.14

Provincial insurance councils

A cursory review of the Canadian Insurance Regulators Disciplinary Actions database indicates that insurance councils also recognize the central role held by financial planning in the advice which advisors provide to their clients15. It is telling that in several recent cases from the Insurance Council of British Columbia, the disciplined advisors were ordered to take CFP® and/or CLU® courses.

For example, in the May 1, 2014 decision of In the Matter of the Financial Institutions Act (RSBC 1996, c. 141) (The “Act”) and The Insurance Council of British Columbia (“Council”) and Grant Sheldon Persal16 (May 1, 2014), the Council found that the life agent, among other issues, successfully advised his clients to purchase an insurance product that they did not fully understand. In reaching its decision, the Council summarized the investigation and review done by its Review Committee, which examined a number of precedents. For example, the Council noted that:

In J. Duke, the licensee made inappropriate recommendations to a client regarding investments in exempt market securities in light of the client’s age, risk tolerance, and financial profile. The licensee was an experienced insurance agent who knew, or ought to have known, the risk posed by the investment was too high for his client and he should not have recommended the investments. The licensee’s licence was suspended for 12 months, [and] he had a condition imposed on his licence that required him to complete courses necessary to obtain the Chartered Life Underwriter designation or the Certified Financial Planner designation.17

Accordingly, in its decision, the Council imposed on the life agent’s licence a requirement that the agent, following completion of his suspension, must successfully complete at least one course, per licence year, toward either a CLU® designation or a CFP® designation, until his successful completion of all of the courses required to attain either designation.

Similarly, in In the Matter of the Financial Institutions Act and the Insurance Council of British Columbia and Wei Kai Liao (December 30, 2014)18, the advisor had two clients make complaints about the life and critical illness policies he had sold, in addition to investment loan/leveraged investment recommendations. The Council ordered that:

A condition is imposed on the Licensee’s life and accident and sickness insurance licence that requires him to successfully complete one of the following courses (the “Courses”) during each of the next four licence periods commencing with the current licence period:

  1. Certified Financial Planner (“CFP”) 231 - Financial Planning Fundamentals
  2. CFP 232 - Contemporary Practices in Financial Planning
  3. CFP 233 - Comprehensive Practices in Risk & Retirement Planning
  4. CFP 234 - Wealth Management & Estate Planning (page 2 of decision).

In 2012 Lambert John Schmid was found to have failed to conduct a sufficient needs analysis in selling life policies to a married couple. Among other disciplinary measures, the Council imposed on Schmid’s life and accident and sickness insurance licence the requirement that he successfully complete all of the courses in Advocis’ Best Practices program, or a similar program approved by the Council.19

If these cases are not regulatory recognition of life-licensed advisors providing financial planning, then it is hard to see just what would qualify as financial planning.

Financial planning is recognized as a necessary component of financial advice by industry associations and designation-granting bodies

Industry groups and designation-granting bodies such as Advocis and the Financial Planning Standards Council (“FPSC”) have developed mandatory rules and guidelines, and codes of conduct, to which their members (Advocis) or holders of their advanced designations (both Advocis and the FPSC) must adhere. These designations and related educational programs enable financial advisors to develop additional skills sets and areas of specialized knowledge in order to enhance the planning services they provide to clients who require more detailed or sophisticated forms of planning. Prominent examples are the CLU® and the CFP® designations. In addition, the basic rules and obligations for advisors in regard to the minimum and necessary financial planning obligations required for all advisors in the securities sector by IIROC, the MFDA and the OSC and, in the insurance sector, by FSCO and the CLHIA, are echoed on the FPSC website for CFP® designation holders, as well as in the Advocis Best Practices Manual.

As the FPSC notes in its consumer guide 10 Questions To Ask Your Financial Planner, the nature of the services provided by a CFP® designation holder vary widely, ranging from financial planning to product advice to more specialized areas:

The services a financial planner offers will vary and depend on their credentials, registration, areas of expertise and the organization for which s/he works. Some planners offer financial planning advice on a range of topics but do not sell financial products. Others may provide advice only in specific areas such as estate planning or taxation. Those who sell financial products such as insurance, stocks, bonds and mutual funds, or who give investment advice, must be registered with provincial regulatory authorities and may have specialized designations in these areas of expertise.” (emphasis added)20

Advocis’ Best Practices Manual emphasizes the central importance of financial planning in typical advice transactions, which fall far outside the ambit of a formal financial plan: the section entitled “KYC – Know Your Client” begins as follows:

Gathering the Client Data Know Your Client

Best Practice Principle: “Know your client” (KYC) is about more than meeting regulatory requirements.

Tip: Basic KYC is only a starting point in the information required to effectively analyze a client’s situation. Adding incremental data enables advisors to add increasing levels of service and advice.

Gathering detailed information about a client is nothing new to an advisor who has been doing comprehensive financial plans. However, in recent years, tougher compliance laws have forced all advisors, even those who operate in a very “transactional” manner, to collect more robust KYC information. Quite frankly, to do anything else would be like a doctor who spends most of his time writing prescriptions to deal with symptoms rather than doing examinations and tests for a deeper understanding that can lead to a cure. (emphasis added)21

Financial planning is recognized as a necessary component of financial advice: the Canada Revenue Agency

It is worth considering how the Canada Revenue Agency (“CRA”) treats the activities of financial advisors and planners. With regard to the tax treatment of advice dispensed by advisers and planners, one is not permitted to treat as tax deductible on one’s income tax return any fees one was charged for advice and planning.22 Typically, however, one is permitted to deduct “investment counsel fees” for specific securities transactions. From a policy perspective, these securities transactions are executed with the aim of generating taxable income. But – and this is significant – one cannot claim as tax deductible the trailing commission: this fits with the general principle that financial planning is not tax deductible – since trailers pay for the planning activities of an MFDA or IIROC dealing representative, and hence are not tax deductible, just as other, more “official” forms of financial planning are not tax-deductible. Indeed, from the CRA’s point of view, planning activities are less about generating taxable income and more about sheltering income from tax.

Thus, from the tax treatment point of view of the individual retail investor or consumer, certain activities done by advisors — such as charging a trailing commission and providing various forms of advice pursuant to it — coincide conceptually with the same planning activities done by those individuals holding out as financial planners. This reinforces the notion that planning is a subset of advice, and is conducted by MFDA or IIROC dealing representatives as well as by CLU® or CFP® designation holders.

Advisor competency – the central components of financial planning are therefore already part of the licensing requirements for all financial advisors

Ontario’s financial consumers seek a wide array of financial planning advice, based on their personal financial circumstances, stage of life and retirement goals. This advice ranges from the relatively straightforward (e.g., the selection of a RRSP), to the complex, such as estate and trust planning and more sophisticated wealth management strategies. Regardless of the complexity of the advice being sought, advisors must always demonstrate the required competencies and ensure the advice is appropriate by adhering to the basics of the applicable KYC requirement – his or her life and financial situation, his or her needs and goals, and level of risk tolerance – and applicable KYP requirements – such as the suitability of the product or service for the client, as well as its benefits and potential risks. Obviously an advisor who follows MFDA Rule 2’s obligations on suitability and KYP obligations when providing mutual fund advice to a twenty-year-old who is making his first mutual fund purchase should not be held to the same standard of planning proficiency as an advisor who is drafting a comprehensive financial plan which includes a will and a trust for an upper-middle-class family, for example. Each level of advice should and does have different knowledge requirements. But in both situations, it cannot be denied that rules governing licensees and their conduct incorporate financial planning.

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

No. As we have set out in the introductory section of this submission, a number of problems in the current regulatory scheme expose Ontario’s consumers of financial advice and planning products and services to undue – and unnecessary – costs and risks.

Ontario’s web of regulatory relationships produces unnecessary complexity for all stakeholders—plus increased compliance costs and needless confusion for consumers

First, the current regulatory landscape in Ontario’s financial services sector is a maze of complicated reporting and accountability/review relationships. At present, financial advisors and their clients are caught in a confusing web of regulatory relationships. This is ably demonstrated in Figure 2.

ontario's current regulatory structure

Click on image for larger version.

FIGURE 2. Ontario’s current regulatory structure has become bewilderingly complex. Clearly the needs of consumers and advisors has outgrown and outpaced the existing and largely product-based model which currently regulates Ontario’s financial services industry. Each one of the blue lines represents a compliance requirement or other form of regulatory activity – which in the end are passed on to the Ontario consumer.

Consumer exposure to unnecessary risk – the case of fraud

Second, there is the case of the rogue advisor – who is almost always unregulated. An exemplary instance of the risks to which retail consumers are unnecessarily exposed may be found in the recent case of Gary Sorenson and Milowe Brost, who were sentenced in July 2015 to 12 years in prison for one of the largest Ponzi schemes in Canadian history. Among other offences, they were found guilty of bilking more than 2,000 investors of up to $2,000,000. The pair had already been found guilty of fraud and theft for an elaborate investment scheme which lured investors with the promise of unrealistic returns. All told, the impugned activity of the duo began as early as 1999, and more than 2,400 investors from around the world lost somewhere between $100,000,000 to $400,000,000 (Canadian dollars). The Alberta Court of Queen’s Bench received approximately 600 victim impact statements – many of whom lost their life savings.23

The proposed DAA would address this sort of fraudulent activity. While one can never completely eliminate fraud, or indeed any kind of criminal activity, the delegation of authority to a mandatory professional organization for financial advisors would make the Sorenson-and-Brost fraud scheme much less likely to arise in the first place. Perhaps more importantly, it would also prevent such a scheme from persisting for as long as it did (one set of their fraud and theft offences took place over an entire decade – between 1999 and 2008). By requiring anyone who holds out as a financial advisor to be a member of a DAA and to have their credentials and disciplinary history filed in a publicly accessible database, a DAA greatly diminishes the ability of a Sorenson or a Brost to position themselves to the unknowing public as competent, capable advisors. As well, requiring all professional advisors to report such fraudulent activity to their professional authority further increases the likelihood that such unscrupulous persons will be identified long before they can cause such wide-reaching harm.

Continuing to ignore the vast majority of persons who act as advisors in title or in scope of activity simply leaves too many Ontarians at risk

Third, there is the related problem faced by consumers of understanding just which groups of retail-facing intermediaries are currently being regulated – and which aren’t. This raises one of the most crucial questions facing the Expert Committee: should Ontario regulate only those advisors who hold advanced designations, or whether all Ontarians deserve higher standards – and not just those who can afford them?

The rules regarding licensing under the MFDA, IIROC, OSC and FSCO regimes all require that financial advisors gather and analyze that information which is necessary to make informed recommendations to their clients. Such recommendations must take into consideration both the client’s short-term and long-term goals. Indeed, even a cursory review of the FPSC website and its KYC and KYP requirements and suitability rules largely reflect the basic licensing requirements currently in place for all financial advisors. Clearly, all financial advisors conduct financial planning under the natural course of servicing their clients, as required under the rules governing their licensing. Advisors who have completed additional training to achieve a CLU® or CFP® designation have undertaken a further degree of specialization and are therefore able to offer clients a more complex form of financial planning in the course of providing financial advice. However, not every client requires the services of such a specialist. All of this effectively undercuts the position, recently articulated by advocates of a style of piecemeal policy reform, that only CFP® designation holders provide financial planning, or that financial planning is somehow a discipline and career distinctly and categorically separate from the field of financial advice. Indeed, advisors who hold the CFP® designation and hold out to the public as financial planners are simply able to provide a more detailed, specialized and rigorous form of financial planning.

Without diminishing the value of advisors who hold advanced financial planning designations, concern over consumer access to financial advice leads us to note that some of these advisors operate from a fee-based or even fee-only platform. The preferred methods of compensation used by these advisors undoubtedly impact the desire of consumers to seek out advice, and to pay for it. Moreover, fee-only advisors represent a small proportion of the market– indeed it is estimated by PricewaterhouseCoopers in its Sound Advice: Insights into Canada’s Financial Advice Industry report that there are approximately 450 fee-only advisors in all of Canada.24 We believe they serve an important niche within the population of Ontarians who can afford their services. Moreover, it is often these planners who stand out through their demonstrable commitment to professional levels of proficiency, ethics and continuing education. But they simply do not represent a viable advice channel for the vast majority of Ontarians. Besides the fee-only group, there are also advisors who focus on estate planning, wealth transfer, health insurance, living benefits and similar areas of concentration – and to do so hold advanced designations that signify the advisor’s expertise in that area of planning.

In practice, few Ontarians can afford a stand-alone comprehensive financial plan, as this typically requires an outlay of several hundreds or even thousands of dollars at once. Instead, the vast majority of Ontarians who receive planning receive it to varying levels and degrees through their advisors who are required to engage in financial planning prior to making product recommendations. Accordingly, we remain at a loss in understanding how one can conceive of financial planning as a stand-alone profession that is separate from advice. This planning is often aimed at addressing specific life events, such as saving for a home or determining whether the client is able to afford the desired retirement. Consumers often do not directly pay for this planning, as the planning is usually followed by the sale of products in order to ensure the plan’s fulfillment. It is these product sales which compensate the advisor for his or her efforts. Most consumers receive their planning and advice in this manner because it is accessible and affordable. We believe that all Ontarians deserve to enjoy the benefits of enhanced professionalism in the industry and to be able to trust that their advisor is qualified and competent; this right should not be restricted to a narrow subset of the population that can afford comprehensive financial plans, as doing so would not serve the larger public interest. Therefore, we urge the government to be cognizant of the planning and advisory needs of the majority of Ontarians as it considers reforms.

As we have seen, all financial advisors must engage in fundamental forms of financial planning, and certain financial advisors may elect to undertake further specialized forms of more sophisticated financial planning. Given all of this, what perspective does the advisor in the field have on regulatory reform – especially that of the advisor who may be characterized as an “advanced planning” provider? We would note that Advocis is uniquely positioned to provide a practitioner’s perspective on regulatory reforms which would impact Ontario’s financial advisors and planners: our association is composed of financial advisors, many of whom have acquired financial planning designations (among other advanced designations). In our experience, these are advisors who have acquired designations such as the CLU® or CFP® are already committed to meeting if not exceeding higher requirements in terms of advising and planning proficiencies, standards of ethical conduct, and the maintenance of an appropriate standard of industry knowledge through ongoing continuing education.

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?

Under the proposed DAA, all financial advisors would be required to comply with the DAA’s written, annotated and publicly accessible code of professional and ethical conduct. Such a document would govern member activities related to real and apparent or potential conflicts of interest, set out curative measures, including enhanced disclosure hard and soft compensation on all products, regardless of sector, and explicitly codify the following principles:

  • recognition of the priority of the client’s interests over those of the advisor;
  • specify duties respecting conflicts of interest, including disclosure to the client of all real and apparent conflicts;
  • the duty to provide competent service, performed with honesty and integrity; and
  • the client`s right to access an enforcement mechanism specifically designed for disciplining and punishing members for misconduct, including criminal convictions and regulatory infractions.

Violation of these codified principles would become a matter for investigation, discipline and enforcement (see the answer to Question 4 (g), below).

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:

  1. Licensing and registration requirements;
  2. Education, training and ethical responsibilities;
  3. Titles and designations of individuals who engage in financial planning and/or the giving of financial advice;
  4. Specific activities that should be included or excluded in a regulatory scheme;
  5. Costs and other burdens of regulation;
  6. Regulation of compensation; and
  7. Complaints and discipline mechanisms.

Question 4 cuts to the heart of the Expert Committee’s task: it asks what form of regulation is best suited to provide oversight on the provision of financial advice? Advocis believes that any truly comprehensive answer to this question must be articulated through the advancement of a positive, progressive regulatory model. Accordingly, we will now set out how a DAA model would be situated within the larger regulatory structures already in place in Ontario.

The consumer need for a DAA

As we have argued throughout, retail investors and other consumers of financial products in Ontario need to be assured by a regulatory body that they are accessing affordable, professional-grade financial advice. This means that consumers of retail financial products, advice, and other services, including planning, need to know that any individuals who provide financial advice, whether or not that individual uses the title of “financial advisor” or some variant thereof, has met various initial and ongoing proficiency standards. The least expensive and least intrusive way to accomplish this is through Ontario establishing that the provision of retail or consumerlevel financial advice is a recognized professional activity. This, in turn, requires the creation of a professional organization for financial advisors, the authority of which would be delegated in statute by the Ontario Minister of Finance to the DAA. Depending on the particulars of its reporting and governance structure, such a DAA could be a way for the government to quickly address sudden and unforeseen regulatory concerns. Under a DAA the province would still retain overall accountability and control of relevant enabling legislation and monitor and remain accountable for the overall performance of the authority. Additionally, DAAs have certain reporting obligations to the government, such as annual reports and audited financial statements, and can be subjected to operational reviews.

By creating a DAA, Ontario’s current regulatory scheme can be easily reconfigured

With minimally disruptive modifications, the regulatory scheme in Ontario can be reconfigured to provide comprehensive, efficacious, and cost-effective consumer protection. DAAs are not-for-profit corporations that assume the day-to-day operational responsibility for licensing, education, complaints handling, inspection and enforcement matters as described in government legislation. Unquestionably, DAAs immediately reduce the government’s “fiscal footprint”: the DAA’s employees are not public servants and they are self-financing, largely through fees paid by the governing body’s members. This model has gained acceptance in several provinces: notable examples include Ontario’s Travel Industry Council, Alberta’s Boilers Safety Association, and the British Columbia Safety Authority.

The DAA model removes silos at the consumer level and plugs a major gap in Ontario’s regulatory framework

The DAA would focus on the financial advisor and consumer relationship. In doing so, it will remove oversight of the retail consumer services provided by financial advisors from the MFDA, IIROC, OSC and FSCO and consolidate it under a unified consumer protection rubric. Such consolidation eliminates the present state of consumer and advisor confusion by introducing a coherent regulatory structure to the advisor-client relationship. While, the silos which currently exist between the insurance and securities sectors at the product level will remain intact in order to preserve existing regulatory expertise, the silos are removed at the level of the advisorclient relationship.

suggested cross-sectoral, consumer-focused regulation

Click on image for larger version.

FIGURE 3: This chart shows how a DAA could provide cross-sectoral, consumer-focused regulation and sets out the parameters for a potential reform of the delivery of advice to Ontario’s financial consumers.

The proposed new regulatory approach will not disrupt any existing product-related regulation; however, if the provincial government is considering a further rationalization of the system, then we would note that a review of the existing SROs for regulatory and cost efficiencies would be more easily managed in this consumer-focused model. It is critical to recognize the efficiency and cohesiveness to be found in the well-defined regulatory accountabilities inherent in a single professional body; such a model can remove confusion, cost, duplication and overlap; quickly address sector-specific problems; and simplify what is currently an unreasonably confusing system for consumers. The expected result would be enhanced levels of consumer protection and satisfaction. As Advocis has noted elsewhere, the DAA model is a relatively new way for a group to obtain professional status. Of interest to us here is the process undertaken by the Ontario government to modernize the regulation of the funeral, transfer service, cemetery and crematorium sectors. The government notes that “it is more effective to have a single regulator for the entire sector which will create a one-window approach for both licensees and consumers.”

Therefore, in 2016, a DAA known as the Bereavement Authority of Ontario will become the single regulator for the bereavement sector, handling, both licensing and enforcement services.

Similarly a new DAA focused on financial advice and the relationship between the advisor and client will eliminate much of the duplication and confusion that currently exists under the product-oriented model. In contrast to the existing web of regulatory oversight represented in Figure 2 (on page 26), Figure 3 illustrates the simplicity that can be achieved with a DAA which focuses on the advisor/client relationship.

Advocis believes that a truly industry-wide effort to regulate all financial advisors will enable the industry to move beyond the status quo and thereby avoid such well-publicized instances of egregious criminal conduct, which of course understandably erodes public trust in our advice industry and, to an extent, in our capital markets. Just as importantly, an industry-wide DAA will eliminate less-reported by equally problematic regulatory hazards, such as regulatory arbitrage and capture. Promoting professionalism in all advice-based, retail-focused relationships between intermediaries and consumers in Ontario’s financial services sector may in fact be the most effective way to inculcate an enhanced commitment to ethical and professional conduct. Excluding financial advisors – whether in title or in scope of practice, or both – from any such reform effort will virtually guarantee its failure. As we have repeatedly stated: Ontarians deserve better. To see how we can give Ontarians the regulatory system they are entitled to, it is first necessary to understand in more detail the current system, which we believe is an impasse of sorts – one which prevents the introduction of smaller, smarter and more targeted regulation with a consumer focus.

In our answers to questions 4 (a) to (g), we provide detailed discussion of the nature and operation of a proposed DAA. These operational details indicate how a DAA model would work in the best interests of Ontario’s financial consumers by ensuring that all advisors meet necessary minimum professional standards. In contrast to the universal approach of a DAA stands the argument forwarded by other industry groups which seeks to regulate only a particular advanced planning designation. Unfortunately, such a reform would leave most Ontarians still exposed to unnecessary risks while, in effect, creating a narrowly-constituted professional group of advisors who alone are permitted to provide financial planning advice. Such an approach will inevitably restrict consumer access to this subgroup of now-privileged designation holders to the wealthier segments of society. For example, if the Ontario government were to decide to establish a profession for only those few thousand CFP®s and CLU®s in Ontario, then the remaining tens of thousands of financial advisors who are not holders of an “approved” planning designation (in this hypothetical case, either a CFP® or a CLU®), would not be permitted to act as financial planners. The result? By law the overwhelming majority of Ontario’s advisors would be forbidden from providing their clients with planning services – including the critical financial planning services which they are presently required to perform under the current licensing requirements of the MFDA, IIROC, OSC and FSCO. In fact, continuing to provide clients with those planning services required for the purchase of a life policy or mutual fund would result in these non-designation holders trespassing on the newly circumscribed scope of the new professional activity of financial planning.

Yet this hypothetical policy is in fact the argument now being advanced by several stakeholders seeking to create a “planning” profession for only those individuals who hold a particular designation, in spite of the fact that this would exclude from engaging in financial planning tens of thousands of advisors who, in the course of working directly with millions of Ontarians, provide them with financial advice which is inclusive of financial planning. The establishment of a “planning only” regulatory model would also require a legislative paradigm shift, one which would necessitate the wholesale redrafting of thousands of pages of existing laws and regulations, bulletins and guidelines, rules and policy statements, all of which require that all of Ontario’s (and indeed those throughout Canada) financial advisors engage in some level of financial planning in the interests of consumer protection. A “planning only” profession will fail to address any of the numerous and pressing concerns related to consumer protection, exacerbate current levels of confusion and complexity experienced by consumers, and add another layer of regulation. Most problematically, a “planning only” policy would in effect remove the critical financial planning components to which today’s life agent or mutual fund licensee must adhere, thereby exposing millions of Ontarians to immediate and ongoing risk, and redirecting those consumers who can afford it to engage the services of the favoured designation holder. Yet what the province needs is to simplify and clarify matters for consumers, government agencies, and industry stakeholders alike.

(a). Licensing and registration requirements

Under the proposed DAA, the consumer’s assurance that his or her advisor has met or exceeded the initial proficiency standards would derive from the fact that every person in Ontario who is licensed or registered to sell financial products has met the initial requirements for membership in the DAA. Further, the DAA would be able to develop categories and subcategories for membership, as conceptualized in Figure 1 (on page 17), which would recognize the areas of specialization reflected, for example, in designations such as the CFP® and the CLU®.

Mandatory membership and unity of oversight: Plugging another gap in Ontario’s regulatory framework

Under the DAA, membership would be mandatory for all of the province’s financial advisors. Such mandatory membership addresses the concerns raised above with respect to title and scope protection. The result would be that individuals who hold themselves out as financial advisors would be required to be licensed. Licensing is currently split between three regulators: FSCO, the MFDA and IIROC. It would make sense if licensing was handled by a single source, as this would provide a great deal of efficiency. It would also result in a single entity for consumers to consult with respect to the licensing of anyone holding out or purporting to be a financial advisor.

(b). Education, training and ethical responsibilities

Advocis believes that proficiency standards and continuing education are cornerstones of professionalism. Under a DAA model, the DAA would establish initial proficiency standards for financial advisors, and would administer, monitor and enforce continuing education requirements designed to ensure that all financial advisors maintain a high standard of proficiency. The DAA would be required to actively administer their codes of conduct, so that the public is assured that the DAA’s member advisors understand and fulfill the ethical obligations they owe to their clients.

Individuals who elect to hold themselves out as competent practitioners in areas of professional specialization, such as financial planning, would be required to maintain in good standing the necessary recognized designations. The designation programs would be provided by organizations which the DAA has vetted and determined that their designation program meets the province’s standards for specialization. This mandatory review would help address the problem associated with the alphabet soup of accreditations, certificates and designations that currently exist and are misleading to the public. It would also allow for those legitimate designation programs which currently exist to continue to provide the specialized education products which advisors and their clients want.

financial advisor's career path

FIGURE 4. The financial advisor’s career path and professionalism: a DAA would work with government and stakeholders to establish entry requirements for the profession. Figure 4 demonstrates the development of a financial advisor from the initial entry into the profession all the way through to the attainment of one or more specialist designations, which are for those advisors who wish to acquire deeper knowledge and professionalism.

Continuing education (CE) requirements: The DAA’s annual continuing education requirements would focus on the financial advisor’s duties to clients. These CE requirements would complement and build on the practice proficiency standards and CE requirements of regulators. However, all members would be required to fulfill ongoing CE requirements, which would have a structured component, including mandatory professional ethics and conduct requirements. These would include course requirements established by professional associations identified by the DAA as proficient in providing CE.

A code of professional conduct: All financial advisors would be required to subscribe to their DAA’s code of professional conduct, and abide by their DAA’s rules of professional conduct in all of their dealings with third parties (i.e., the application of the code and rules would not be limited to the financial advisor-client relationship). Any code of professional conduct would of necessity establish and explicate:

  • the priority of the client’s interest over those of the advisor;
  • issues of misconduct (including criminal convictions and regulatory infractions);
  • the duties surrounding conflicts of interest;
  • the duty to provide competent service;
  • the duty to act with honesty and integrity;
  • the duty to preserve and protect client confidentiality; and
  • the duty to cooperate with the regulators.

An errors and omissions insurance requirement: All financial advisors, and their corporations and/or agencies, would be required to carry professional liability insurance relating to the activities they ordinarily engage in as financial advisors.

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

As we have repeatedly argued, Advocis believes that regulating the usage of the title “financial advisor” is timely, appropriate and necessary. Financial advisors are one of the last groups of specialized practitioners whose professional title is not regulated by law. While other professions such as medicine, law and engineering have had their professional titles regulated for over a century or more, in recent years many other areas of professionalized activity have become similarly regulated. For example, in Ontario, the title of “Social Worker” is restricted to registrants of the Ontario College of Social Workers and Social Service Workers; in Alberta, the Alberta Boilers Safety Association, and the Petroleum Tank Management Association of Alberta are restricted to registrants of these professional bodies.

With so many people struggling to meet their retirement goals, with new families starting out without proper financial planning in place, and with government policies increasingly shifting the responsibility for Ontarians’ future financial needs onto individuals, now is the time to regulate the use of the professional title of “financial advisor.”

To better protect the public interest, we believe the government should establish a DAA with a board of directors to be composed of financial advisors and members of the public, among other persons. These two sources of input would be essential to the DAA’s ability to set and implement appropriate baseline minimum standards for all persons providing retail advice and planning. To recognize those advisors who have obtained additional education, we suggest they be recognized as being specialists in their area of expertise. This would be analogous to what the Law Society of Upper Canada offers: all its members must satisfy baseline standards, but through its Certified Specialist program, it also recognizes those practitioners who are experts in, inter alia, criminal law, family law or real estate law.

With regard to advisor designations, the DAA would identify those designations that meet the defined expectations of those holding out as having completed an advanced designation program in relation of financial planning, such as a CLU® or CFP®. Advocis has of course long been committed to the provision of high-quality designations for financial advisors which will ensure that consumers are working with a person who has met sufficiently advanced proficiency standards. The following designations would be granted initial proficiency recognition, provided that the advisor is in good standing with one of the relevant designation-granting bodies:

  • Chartered Life Underwriter® (CLU®), sponsored by Advocis, the Financial Advisors Association of Canada;
  • Certified Financial Planner® (CFP®), sponsored by the Financial Planning Standards Council;
  • Personal Financial Planner (PFP®), offered by Canadian Securities Institute;
  • Certificate in Financial Planning (Planificateur financier [Pl. fin.] designation), sponsored by the Institut québécois de planification financière (IQPF);
  • Registered Financial Planner® (R.F.P.®), sponsored by the Institute of Advanced Financial Planners;
  • Chartered Financial Consultant (CH.F.C.®), sponsored by Advocis, the Financial Advisors Association of Canada; and
  • Chartered Financial Analyst (CFA®), sponsored by the CFA Institute.

Under the proposed model, all financial advisors who hold themselves out as financial planners would be required to hold in good standing one of the above-noted financial planning designations. A DAA which established a “certified specialist” program would satisfy both the government’s objective of protecting all Ontarians who receive financial advice with baseline standards, while providing the motivation for advisors to continue their education and achieve a specialization as a key competitive advantage in the marketplace.

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

Included activities: Subject to several narrow and easily identifiable exceptions listed below, everyone who sells financial products to consumers, and everyone who offers financial advice and/or planning to the public, would be subject to regulation under the DAA model. This would include:

  • individuals who are licensed to deal with the public with regard to life and health insurance under insurance legislation;
  • individuals who are registered by a securities regulator in any advisor category under National Instrument 31-103 and are licensed to sell or provide advice to the public with respect to financial products;
  • individuals who hold themselves out by titles or claimed credentials that suggest financial advice-giving expertise, such as “financial advisor,” “investment advisor,” “wealth planner,” “wealth advisor,” “financial planner,” “estate planner,” and “retirement planner” or such other titles as may be designated by regulation, regardless of whether they are required to be licensed or registered to sell or provide advice regarding financial products; and
  • individuals who hold themselves out as pensions or group benefits consultants who are not otherwise captured by the criteria above.

Excluded activities: It is important to note that the DAA model will not capture job-related activities executed by these clearly identifiable classes of financial services practitioners whose activities may be characterized as a form of “financial advice,” such as:

  • mortgage brokers and real estate agents;
  • bank tellers who offer advice about deposit products;
  • licensed accountants who provide financial advice ancillary to their provision of accounting and tax advice; and
  • lawyers who offer financial and tax advice ancillary to providing legal advice.

(e). Costs and other burdens of regulation

Advocis’ proposed DAA model is simple, straightforward, and does not require significant government action or resources: anyone using the professional title of “financial advisor” must maintain ongoing membership in the DAA. The current regulatory burden on financial advisors and their firms is compounded by the fact that financial advisors are required to address regulation from different sectors that are directed to their conduct and relationship with consumers. Indeed, a financial advisor working with a single client and recommending products from the insurance and securities sector will have different obligations, depending on whether the product falls under the purview of FSCO, the MFDA, or IIROC. The result is that under the current system a financial advisor is spending an inordinate amount of time ensuring compliance with respect to the regulatory requirements of the various sectors, as well as explaining to clients why they must treat the recommendation of the segregated fund differently from a mutual fund, and why the conversation with respect to an exchange-traded fund is different yet again. This level of complexity is the result of an outdated mode of regulation that is focused on product and was developed at a time when this made sense.

Regulation must be changed to recognize that an evolution has taken place in the provision of financial products and services and the advice which accompanies them. In short, the existing product-based regulatory framework is not adequate for governing the advisory relationship: it simply does not reflect the manner in which consumers receive advice today. Therefore, at least some new regulatory infrastructure will be required.

Many of the commentators at the Ontario Ministry of Finance’s 2014 Roundtable Sessions Investigating the Merits of More Tailored Regulation of Financial Planners in Ontario on Friday, January 10, 2014 and Tuesday, January 14, 2014, were concerned about new regulatory costs that would be borne by firms and ultimately passed onto consumers. We agree with this policy position – we have no desire to create a costly new structure that renders the entire industry less competitive; after all, it is our members who are working with Ontarians face-to-face, and they will be the ones having to explain these costs to an unimpressed audience.

Fortunately, a new DAA to oversee the conduct and proficiency of all financial advisors does not require significant resources to implement. Nonetheless, there will be certain new costs associated with the proposal, including the cost of developing databases and websites, and establishing the disciplinary and hearing process. Yet these initial costs will be offset by the reduction in costs as existing regulators who were created to oversee brokers, dealers, and products will be able to focus their expertise on these issues and the delegated oversight of financial advisors that these entities have assumed will be transferred to the new DAA.

Notably, these costs are largely fixed costs that are required to set up base infrastructure; the variable costs of adding an additional advisor or planner to the structure are minimal. In fact, the greater the number of advisors in the structure, the lower the cost per advisor, which would mean that the membership fee payable by each registrant would be smaller if all advisors and planners are captured.

This is in contrast to statements made by certain proponents at the Ministry’s roundtables; some participants suggested that regulating all advisors would be too ambitious and costly. Instead, they argue, Ontario should focus only on financial planners. In truth, if Ontario were to focus exclusively on planners, the fixed cost of that base infrastructure would have to be amortized over a much smaller base, resulting in much higher fees per planner. These financial planners would have to respond to the new and increased regulatory burden by jettisoning their less remunerative clients, as has happened in the United Kingdom with the advent of the Retail Distribution Review (“RDR”).

Public regulation is, of course, costly to taxpayers, at least some of whom do not consume the regulated service. In the case of self-regulation for financial advisors, as outlined in our Raising the Professional Bar proposal, the costs would be borne by the regulated actors in the financial advice sector, who would seek to split the costs of regulation only with those consumers using financial advice, further reducing costs for the end user or consumer. Therefore, we believe that any argument that Ontario should focus on professionalizing financial planners only on the basis of cost considerations is both contrary to the public interest and at variance with the economics of establishing regulatory infrastructure. As such, it is wholly inconsistent with sound public policy.

(f). Regulation of compensation

The DAA would determine what the appropriate compensation models would be. Advocis believes in allowing consumers to choose the type of payment scheme through which they wish to engage with their financial advisor, whether it is based on commission, a percentage charge on assets under management, or an hourly fee.25 Our research indicates that removing choice will result in less access to financial advisors by those most in need of advice. Consumer outcomes in the United Kingdom and Australia – jurisdictions which introduced commission bans – demonstrate that eliminating embedded compensation drives advisors from the industry and forces the remaining advisors to increase their fees, thereby pricing advice beyond the reach of broad swaths of the population.

While the vast majority of consumers do not want to pay an hourly rate for financial advice, this option should remain, since it does accommodate the needs of a small but lucrative segment of consumers. Allowing for choice will ensure all consumers have access to advice, can grow their wealth, achieve their life goals, and militate against risks associated with their lifestyle and unique personal needs and characteristics. As a consumer’s wealth grows, he or she may at any time choose to move from a commission based model to an hourly fee or an assets under management model – depending on which model is most economical for them.

(g). Complaints and discipline mechanisms

What would the role of a DAA be when it comes to advisor discipline? Can a DAA be expected to handle complaints about its own members? Is the current set of mechanisms for the handling of client complaints and the meting out of discipline – which is admittedly patchwork by nature – at all sufficient to the tasks at hand? These are legitimate questions. As we will see below, anecdotal evidence suggests that registrants who are members of an SRO commit fraud or other forms of financial malfeasance at a lower rate than non-SRO registrants.

The Canadian Foundation for Advancement of Investor Rights (FAIR Canada), has issued two reports in the last four years which examine advisor malfeasance. It outlined a series of recommendations in an August 2014 report, including the idea that Canadian regulatory agencies must collaborate more effectively, especially in the tracking of fraud complaints, that regulators should publicize the results of their findings, and that governments and regulators in provincial capitals and in Ottawa should implement a national whistleblower program. In examining investment fraud in Canada, the definition of investment fraud was limited to fraud involving securities that directly affect individual retail investors, such as Ponzi schemes and boiler rooms. The report reviewed all of the fraud cases that were concluded by the CSA in 2012. The CSA’s 2012 Enforcement Report was the first to include a specific, stand-alone category for fraud. Upon FAIR’s review of these cases, it was stated that the “overwhelming majority of the cases (fifteen out of eighteen) involved perpetrators who were not registered.”26

In February 2011, FAIR Canada released A Report on a Decade of Financial Scandals, which reviewed fifteen of the largest and most high profile securities-related scandals from 1999 through the end of 2009. This report emphasized the fact that “the Canadian securities regulatory system is complex and fragmented. There are thirteen provincial and territorial securities regulators and two national SROs... With this bewildering array of regulators, investigation agencies and prosecutors, no one agency has ultimate responsibility for combating investment fraud.”27 It also stated that five of the 15 cases reviewed involved firms and individuals not registered with securities regulators. About 22% of the Total Loss can be traced back to non-registered individuals and firms.28 More interestingly, while “approximately 78% of the Total Loss was attributable to registered firms or individuals,” only “some 17% of the Total Loss involved registered firms or individuals who were also subject to the supervision of an SRO. It would therefore appear that registrants that are directly regulated by a provincial securities commission (but not an SRO) represent a much greater risk of investment fraud losses by investors than registrants that are also SRO members.”29

Advocis has long advocated for the need to introduce a true system of professional accountability for financial advisors, one which is integrated across all consumer sectors in Ontario’s financial markets. A DAA would be empowered to suspend or revoke membership, or impose various conditions on membership for unprofessional conduct, including violations of regulatory requirements, failure to cooperate with regulators, and criminal and regulatory offences. Actions or omissions which impugn or bring into disrepute the advisor’s professional integrity or competence, or that of the profession as a whole, and their suitability to offer financial advice to the public, would be reviewable.

As noted above, a regulatory requirement that advisors must be in good standing with a DAA would prevent unscrupulous individuals from simply moving to a different financial sector and seeking licensing or registration. The resulting regulatory umbrella created by this DAA model would close current gaps in the enforcement and disciplinary reach of regulators, by ensuring that individuals who violate industry requirements in any one sector would not be permitted to continue activity in the industry without proper review. A DAA would have discretion with regard to the investigation of complaints and the initiation of professional discipline.

The DAA model is the means to ensure promotion of the public interest

In terms of the particulars of how the DAA model would handle issues of enforcement and discipline, the guiding principle would be the promotion of the public interest. Accordingly, the DAA should be a not-for-profit entity dedicated to financial advisor professionalism in the public interest. It is essential that the DAA be entirely independent from financial institutions, as well as product manufacturers and distributors.

The governance arrangements of a DAA would ensure that it would have public directors on its Board, and also on any board committee responsible for professional conduct and discipline. The following features would define the basic parameters of a DAA’s disciplinary process:

  • a show-cause requirement: the DAA would be entitled to require an individual who has had his or her license or registration suspended, cancelled or made subject to ongoing conditions in other jurisdictions, to show cause why he or she is fit to be accepted as a member or to continue as a member of the DAA;
  • effective sharing of membership information: the DAA and other regulators would inform each other in a timely manner with regard to any changes in the membership and licensing or registration status of individuals. Upon being informed that the licensing or registration status of a member has been suspended, revoked, or made subject to conditions in any other jurisdiction, or that the member is the subject of disciplinary proceedings in another jurisdiction, the DAA would take appropriate steps. Similarly, regulators in other jurisdictions would initiate a review of the licensing or registration of an individual upon being informed by the DAA in Ontario that an individual has been suspended, or made subject to conditions, or that his or her license or registration has been revoked, suspended or made subject to conditions by another regulator;
  • a complaints and disciplinary process: there would be no duplication of process or procedure here, as the DAA would not duplicate the enforcement and disciplinary functions of regulators. The DAA would assume the oversight currently residing with the MFDA, IIROC and FSCO in relation to the conduct and competency;
  • a priority given to matters of public protection: As well, a DAA, in its complaints and disciplinary processes, would give priority to protecting the public by ensuring that only one body is overseeing conduct and redress. This ensures that consumers are no longer confused about which sector’s regulator they need to raise their complaint with as all conduct issues related to the advisor/client relationship are addressed by the DAA in the first instance;
  • timely initiation of proceedings: a DAA would be entitled to initiate disciplinary proceedings where there is reason to believe that a member has violated the code of professional conduct. Public directors of the association would participate in directing the investigation of complaints and the initiation of disciplinary proceedings. The association would be entitled to initiate disciplinary proceedings whenever it considers it appropriate to do so, and would be empowered, in the course of its disciplinary process, to suspend or terminate membership, and to impose conditions on membership;
  • oversight of issues relating to advisor competence and incapacity: a DAA could investigate a member’s competence and capacity to provide services to the public, and initiate proceedings and suspend or revoke membership or impose other conditions; and
  • imposition of appropriate and effective administrative sanctions: a DAA would have the authority to suspend or terminate membership, and to impose conditions on membership for administrative reasons, including for non-payment of fees, for failure to fulfill continuing education requirements, and for suspension or termination of licensing or registration by a regulator in other jurisdictions.

In concluding this section, we wish to note that the proposed DAA would be required to publish its proficiency standards and have a positive obligation to ensure that all practicing financial advisors meet these standards. The responsibility of the DAA to publicly set out these standards and ensure industry adherence to them is the centerpiece of its consumer-focused commitment to industry transparency. Since each of the subheadings in Question 4 (a) to (g) fall under the purview of the DAA, it seems to Advocis that a DAA, prior its becoming operational, would need to work in an open, consultative, and collaborative manner with government and stakeholders to develop the administrative agreements and other legislative documentation needed to create and support the DAA.

While Advocis is grateful for the opportunity provided by the Ministry of Finance to set out our views during the Expert Committee’s consultative process, in the event the regulatory changes proposed in this paper result in a DAA for Ontarians, then we would offer our further assistance in the development and drafting of the myriad of regulatory documents, bulletins, and guidelines necessary for the implementation of the DAA.

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.

We have set out in Part One, above, the major consumer harms which arise in the present regulatory environment. For your ease of reference, we will list the major ones here:

  • consumer risks associated with no title or scope protection for financial advisors;
  • the hopping from one industry sector to another by advisors who have been sanctioned or disciplined in a particular sector, a problem which is enabled by the lack of coordination between existing sectorspecific regulators and SROs;
  • the inability of the system to deal with fraudsters before they cause harm;
  • the overall level of complexity in our current regulatory system makes it far too confusing for consumers;
  • the persistence of a regulatory gap in the governance of the advisor-client relationship, which is structural in nature since the present system was developed for the oversight of sectors and products and therefore cannot address the evolution that has taken place at the advisor-client intersection;
  • in turn, this regulatory gap results, unfortunately, in a lack of trust in the efficacy of the entire regulatory system, which we see expressed in the media and by certain “consumer advocacy” groups; and
  • regulatory responses to perceived deficiencies by regulators who do not understand the foundational nature of the client-advisor relationship, in particular, its importance to the long-term retirement security of Ontarians. Too often reform measures imported from other jurisdictions miss their intended target and create more problems than they solve. We now see the potential for this unfortunate and unjustified regulatory overreach in Ontario, which is considering the banning of embedded commissions in the sale of mutual funds – an exercise whose basis lies in problems identified in foreign jurisdictions (chiefly the United Kingdom and Australia).

Indeed, the ban on trailing commissions enacted pursuant to RDR in the United Kingdom has:

  • reduced consumer access to financial advice: this is particularly so for those who arguably need financial advice the most – lower-middle class and middle class persons who cannot afford a fee-for-service advisor. This is especially problematic in light of growing need for financial advice which is driven by the new pension freedoms introduced in April 2015. Indeed, in the 12 months to January 2015, 60% of advisers turned away potential clients, mainly due to the fact that service was uneconomical for the client based on the client’s needs (42%), or was unprofitable to the firm (29%);30
  • increased the cost of advice: a post-RDR study commissioned by the industry regulator, the Financial Conduct Authority (“FCA”), indicates that the cost of advice has risen since the RDR’s implementation;31
  • seen a reduction in the total advisor population: two years after the RDR was implemented, there has been an increase in the total advisor population, but it is still lower than before RDR;32 and
  • set the stage for a further reduction in advisor numbers and a rise in the cost of advice: data from the FCA indicates that roughly 38% of retail investment advisors’ income was made up of net commission in the last year. Once the grandfathering provision on existing commissions expires, we can expect to see a dramatic drop in the total advisor population in the United Kingdom.

It cannot be emphasized enough that Canada has not experienced the massive mis-selling scandals experienced in the United Kingdom and Australia by bank-employed financial advisors, due to our different methods of regulating and enforcing suitability criteria at the retail level. We can be sure of one thing: inappropriate regulatory responses will have a detrimental impact on future government policy and access to sound financial advice.

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?

Yes. As is now the case in other jurisdictions internationally, Ontarians should have access to a central registry of information which contains the complaint or discipline history of individuals and other intermediaries which engage in financial planning and the provision of financial advice. Ensuring ease of public access to information on financial advisors is a crucial element of any protection scheme for financial consumers. A truly consumerfocused regulatory organization, including a DAA, should be required to make information about their members conveniently accessible in a single public database. This will enable the public to easily determine if an individual is a member of a DAA and review his or her credentials.

Accordingly, under the proposed model, a DAA and its members would be required to fully participate in a public registry of financial advisors, which would be accessible on the internet and through other appropriate modes of public inquiry. The public registry would enable any member of the public to conveniently access information about an individual’s qualifications, registration/licensing status, and professional conduct as a financial advisor. Such a registry would include a history of all sustained complaints and disciplinary action, as well as information on any confirmed breaches of any section of the DAA’s code of professional conduct.

Conclusions and Looking Ahead

Throughout its long history, Advocis has been committed to proficiency standards for all financial advisors. This is consistent with our commitment to our clients – as set out in our enabling federal legislation – and in our Latin motto, non solis nobis – “not for ourselves alone.”

As we have argued, any undertaking to reform the regulation of financial advisors in Ontario should also be seen as an opportunity to address and alleviate current instances of regulatory inefficiencies, areas in which consumers and advisors experience unnecessary complexities and compliance.

Ontarians deserve to know that all advisors are subjected to a single, uniform set of regulatory standards. With regard to any further regulation of financial advisors, including those who hold advanced planning designations, Advocis is firmly of the belief that any future policy reforms must be based in the reality that financial advisors play a critically important role for millions of Ontarians and their families. Through the provision of financial planning and investment advice, retirement and estate planning, disability coverage, long-term care and critical illness insurance, advisors help the public prepare for life’s events and secure their financial futures. This is ever more important in an economic climate where the government, facing its own fiscal challenges, is expecting Ontarians to be increasingly self-reliant. Given their critical role, Ontarians should be able to trust that financial advisors are proficient, up-to-date in their knowledge and in compliance with the highest standards of conduct and ethics. While this aptly describes the majority of advisors, there are inevitably some who do not meet these standards, and due to gaps in the current regulatory framework, consumers are exposed.

A DAA is needed for financial advisors as it will provide title and scope protection for those persons who meet the requirements. Only these individuals will be able to hold out to the public as financial advisors. It would also require that anyone who meets the definitions and standards must be a member of the DAA. Of course, great care must be taken to ensure that any proposed solution which is put forward by any given stakeholder is not a self-serving proposition which would result in that stakeholder achieving a legally recognized form of regulatory capture; rather, it must have the interest of the industry and consumers as the foundational principle, and must clearly and fairly critique the existing landscape.

Advocis would be pleased to offer further comment or assistance on this matter at any time in the future. To discuss any of the issues that we have raised, please contact the undersigned, or email Ed Skwarek, Vice President of Regulatory Affairs and Public Affairs at eskwarek@advocis.ca.

Sincerely,
Greg Pollock, M.Ed., LL.M., C.Dir., CFP
President and CEO

Caron Czorny, FLMI, ACS, CFP, CLU, CH.F.C., CHS, ICD.D
Chair, National Board of Directors

 

[1] In this regard, see the Appendix for Advocis’ June 5, 2015 submission to the Expert Advisory Committee for FSCO/FST/DICO Mandate Reviews, convened by the Ontario Ministry of Finance’s Financial Institutions Policy Branch and Income Security & Pension Policy Division: Advocis, Review of the Mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corporation of Ontario.

[2] See, for example, the recent study by Professors Claude Montmarquette and Nathalie Viennot-Briot of the Centre for Interuniversity Research and Analysis on Organizations (“CIRANO”) – Canada’s largest and most scientific independent study to date on the value of financial advice, entitled Econometric Models on the Value of Advice of a Financial Advisor (2012). The study provides strong evidence for the connection between financial advice and the accumulation of financial wealth by Canadians. Among its key findings are: i. Advice has a positive and significant impact on wealth accumulation, relative to non-advised persons. Households with four-to-six year-long advisory relationships accumulated 58% greater assets, and households with 15+ years advisory relationships accumulated 173% greater assets. ii. Advice is not exclusively for the wealthy. The median initial investment for the over 10,000 advised households in the study was only $11,000. iii. Advice positively impacts savings and retirement preparedness. Advisors played a key role in improving the savings behaviour of households in the study. iv. Advice positively impacts levels of trust, satisfaction and confidence in financial advisors. In sum, by working with an advisor, households are able to see first-hand the value of advice in terms of wealth accumulation and retirement preparation and readiness. Advocis will provide the Ministry of Finance with copies of the CIRANO study upon request.

[3] PricewaterhouseCoopers, Sound Advice: Insights into Canada’s Financial Advice Industry, July 2014.

[4] On June 22, 2015, the MFDA launched a consultation to consider whether it should require mutual fund dealer representatives to fulfill continuing education requirements. Online at mfda.ca/regulation/bulletins15/Bulletin0644-P.pdf.

[5] National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations, p. 44. Online at https://www.osc.gov.on.ca/ documents/en/Securities-Category3/ni_20150111_31-103_unofficial-consolidated.pdf.

[6] Companion Policy 31-103 CP - Registration Requirements, Exemptions and Ongoing Registrant Obligations, p. 150. Online at https://www.osc.gov.on.ca/ documents/en/Securities-Category3/ni_20150111_31-103_unofficial-consolidated.pdf.

[7] Mutual Fund Dealers Association of Canada, “Financial Planning Consultation Submission to the Ontario Ministry of Finance,” February 5, 2014, p. 2. Online at www.fin.gov.on.ca/en/consultations/rfp-submissions/mutual-fund-dealers-association-of-canada.pdf.

[8] See Investment Industry Regulatory Organization of Canada, IIROC Rule 1300 Supervision of Accounts, 1300.1(p) to (s). Online at www.iiroc.ca/ Rulebook/MemberRules/Rule01300_en.pdf.

[9] See Financial Services Commission of Ontario, Life Insurance Product Suitability Review (Point-of-Sale). Online at www.fsco.gov.on.ca/en/insurance/ Pages/eblast-point-of-sale-sept-2014.aspx.

[10] Canadian Life and Health Insurance Association, Reference Document: IVIC Suitability Needs-Based Sales Practices (February 2013), p. 2.

[11] Ibid., p. 2.

[12] Ibid., p. 4.

[13] Canadian Life and Health Insurance Association, Guideline G2: Individual Variable Insurance Contracts Relating to Segregated Funds (January 2011), p. 77.

[14] Canadian Life and Health Insurance Association, Key Facts About Segregated Funds Contracts, p. 7.

[15] The Canadian Insurance Regulators Disciplinary Actions database offers public access to regulatory decisions issued by insurance regulator members of CISRO and CCIR. The database is at http://decisions.cisro-ocra.com/ins/en/nav.do.

[16] In the Matter of the Financial Institutions Act (RSBC 1996, C.141) (The “Act”) and The Insurance Council of British Columbia (“Council”) and Grant Sheldon Persal (May 1, 2014). Online at http://decisions.cisro-ocra.com/ins/bcic/en/item/71642/index. do?r=AAAAAQAddW5zdWl0YWJsZSBmaW5hbmNpYWwgcGxhbm5pbmcB.

[17] Ibid., p. 8.

[18] Online at http://decisions.cisro-cra.com/ins/bcic/en/item/100203/index.do?r=AAAAAQAEbGlhbwE.

[19] In The Matter of the Insurance Council Of British Columbia (“Council”) Report of Council in the Matter of the Financial Institutions Act (The “Act”) (R.S.B.C. 1996, C.141) and Lambert John Schmid (March 5, 2012). Online at http://decisions.cisro-ocra.com/ins/bcic/en/63693/1/document.do.

[20] Online at www.fpsc.ca/10-questions-ask-your-planner.

[21] For more on the Advocis Best Practices Manual, please contact Advocis at info@advocis.ca.

[22] Canada Revenue Agency, IT238R2 - Fees Paid to Investment Counsel. Online at www.cra-rc.gc.ca/E/pub/tp/it238r2/ it238r2-e.html. The CRA notes that fees paid for other types of advice, such as financial planning, are not within the provisions of paragraph 20(1) (bb), and are not deductible. As well, commissions are specifically excluded from the definition of investment counsel fees. So commissions paid to advisors to execute transactions, or front- and back-end mutual fund commissions, are generally not deductible.

[23] CBC News, “Gary Sorenson and Milowe Brost get 12 years in prison for Ponzi scheme” Jul 28, 2015. Online at www.cbc.ca/news/canada/calgary/garysorenson- and-milowe-brost-get-12-years-in-prison-for-ponzi-scheme-1.3170551.

[24] See the Appendix for PricewaterhouseCoopers, Sound Advice: Insights into Canada’s Financial Advice Industry, July 2014, p. 15. “Fee-only planners” are defined as “financial advisors that provide objective financial counselling and associated services for a negotiated fee and who do not directly offer either proprietary or third-party financial products” (p.15).

[25] See the Appendix for Advocis, Banning Embedded Compensation And Imposing A Statute-Based Fiduciary Duty – Regulatory Affairs Bulletin #052- 04/13 (April 2013) and for Advocis’ submission in response to the Canadian Securities Administrators’ Consultation Paper 33-403 – The Standard of Conduct For Advisers And Dealers: Exploring The Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients (February 20, 2013).

[26] FAIR Canada, A Report on a Canadian Strategy to Combat Investment Fraud (August 2014), p. 20. Online at http://faircanada.ca/wp-content/ uploads/2014/08/FINAL-A-Canadian-Strategy-to-Combat-Investment-Fraud-August-2014-0810.pdf.

[27] FAIR Canada, A Report on a Decade of Financial Scandals (February 2012), p. 2. Online at http://faircanada.ca/wp-content/uploads/2011/01/Financialscandals- paper-SW-711-pm_Final-0222.pdf.

[28] Ibid., p. 19.

[29] Ibid., p. 20.

[30] Richard Hubbard, “Financial adviser numbers stabilise, fees rise,” International Adviser, April 14, 2015.

[31] Ibid.

[32] Ibid.

 

Appendix

  • Submission in response to the Expert Advisory Committee for FSCO/FST/DICO Mandate Reviews, Ontario Ministry of Finance, Financial Institutions Policy Branch and Income Security & Pension Policy Division – Review of the Mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corporation of Ontario (June 5, 2015).
  • PwC, Sound Advice: Insights into Canada’s Financial Advice Industry (July 2014).
    • Related document: Advocis, Sound Advice for Ontario’s Households, Economy & Government: Small Business Financial Advisors Helping Middle Class Families [‘Leave Behind’ for the Ontario government], (May 2015).
  • Raising The Professional Bar: Greater Consumer Protection Through Higher Professional Standards (February 20, 2012).
  • Submission in response to the Canadian Securities Administrators’ Consultation Paper 33-403 – The Standard of Conduct For Advisers And Dealers: Exploring The Appropriateness Of Introducing A Statutory Best Interest Duty When Advice is Provided to Retail Clients (February 20, 2013).
    • Related document: Advocis, Banning Embedded Compensation And Imposing A Statute-Based Fiduciary Duty – Regulatory Affairs Bulletin #052-04/13 (April 2013).

June 5, 2015

Expert Advisory Panel – FSCO/FST/DICO Mandate Reviews
Ontario Ministry of Finance
Financial Institutions Policy Branch (FIPB) &
Income Security & Pension Policy Division
Frost Building North, Room 424
95 Grosvenor Street, 4th Floor
Toronto, Ontario
M7A 1Z1

Fax: 416-325-1187
Email: FIPBmandatereview@ontario.ca

Re: Review of the Mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corporation of Ontario

Dear Sirs/Mesdames,

We are writing in response to the Ontario Ministry of Finance’s Consultation Paper on the Review of the Mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corporation of Ontario, published on April 21, 2015. The Government of Ontario has undertaken to review the role, structure and efficacy of all its agencies; as part of this process, the government has convened an Expert Panel to review the mandates of three agencies under the jurisdiction of the Ontario Minister of Finance: the Financial Services Commission of Ontario (FSCO), the Financial Services Tribunal (FST), and the Deposit Insurance Corporation of Ontario (DICO).

We are pleased to offer the following comments on the proposed review.

TABLE OF CONTENTS

EXECUTIVE SUMMARY
PART ONE: ADVOCIS – WHO WE ARE
PART TWO: MANDATE REVIEW QUESTIONS
Questions 1 – 4: The Mandates of FSCO, FST and DICO
Question 5: Future of the Financial Services Sector
Question 6: Consumer Protection and Promoting a Strong Financial Services Sector
Question 7 - 9: Structural Models
Questions 10 - 11: Scope of Responsibility
Questions 12- 15: Corporate Governance
CONCLUSIONS AND LOOKING AHEAD

EXECUTIVE SUMMARY

Questions 1 – 4: The Mandates of FSCO, FST and DICO

The mandates of FSCO, DICO and the FST continue to be of direct relevance to the goals and priorities of Ontario. With regard to the execution of those mandates, Advocis believes that: (1) FSCO has served Ontario’s insurance industry and its consumers very well over the years; (2) the relatively short period of time which has passed since the changes to the FST regarding the discipline of life agents makes it almost impossible to properly evaluate the efficacy of the FST vis-à-vis its amended mandate; and (3) DICO’s mandate is being carried out effectively under conditions of limited funding and constrained budget resources.

Advocis believes that FSCO’s mandate is in need of amendment – including a structural revision of the manner in which the various non-insurance-related responsibilities are carried out – and by whom. Some of the responsibilities currently under FSCO’s purview should, we believe, be transferred to other regulatory bodies in order to better ensure clearer lines of regulatory accountability and realize efficiencies from the streamlining of the regulation of pensions, credit unions and co-operative corporations.

Question 5: Future of the Financial Services Sector

The financial services landscape in Ontario will continue to change at a rapid pace, and with an increase in consumer demand for ongoing innovation in financial services. In its Consultation Paper, the government anticipates that “structural changes in distribution channels, emerging new products, and increased competition are expected to significantly change how the financial services sector meets the future needs of consumers.” We agree. As the government itself suggests, “the mandates and functions of FSCO, the FST” and other agencies must be adapted to better address the “market transformation” which is expected to significantly alter the financial services sector “over the next 10 to 15 years.” The ongoing evolution of Ontario’s financial services sector will therefore “impact… the ability of regulatory structures to effectively and efficiently protect consumers and respond to the needs of the sector.”

Accordingly, Advocis believes that there is a real risk that our current regulatory structures will not be adequate to the task of anticipating and meeting the future needs of Ontario’s financial consumers. Now is therefore an opportune time to recognize that Ontario’s financial services sector needs a new regulatory structure and improved accountability mechanisms. We believe that the Ontario government should adopt a modified “twin peaks” approach, one which borrows proven regulatory techniques and tools from the rest of Canada, by implementing a regulatory structure which harnesses as needed the most efficacious and useful regulatory structures and tools deployed by government departments, regulatory agencies, and government-recognized professional bodies.

Question 6: Consumer Protection and Promoting a Strong Financial Services Sector

Advocis believes Ontario needs a new approach to consumer protection, especially in light of ongoing changes in the design and distribution of financial products. Effective financial regulation should promote an environment receptive to established and new methods of raising capital, ensure the integrity of our financial markets, foster the confidence of retail investors in Ontario’s capital markets, and in general promote better protection of Ontario’s financial consumers – in particular retirees and pension plan members close to retirement.

At a minimum, retail investors and other consumers of financial products in Ontario need assurance that they have the ongoing ability to access affordable, professional-grade financial planning and product advice. The best way to ensure this access is to establish the provision of financial advice as a professional occupation in Ontario. And the least intrusive or disruptive means to this end goal of professionalism is by way of the delegation of administrative authority to an organization to enforce professional standards and regulate the behaviour of financial advisors at all consumer touch points.

Question 7 - 9: Structural Models

With regard to the Consultation Paper’s question “Are there any regulated financial services entities or sectors that would be suited to a self-regulatory regime?,” Advocis would agree with the Auditor General of Ontario’s Annual Report 2014 and answer that FSCO should delegate certain tasks to a professional organization exclusively for financial advisors. This new organization should be a delegated administrative authority (DAA) for consumer-facing, individual financial service practitioners, such as life agents. This DAA would operate mainly by way of a principlesbased approach, although the registration of individual financial advisors would be a rules-based matter for the DAA to conduct and enforce.

In our proposed regulatory structure, FSCO and the OSC would retain their formal independence from one another, and FSCO would retain many of the powers it currently uses to enforce the Insurance Act and to otherwise regulate the insurance-based market participants and stakeholders under its purview. However, the oversight of pensions would be transferred to a new Ontario Pensions Board. This structure could be operated for a pre-determined trial period, after which a mandatory legislative review of its effectiveness would begin. Allowing FSCO and the OSC to remain independent of one another would have the merit of preserving each agency’s existing areas of regulatory experience and expertise, and minimize the disruption to firms, financial advisors and their clients, and to other stakeholders.

Questions 10 - 11: Scope of Responsibility

Advocis believes that prudential regulation and regulatory enforcement is not simply the function of a jurisdiction’s regulatory architecture. It is as much a function of regulator’s own culture, the level and effectiveness of interagency co-ordination, and each agency’s own regulatory philosophy. With these principles in mind, Advocis believes that a number of traditional FSCO functions should be removed from FSCO’s mandate, as follows: (1) the administration of the Pension Benefits Guarantee Fund and all other pension-related responsibilities should be transferred to a new Ontario pension regulator; (2) the incorporation, registration and oversight of co-operative corporations should be transferred to DICO; and (3) the remaining regulatory responsibilities FSCO has for credit unions should also be placed under DICO’s auspices. Given DICO’s performance record to date, it is appropriate in terms of regulatory functionality and efficiency to further consolidate under the auspices of DICO regulatory responsibilities for deposit insurance functions and related solvency concerns for credit unions, caisses populaires, and Ontario’s co-operative corporations.

Questions 12- 15: Corporate Governance

Changes to governance structures of existing and potential future regulatory agencies must be done with an eye to the long-term health of the key sectors of Ontario’s financial markets – insurance, securities markets, the pension system, and so on. A strong framework requires a clear mandate from policy makers to ensure that the regulator has the powers and the human resources to carry out good public policy. The commission structure of FSCO should be led by a clearer board-governed framework which comes with a rejuvenated insurance-focused mandate. There should be a separation of the Superintendent and CEO functions, both of whom should be members of the Board. Finally, there should be a clearer separation of governance of the FST from FSCO to improve independence and avoid perceived conflicts of interest in the area of advisor discipline.

PART ONE: ADVOCIS – WHO WE ARE

Advocis is the largest and oldest professional membership association of financial advisors and planners in Canada. Through its predecessor associations, Advocis proudly continues over a century of uninterrupted history serving Canadian financial advisors and their clients. Our 11,000 members, organized in 40 chapters across the country, are licensed to sell life and health insurance, mutual funds and other securities, and are primarily owners and operators of their own small businesses who create thousands of jobs across Canada. Advocis members provide comprehensive financial planning and investment advice, retirement and estate planning, risk management, employee benefit plans, disability coverage, and long-term care and critical illness insurance to millions of Canadian households and businesses.

As a voluntary organization, Advocis is committed to professionalism among financial advisors. Advocis members adhere to our published Code of Professional Conduct, uphold standards of best practice, participate in ongoing continuing education programs, maintain professional liability insurance, and put their clients’ interests first. Across Canada, our members spend countless hours working one-on-one with individual Canadians on financial matters. Advocis advisors are committed to educating clients about financial issues that are directly relevant to them, their families and their future. What follows reflects the priorities of Advocis’ members and their clients.

PART TWO: MANDATE REVIEW QUESTIONS

Questions 1 – 4: The Mandates of FSCO, FST and DICO

1. Whether, and to what extent, each agency’s mandate continues to be relevant to Ontario’s goals and priorities?

The mandates of FSCO, DICO and the FST continue to be of direct relevance to the goals and priorities of Ontario. To a large extent, much of the content of FSCO’s mandate is at present more relevant than ever to Ontario’s goals and priorities. But much has changed in the regulatory fields in which FSCO operates. Ontario no longer incorporates loan or trust corporations as a result of the reforms made a few years ago, and indeed it may be the case that in the near future the continuing decline in the number of Ontario-incorporated insurance companies will cause Ontario to remove itself from their solvency regulation. In contrast, in the last decade or so, Ontario has seen the growth of significantly larger, well-capitalized credit unions in the province, and so the role of DICO has become concomitantly more important. The recent reforms to the FST, including the expansion of its purview from the discipline of mortgage brokers to include that of life agents is a sign of its increasingly relevant mandate for Ontario’s financial consumers.

2. Whether the agency is carrying out the activities and operations as required in its mandate?

FSCO has served Ontario’s insurance industry and its consumers very well over the years. The relatively short period of time which has passed since the changes to the FST regarding life agents makes it almost impossible to evaluate the efficacy of the FST vis-à-vis life agents; we have set out our views on the matter in a submission to FSCO, Modernizing Disciplinary Hearings for Insurance Agents and Adjusters (September 30, 2013).1 Finally, it would appear that DICO’s mandate is being carried out effectively under conditions of limited funding and constrained budget resources.

3. Whether all or part of the functions of the agency are best performed by the agency, or whether they might be better performed by a ministry, another agency or entity?

Advocis believes that FSCO’s mandate is in need of amendment – including a structural revision of the manner in which the various non-insurance-related responsibilities are carried out – and by whom. Some of the responsibilities currently under FSCO’s purview should, we believe, be transferred to other regulatory bodies in the interests of ensuring clearer lines of regulatory accountability and sectoral efficiencies for pensions, credit unions, and so on. Some of FSCO’s current responsibilities could be transferred to DICO, and others to a new provincial pensions regulator. As well, FSCO should have the ability – as called for in the Auditor General of Ontario’s recent report – to delegate certain tasks to a self-regulatory organization for financial advisors. These revisions will be explored in more detail in the answers to Questions 5 and 8. As will be explained below, we do not believe that FSCO should see its responsibility for the regulation of individual variable insurance contracts, or other insurance products with an investment component, transferred to the Ontario Securities Commission (OSC).

4. Whether changes to the current governance structure and associated accountability mechanisms are necessary to improve mandate alignment and/or accountability?

Advocis believes that such changes are needed; indeed, the need for a realignment of accountabilities and responsibilities in the regulation of Ontario’s financial markets is already overdue and will only become more pressing with the passage of time. These changes are explored in the answers to Questions 5 and 8, below. We would note here, though, that Ontario’s aging population and the recent downturn in its aggregate accumulation of retirement savings (since the global financial crisis) is of special concern, and the establishment of a special, independent pensions regulator strikes us as a desirable reform. Concerns about retirement income adequacy among certain cohorts in the Ontario population, and concerns about longevity risk among the provincial population at large suggest the need for further development of regulatory expertise in the pensions sector, as well as attaining enhanced levels of financial literacy and ushering in a new approach to consumer protection, especially in the face of ongoing developments – which, initially at least, are often prompted by regulation – in the design and distribution of financial products. At a minimum, retail investors and other consumers of financial products in Ontario need to be assured that they will have the ongoing ability to access affordable, professional-grade financial planning and product advice.

As we will explain in more detail below, the least intrusive way to accomplish this last goal is through Ontario establishing that the provision of retail- or consumer-level financial advice is a recognized professional activity. This would require the creation of a professional organization for financial advisors, the authority of which would be derived from the existing authority of a higherlevel regulatory organization. The transfer of this authority would be by way of a legal mechanism known as “delegated administrative authority” (henceforth, this proposed organization will be referred to herein as a DAA). Depending on the particulars of its reporting and governance structure, such a DAA could be a way for the government to quickly address sudden and unforeseen regulatory concerns.

Question 5: Future of the Financial Services Sector

5. What are your views on the future of the financial services sector over the next 10 to 15 years and how should the mandates and functions of FSCO, the FST, and DICO be adapted to address the market transformation to come?

The financial services landscape in Ontario – due to Toronto’s prominence as a financial services centre – will continue to change at a rapid pace, and likely in a more intense and disruptive manner than will be experienced by most of the other provincial and territorial jurisdictions in Canada.2 We will see an increase in consumer demand for innovation in financial services, and, with the passage of the global financial crisis, a return to more global competition from specialized financial institutions and capital markets.

The Consultation Draft rightly emphasizes these changes. It also correctly notes the importance of having effective financial regulation which promotes an environment receptive to established and new methods of raising capital, ensuring the integrity of our financial markets, fostering the confidence of retail investors in Ontario’s capital markets, and promoting better protection of Ontario’s financial consumers – in particular retirees and those retirement plan and pension plan members who are close to retirement. Finally, we would also add that the continuing importance of global capital to Ontario’s capital markets means that one must assume that the risk of a foreign jurisdiction spreading a financial “contagion” to Canada – a risk that has somewhat abated in the contraction caused by the global financial crisis – will re-appear and continue to develop over time.

The need for rapid and flexible regulatory responses

All of this means that the ability of our regulatory structures to effectively and efficiently protect consumers and respond to the needs of the financial sector must be judged by how quickly they can respond to an unforeseen crisis, and how flexible they can address unanticipated consequences of changes in domestic and foreign markets and regulation. Bearing these needs in mind, we would therefore propose that the Ontario government consider the following observations and proposals when proposing changes to the mandates and functions of FSCO, the FST, and DICO.

The regulatory situation today

The current agency mandates of FSCO, DICO and the FST are not fully adequate to the task of protecting consumers. The Consultation Paper notes that “Consumer protection is a key goal of financial services regulation [and] is achieved by setting market conduct standards and regulating solvency. However, the current legislative mandates of FSCO, the FST, and DICO do not explicitly articulate that their goal is to provide consumer protection.” Nor do the mandates of these agencies require “that consumer protection goals must be balanced against the goal of fostering a strong and innovative business environment.”

In fact, the ongoing development of new financial products and distribution methods mean Ontario’s financial consumers are already exposed to unnecessary levels of risk. We agree with the government’s observation that “new technology, new service providers and new distribution channels have also increased options for consumers of all financial services, while supplementing traditional methods… there are concerns that the regulation of financial services products, or those who sell them, has not kept pace with these changes.”

Finally, we must accept that the future needs of Ontario consumers – whatever they may turn out to be – almost certainly cannot be adequately met and addressed through our current regulatory structures. As for the future of Ontario’s financial services sector, the government anticipates that “structural changes in distribution channels, emerging new products, and increased competition are expected to significantly change how the financial services sector meets the future needs of consumers.” As the government itself seems to suggest, “the mandates and functions of FSCO, the FST” and other agencies must be adapted to better address the “market transformation” which is expected to significantly alter the financial services sector “over the next 10 to 15 years.” The ongoing evolution of Ontario’s financial services sector will therefore “impact… the ability of regulatory structures to effectively and efficiently protect consumers and respond to the needs of the sector.”

Advocis’ proposal for realigning financial market regulation in Ontario

Advocis believes Ontario’s financial services sector needs a new regulatory structure and improved accountability mechanisms. In fact, now is the time to reconceive of how Ontario’s financial services sector is regulated, primarily by adopting a “twin peaks” approach (one modified to fit the peculiarities of Canada’s federal regulatory structure) which borrows proven regulatory techniques and tools from the rest of Canada by designing a regulatory structure which harnesses the unique aspects of government departments, regulatory agencies, and government-recognized professional bodies. Indeed, the Consultation Paper correctly observes that “across Canada, different jurisdictions have adopted different structural models for the regulation of financial services. Some jurisdictions have opted for an integrated regulator that is responsible for all sectors… Other jurisdictions deliver regulatory services through a combination of agencies, self-regulatory organizations, and government departments.”3

Advocis believes that the following redesign of Ontario’s financial markets regulation sets out core elements for any future comprehensive regulatory scheme. Ontario’s financial services sector would respond in a more timely, effective and efficient manner to the needs of Ontario’s consumers, businesses, and capital markets through the following realignments and redistributions of regulatory responsibility:

  1. A realigned FSCO
    Advocis believes that a number of traditional FSCO functions should be removed from FSCO’s mandate: the administration of the Pension Benefits Guarantee Fund and all other pension-related responsibilities should be transferred to a new Ontario pension regulator; the incorporation, registration and oversight of co-operative corporations should be transferred to DICO; and the regulation of credit unions should also be placed under DICO’s auspices. Finally, the commission structure of FSCO should be governed by a clearer boardgoverned framework. There should be a separation of the Superintendent and CEO functions, both of whom should be members the Board.
  2. A realigned DICO
    Advocis believes that the transfer of solvency responsibility to DICO in 2009 has worked well. We therefore believe that it is appropriate in terms of regulatory functionality and efficiency to further consolidate regulatory responsibility for deposit insurance functions away from FSCO to DICO. DICO should therefore continue to act as the liquidator for Ontario’s failed credit unions, and other related solvency concerns – and also assume regulatory responsibility for overseeing Ontario’s co-operative corporations, caisses populaires, and credit unions. It is in the interests of Ontarians to have a regulator develop a unique body of experience and expertise to carry on oversight of these “smaller-capital” corporate entities, which are best fostered under an approach somewhat different from that of the OSC.
  3. A realigned FST
    Advocis believes that there should be a clearer separation of governance of the FST from FSCO to improve independence and avoid perceived conflicts of interest. As well, the cross appointments of the FSCO Chair and Vice Chairs as the FST Chair and Vice Chair be eliminated and an independent board for the FST should be established.
  4. A new Ontario pension regulator
    FSCO is staffed by very capable and well intentioned professionals who do the best which can be expected with the resources available to them under their current mandate. However, FSCO lacks the proper mandate and sufficient resources to properly fulfill the role of being the province’s pensions regulator. The Expert Panel has stated that it is “looking for fresh ideas on how to. . . provide efficient and effective regulatory oversight of pension plans to increase security for pension benefits.”4 Advocis believes that the Ontario government should establish a separate pensions regulator and begin to implement a number of the recommendations made in the report from the Ontario Expert Commission on Pensions, A Fine Balance – Safe Pensions, Affordable Plans and Fair Rules (the Arthurs Report).5

    The Auditor General of Ontario recently warned that FSCO does an inadequate job in protecting pension plan members. Indeed, the underfunding of Ontario based DB pension plans has deteriorated significantly over the past decade under the watchful eyes of the Ontario government’s FSCO: the proportion of underfunded Ontario pension plans has increased from 74% to 92% while the total funding shortfall has increased from $22 billion to $75 billion.6 The Auditor General noted that “FSCO has limited powers to deal with administrators of severely underfunded pension plans… FSCO could use the powers it does have more effectively to protect plan members.”7 The Auditor General also expressed uncertainty as to whether FSCO’s “Pension Benefits Guarantee Fund, designed to protect members and beneficiaries of single-employer, defined-benefit pension plans in the event of employer insolvency, is itself sustainable.”8 While the Auditor General recommended that FSCO be given powers similar to those of OSFI, the federal regulator, Advocis believes that now would be the appropriate time for Ontario to begin implementing the vision for the rationalization and reform of pension regulation set out in the Arthurs Report.

    In addition, in its 2014 Ontario Economic Outlook and Fiscal Review, the Ontario government announced a mandate review of FSCO that will consider, among other issues, the role of FSCO in regulating pensions. The budget indicated that the government intends to proceed with the development of regulations to implement the 2010 reforms to the Pension Benefits Act to modernize the powers of the Superintendent of Financial Services. As noted, Advocis would instead encourage Ontario to follow the recommendation of the Arthurs Report and replace FSCO with a new Ontario pension regulator to enforce Ontario’s Pensions Benefits Act. This agency would need the ability to independently self-manage in a manner comparable to the OSC’s. This agency would require the powers necessary to regulate the pension system and an annual budget sufficient to that mandate (which would include data collection and analysis, a robust risk management capability, the issuance of policy statements and opinion letters, the power to conduct hearings and to issue interim orders and advance rulings, as well as rule-making powers). A formalized arrangement would have to be enshrined in law regarding any relationship between this agency and both the FST and the Ontario Court of Justice regarding fines, penalties, orders, appeals, and other matters pertinent to the enforcement of and compliance with the Pensions Benefits Act.

Question 6: Consumer Protection and Promoting a Strong Financial Services Sector

6. Should the legislated mandates of the agencies explicitly refer to the goal of consumer protection, and should that goal be balanced with the goal of promoting a strong financial services sector? If yes, how?

Yes. Consumer protection is a key goal of financial services regulation. This goal is achieved by setting market conduct standards and regulating solvency. However, the current legislative mandates of FSCO, the FST, and DICO do not explicitly articulate that their goal is to provide consumer protection. At the same time, the mandates do not address that consumer protection goals must be balanced against the goal of fostering a strong and innovative business environment. Currently, only DICO, under the Credit Unions and Caisses Populaires Act, 1994, is required to promote and otherwise contribute to the stability of the sector it regulates with due regard to the sector’s need to compete effectively by taking reasonable risks.

Advocis believes that Ontario should bring a strong, new approach to financial consumer protection. A major problem Ontario faces in its financial services sector is that existing law and regulation is almost exclusively product-focused. For example, the reduction of information asymmetries between financial services consumers, on the one hand, and financial institutions and their representatives, on the other, has been an ongoing reform goal of Canada's financial services regulators. The Fund Facts project is a singular instance of this form of regulation. However, the conduct of individual intermediaries, such as life agents, and other financial advisors, is not being fully subjected to proper regulatory oversight that is informed by an understanding of consumer issues.

Accordingly, Advocis believes that the consumer protection functions which impact retail investors and other consumers of financial products and services would be best performed by a new entity, one which reports directly to the Ministry of Finance. This would be a DAA which is responsible for the behaviour of life agents and other financial advisors: in essence, the individuals from whom Ontario consumers purchase financial products, advice and other services. This DAA would supplement the current regulatory scheme by professionalizing the advisor-consumer relationship in the manner set out in Advocis’ proposed Raising the Professional Bar model.9 By mandating that all financial advisors maintain membership in an accredited professional association, the DAA plugs current regulatory gaps by focusing on the standards which govern the consumer-advisor relationship. This DAA concept will be explored in more detail in the answer to Question 9, below.

Question 7 - 9: Structural Models

7. Should FSCO continue to exist as an integrated regulator? If not, what model is more appropriate for the regulation of financial services in Ontario?
Refocusing FSCO

Subject to the proposed reforms set out above, Advocis believes that FSCO should and must continue to exist as a regulator tasked with enforcing the various insurance laws and regulations of the province. To do this properly, FSCO needs to continue to operate with the degree of independence it has hitherto enjoyed. We would note that the Ontario government’s Consultation Paper states that “Since the creation of FSCO, some have advocated a further integration of all financial services regulators into a single regulator.”10 Moreover, as the paper goes on to say, “the financial services sector has been evolving rapidly, and the pace of change is expected to continue at an accelerated rate.”11 We see the second statement as a strong argument against the first statement: i.e., FSCO’s tremendous experience and expertise in regulating insurance – which is unparalleled in Canada – should in fact be refocused through a streamlining of the agency’s mandate and responsibilities.

How to address the classic case of regulatory arbitrage: segregated funds

Many industry stakeholders insist that the route to more effective consumer protection begins with the merger of FSCO and the OSC. Only the creation of a unified regulator can eliminate regulatory arbitrage. It is true that the retail investor is the loser in situations of regulatory arbitrage. Indeed, Advocis has long acknowledged that the considerable similarities between mutual funds and segregated funds mean that consumers often cannot differentiate one from the other, and unscrupulous individuals will bypass the OSC and Canadian Securities Administrators (CSA) initiatives designed to foster consumer protection in the purchase of mutual funds – such as the disclosure mandated by Phase Two of the Client Relationship Model (CRM2) – by selling CRM2-exempt segregated funds. The most effective, least expensive and least disruptive solution to regulatory arbitrage between insurance and securities products is not to merge the two regulators; rather, it is to require that FSCO’s mandate gives it a rule-making ability – in the realm of consumer protection – to require that insurers follow, as appropriate, securities-based disclosure requirements such as Fund Facts and CRM2. A DAA for financial advisors, including life agents, could be used to monitor and otherwise ensure than the disclosure on segregated funds and mutual funds is a harmonious as possible.

The perils of merging FSCO with the OSC: the demise of effective, efficient insurance regulation

In 2000, the government of the day proposed a merger of the OSC with FSCO. While this idea has since been shelved, its spectre remains. The regulatory expertise developed by FSCO working with industry stakeholders would very likely be swallowed up by the OSC, and principles-based regulation (PBR) of insurance would be replaced by a securities-style, rules-based approach which is not needed or even appropriate for the sale of the vast range of products and services offered by a licensed life agent to middle class Ontarians.

FSCO has been a knowledgeable and fair regulator, and Advocis and our members – speaking on behalf of their clients – would be opposed to a merger of FSCO with the OSC. Such a merger would see FSCO’s regulatory culture on insurance products and services disappear into the securities culture of the OSC. If a single regulator or system of regulation is allowed to dominate Ontario’s financial markets, FSCO’s existing regulatory expertise and proven regulatory approaches will disappear, with securities-based regulatory concepts replacing them.

The perils of merging FSCO with the OSC: Creating a monolithic, “too-big-to-fail” regulator

In addition to driving up the cost of even basic life products, such a merger would almost certainly see the status of FSCO as a body which enforces existing legislation replaced by an OSC-based approach, one in which the new OSC-FSCO hybrid would have decision-making, rule-making and adjudicative powers, similar to the current OSC.

In the absence of the type of structural reform we have set out above, current proponents of an OSC-FSCO merger would have the various subsectors of the province’s financial markets subjected to a “super-OSC” which would regulate life agents and insurance brokers, mortgage brokers, credit unions, and pension funds. This would mean that the future financial well-being of every Ontarian – even if he or she does not own a single security – would still be beholden to this super-regulator in a greater or lesser degree, provided he or she has a mortgage, owns a life insurance policy, holds car insurance, or uses a credit union.

But the demise of the four pillars need not necessitate the rise of a single super-regulator – and the resulting exposure to massive regulatory risk in the event the rule-making, rule-enforcing superagency gets things wrong. Ensuring proper protection of the public interest and enhancing public confidence in the regulated sectors is best done on a sector-by-sector approach, one which recognizes and responds appropriately to the unique characteristics and challenges of each financial sector (pensions, credit unions, etc.). It is not done by subjecting virtually all of Ontario’s capital – including that of the province’s pension system and its massive exempt market – to a single entity.

8. Should DICO continue to be a separate agency? If not, what model is more appropriate for the provision of deposit insurance and regulation of credit unions in Ontario?

Yes. DICO should be the single regulatory agency for both deposit insurance and the activity of credit unions in Ontario. Credit unions and co-operative corporations are often very different from “mainstream” corporations, in part due to their activities and to their often smaller amounts of capitalization. This expansion of DICO’s mandate would also avoid the peril of a “too-big-to-fail” combined OSC-FSCO regulator, as described in the answer to Question 7, above.

9. Are there any regulated financial services entities or sectors that would be suited to a selfregulatory regime?

Yes. The regulation of financial advisors – in the case of this submission, those life agents who are currently governed by FSCO, could be delegated to a DAA. With respect to the delegation of oversight to a DAA by FSCO, the Auditor General’s report noted that

FSCO is responsible for directly overseeing more than 55,000 registrants and licensees in the insurance sector (this does not include insurance brokers, who are licensed by the Registered Insurance Brokers of Ontario) and more than 11,000 in the mortgage sector. We felt that these large numbers could justify the industries assuming greater responsibility for overseeing their professions, including their establishing self-regulation and consumer protection funds, as is the case in many other similar self-regulated service industries . . . If responsibility for oversight of regulated financial sectors were to fall to associations that oversaw industries, FSCO could assume the role of overseeing those associations rather than overseeing individual companies. This would require that FSCO recommend changes to the legislation that governs these professions, but it would allow FSCO to focus its resources on more serious and strategic matters pertaining to the regulated industries.12 (emphasis added)

Recommendation 9 in Chapter 3, Section 3.03, of the Auditor General of Ontario’s 2014 Annual Report, entitled Financial Services Commission of Ontario—Pension Plan and Financial Service Regulatory Oversight is as follows:

To ensure that regulatory processes exist commensurate with the size and maturity of the industries, the Financial Services Commission of Ontario (FSCO) should explore opportunities to transfer more responsibility for protecting the public interest and enhancing public confidence to new or established selfgoverning industry associations, with oversight by FSCO. Areas that could be transferred include licensing and registration, qualifications and continuing education, complaint handling and disciplinary activities. In addition, associations could be responsible for establishing industry-sponsored consumer protection funds to provide more confidence in their services by the public. FSCO should then submit such proposals to the Ministry of Finance for consideration of legislative changes that would make it possible. For regulated financial sectors, including insurance companies, credit unions and caisses populaires that have fewer registrants, FSCO, in conjunction with the Ministry of Finance, should explore the possibility of transferring its regulatory responsibilities to the federal Office of the Superintendent of Financial Institutions.13

Advocis’ position on this recommendation now follows.

The new DAA and the goals of the present regulatory review

Financial sector regulation has three major policy goals, which are: (1) the preservation and promotion of financial stability; (2) the maximizing of aggregate levels of efficiency in the financial system understood either as a whole or in terms of its various component sectors; and (3) consumer protection. The policy goal of consumer protection is simpler and more concrete – it seeks to protect consumers, often understood as retail investors, from information asymmetries, and from exposure to undue or unnecessary levels of risk. In light of this, what would be the impact of the proposed new DAA for individual financial advisors?

DAA-based market conduct regulation and supervision

Securities and insurance regulation should, when focused on market conduct, seek to promote confidence in Ontario's financial system by ensuring the fair treatment of consumers of financial products and services; the promotion of financial literacy among Ontarians; the promotion of financial stability; a reduction in financial-based crime; and the preservation and promotion of the overall efficiency and integrity of Ontario’s capital markets. Obviously much of what FSCO and the OSC currently do under their present mandates fulfills these goals.

However, financial services regulation should also protect consumers from the risks inherent in financial products and in financial services, while also establishing standards of conduct sufficient to appropriate levels of consumer protection – and all without placing an undue regulatory burden on financial intermediaries. Otherwise, the regulatory costs will be passed onto those same consumers and result in a reduction in the consumption of essential financial services, such as professional financial advice. Certain reform measures will complement and improve current levels of consumer protection. Consumer protection regulation is, almost as a matter of necessity, outcomes based — which requires financial institutions, their dealing or advising representatives, and other intermediaries, to comply with both stringent rules-based regulation, as well as with more flexible principles-based regulation.

What Advocis has set out in its Raising the Professional Bar proposal is a professional DAA framework which focuses on the behaviour at the heart of the advisor-client relationship. It would afford protection to Ontario’s financial consumers on an ex ante basis by eliminating bad actors before they can cause consumer harm. And it would provide an opportunity to quickly address emerging regulatory concerns by having a PBR-based code of conduct which could be updated as needed to ensure regulatory action is taken in the immediate aftermath of the identification of a nascent regulatory problem. For example, consider the asset-backed commercial paper scandal – how far and how deep would the mis-selling actually have gone if suitability requirements were being adhered to? If, in order to sell asset-backed paper, one had to maintain membership in a DAA (with the power to audit its member advisors and suspend those engaged in mis-selling), it is hard to see how the ABCP fiasco could have gone as far as it did.

Reforming Ontario’s financial markets regulation

Microprudential regulation focuses on protecting individual components of the financial system – fundamentally, firms such as credit unions and banks, and financial markets – to ensure that they can efficiently perform their underlying economic functions. Macroprudential regulation seeks to protect the financial system’s ability to function as a network within which those individual components can efficiently operate; as such, it seeks to address and eliminate systemic risk.

Both these forms of regulation are being executed in Ontario with varying degrees of success by one or more of DICO, FSCO, and the OSC. DICO, for example, is a model of traditional financial regulation: its current mandate focuses on deposits and solvency because, historically, these issues have been the primary concern to arise as a result of the aggregation of individuals’ money – by taking deposits from customers and then allocating their money through loans – to borrowers to invest in productive projects, such as factories. So, from DICO’s perspective, much of its mandate is designed to ensure that Ontario’s deposit-taking entities continue to function efficiently. We have proposed changes to the mandates of DICO and FSCO to improve various aspects of microprudential regulation in Ontario.

Addressing imperfections in government regulation

Nevertheless, amending the mandates of existing agencies will only take us so far. Gaps will inevitably come to light in the province’s regulatory framework, regardless of how many reform projects are implemented. In this respect we would note that the Expert Panel has stated that it is “looking for fresh ideas on how to. . . protect consumers of financial services. . . [and] maintain an appropriate balance between protecting consumers and promoting efficient markets.”14 It is to the development of such “fresh ideas” that we now turn.

The DAA model can reduce regulatory response waiting periods, ensure effective ongoing principles-based regulation, and protect consumers before harm occurs

A DAA for financial advisors would provide a level of ex ante consumer protection in terms of establishing requisite minimal standards of education and competence for advisors – a regulatory approach which is all but absent in Ontario when it comes to many of those individuals who hold out as financial advisors.

When it is introduced and put into force, financial regulation is of necessity tethered to the particular jurisdiction’s “financial architecture”—in our case, to the design and structure of Ontario’s financial markets, to its firms, and to its related institutional shareholders. To a very real extent, any particular piece of financial regulation is “frozen” at the time in which it is promulgated. Regulators try to get around this freeze by mandating in legislation reviews of the regulation on a periodic basis (say, every five years), and by relying on the more flexible approach permitted by principles-based regulation. But ongoing monitoring and updating of a piece of financial regulation can be costly, and is subject to political interference at each stage of mandatory periodic review. Similarly, principlesbased regulation is open to the very natural human risk of embracing the status quo, even at a time when the status quo may need to be changed, however modestly. And of course much of the regulatory apparatus meant to deal with issues of market conduct operates on an ex post, after-thefact basis.

The DAA model will allow for more timely and responsive regulation

Advocis believes that the creation of a DAA for financial advisors, e.g., one inclusive of life agents currently regulated by FSCO, and which reports directly to the Minister of Finance, could significantly reduce the time-lags experienced by regulators when implementing responses to emerging regulatory problems. While such time lags are inherent in formal microprudential regulation, our DAA proposal offers a means to provide for more timely policy responses to emerging issues in Ontario’s financial markets. The drivers of this enhanced time sensitivity find their basis in certain features of regulatory institutional design, particularly in regard to the fostering of appropriate incentives. Specifically, our DAA proposal would allow for more targeted and timely regulatory responses to concerns faced by Ontario’s financial consumers for the following reasons:

(1) on a textual basis: the drafting, review and final promulgation of a piece of principlesbased regulation which is to be followed by the members of the DAA can be more quickly achieved than the implementation of full-blown law and regulation (an example of this sort of textual regulatory supplement to an existing code is the Guidance Notices issued by the Mutual Fund Dealers Association of Canada (MFDA) pursuant to specific sections of the MFDA rule book);

(2) on a legal and political basis: if faced with events in Ontario’s financial markets which clearly require curative or corrective direction, it is reasonable to expect that the Minister of Finance will exercise his discretionary powers as promptly as possible, given the minister’s own sense of direct responsibility to voting Ontarians, and to his self-incentive to avoid the potentiality of political fall-out down the road, should it become apparent that the Ministry failed to take timely action when the problem was still in its nascent stages (e.g., consider how much more limited the damage from the asset-backed commercial paper scandal would have been in Ontario if the OSC’s intervention on mis-selling to retail investors had occurred in a more timely manner); and

(3) in terms of institutional incentives: the DAA, in light of its reporting obligations to the Ministry of Finance, would seek to ensure that its members’ observance of its own principles-based regulation (as set out, for example, in the DAA’s annotated principles-based code of conduct) was at all times properly cognizant of the regulatory concerns which the regulator has identified as contemporary or emerging concerns requiring specific actions by advisors. If a DAA failed to ensure that its members are properly prudent and diligent in the management and execution of their regulatory responsibilities, then it could very well risk finding itself subject to ministerial intervention and review, particularly with regard to the interpretation and enforcement of its code of conduct. Such a DAA could even be at risk of losing its DAA status. These outcomes are strong incentives for the DAA to maintain a sufficiently robust level of consumer protection.

DAAs, to survive and flourish under the reform scheme we have set out both here and in our Raising the Professional Bar initiative, must have the support of a plurality of their members. But much more importantly, an advisor-based DAA, created by FSCO to specifically focus on the behaviours which emerge at the intersecting of the advisor and the client (whether it is a one-time sale or a relationship which lasts decades) must have the trust of Ontarians and their governmental representatives – in particular, that of the Minister of Finance.

A FSCO-delegated DAA: Setting standards to protect Ontario’s financial consumers

It is difficult for Ontario’s financial consumers to know if their financial advisor has achieved a standard level of proficiency. The development of practice standards, a code of conduct, minimum educational qualifications and continuing education standards, and specific licenses or designations for certain intermediaries (i.e., a CLU designation for those engaged in wills, estate planning and wealth management) are all consumer protection requirements which can be undertaken more effectively by a DAA than by a government agency. Advocis believes that:

  • the lack of legal protection for both title and scope of the term “financial advisor” confuses and misleads consumers in terms of services offered and standards of professionalism;
  • the absence of a mandatory professional framework which clearly articulates for consumers the salient differences between financial planners, life agents, and other types of financial advisors, as well as other individual intermediaries who provide financial products and advice, should be addressed. This absence enables financial intermediaries to occasionally opt out of additional commitments to the detriment of their clients, especially if they find them too expensive or difficult to meet; and,
  • the lack of a regulatory framework which will support professional bodies in a sector-wide regulatory structure, the absence of any direct policy measures which will support consumer access to affordable financial advice, and the absence of binding regulatory measures to support consumer access to effective forms of redress, all contribute to unnecessary levels of confusion and risk exposure on the part of Ontario’s financial consumers.

Advocis therefore supports the following regulatory reforms:

  • the development and implementation of a modified “Twin Peaks” regulatory design, which recognizes and facilitates the role of a new approved professional DAA in assisting the Ontario Ministry of Finance and regulatory agencies in achieving their consumer protection and confidence mandates;
  • the establishment of a public registry which is managed by the new DAA with a requirement for all financial advisors who sell product and/or provide personal advice to be individually registered; and
  • the granting to the new DAA of powers of suspension regarding life agents suspected of material breaches of the DAA’s Code of Ethics.

Questions 10 - 11: Scope of Responsibility

10. What areas of responsibility could be removed from/or added to the mandates of FSCO or DICO?

The current mandate of DICO is to provide deposit insurance for depositors in credit unions, and to promote standards of sound business and financial practices for member credit unions. In fulfilling these responsibilities, DICO may examine the affairs of member credit unions. As we have stated earlier, FSCO’s current responsibilities for credit unions and caisses populaires should be transferred to DICO. In light of the recent increase in the complexity and size of Ontario’s credit unions, Advocis believes that now is the time for DICO to become the agency fully responsible for enforcing in the province’s credit union sector prudential policies, supervisory requirements, and the framework for market conduct. To do this effectively, DICO should look to the regulatory approach used by the Canadian Deposit Insurance Corporation for federally regulated financial institutions.

In Ontario, the Auditor General of Ontario’s 2014 Annual Review recommended that FSCO improve the effectiveness of its regulatory oversight of co-operative corporations. We would suggest that this responsibility should also be transferred to DICO, to ensure that the unique aspects of the province’s credit unions and co-operative corporations (often smaller-capitalized, and governed by less rigid rules) be allowed to continue to develop under the auspices of a regulator which would not be, a priori, be mandated to implement the more formal regulatory approach of a securities agency like the OSC.

11. Should DICO continue to act as liquidator of failed credit unions?

Yes. This is in keeping with the vision of an enlarged DICO set out in response to Question 5, above.

Questions 12- 15: Corporate Governance

12. Is the commission structure of FSCO effective, or should consideration be given to establishing a clearer board-governed framework? Should there be a separation of the Superintendent and CEO functions? Should the Superintendent/CEO be a member of the Board?

In light of the reforms to FSCO which we have proposed, we would suggest that the current commission structure of FSCO be retained and re-focused on insurance concerns. If an independent FST is put in place, there may be no reason to separate FSCO’s Superintendent and CEO functions. It is important that the placing of insurance as FSCO’s sole responsibility be given recognition through the appointment of commissioners familiar with the industry.

Accordingly, a committee which would canvass the province’s insurance industry should be struck to determine how to better structure a revised FSCO, in order to better serve Ontario’s financial consumers and other industry stakeholders. It is critically important that a new FSCO be able to conduct regulation by reliance on specialized senior commissioners who in turn are supported by a staff of expert senior managers. Along with the technical and administrative expertise demanded by the proper regulation of insurance, FSCO’s own governance should be reflective of the importance of professional insurance advice in the financial planning of the province’s citizens and indeed the crucial role the capital controlled by insurers can play in the province’s financial future.

13. Should there be a clearer separation of governance of the FST from FSCO to improve independence and avoid perceived conflicts of interest?

Yes. Advocis supports the creation of an independent adjudicative tribunal.

14. Should the cross appointments of the FSCO Chair and Vice Chairs as the FST Chair and Vice Chair be removed and an independent board for the FST established?

Yes.

15. Is the board governed structure of DICO effective? If not, what alternate governance structure should be given consideration? Should the President/CEO of DICO be a member of the Board?

Given the reforms to DICO which we have proposed, the size of DICO’s board should probably be increased, and the nomination process for DICO directors revised to better emphasize the relevant skills and expertise required to be an effective DICO board member.

CONCLUSIONS AND LOOKING AHEAD

Actual financial regulation tends to be imperfect. Like anyone else, the public and politicians – and even policymakers and regulators – are apt to be influenced by both popular and trade media, which can unwittingly paint a distorted portrait of a state of affairs by unduly emphasizing what journalists find interesting, understandable and accessible. In financial regulation, this distortion tends to become most manifest in the wake of a financial crisis; people naturally want to understand what happened, why it happened, and how to learn from it to prevent the next crisis. Regulators, post-crisis, often find themselves being expected to devote more resources than they would like to the concerns of the day (that is, to the crisis of yesterday), understandably may feel they are being buffeted by forces of political short-termism. The typical post-crisis outcome is therefore a focus on preventative regulation – and in particular regulation aimed at preventing the previous financial crisis from happening. But, on its own, this focus is always too narrow, because it is simply not possible for policymakers and regulators to always be able to see the causal elements of the next financial crisis coalescing on the horizon. It is for these reasons that we feel the Ontario government has shown tremendous foresight – and farsightedness – in its commitment to reviewing how financial advice is supplied to Ontarians, and by whom. We would urge the Ontario government to follow through on certain suggestions made by the province’s Auditor General to delegate the responsibility for the actions of life agents to a professional membership organization, one which would be accredited as a professional DAA.

Any undertaking to reform the FSCO mandate should also be seen as an opportunity to address and alleviate current instances of inefficiency and unaccountability, as well as cases of unnecessary complexity or disproportionate levels of regulatory scrutiny. We have attempted to set out the parameters for a potential reform of the FSCO, FST, and DICO mandates in order to lead to the cultivation of ethical norms for financial advisors. The continued growth of interconnected financial markets, as well as the institutions that operate within them, all but guarantees that future crises which will require innovative regulatory responses will occur, and very likely with little warning. Ontario’s regulatory apparatus will need to be adaptable to the changing financial economic landscape.

The use of DAAs as a supplement to Ontario’s conventional forms of regulation (which are being placed under considerable strain) will be an effective way of deterring socially undesirable behavior by individual financial services practitioners. Before Ontario firms begin to adopt the U.S.-style approach – recently exemplified by the actions of JPMorgan Chase, among others – to seeing regulatory fines less as an indication of misconduct to be avoided in the future and more as simply the cost of doing business, the self-regulation of life agents represents an opportunity to engender a culture of ethics within the financial services industry — one that would be pervasive in and amongst individuals, while also being embedded within financial firms, and yet insulated from the internal governance structures of those institutions. It is possible this form of self-regulation may eventually prove to be more effective than conventional regulation in the long term. But for it to succeed, the support of agencies which regulate macro-prudential level and those which enforce stringent rules-based norms of market conduct will be necessary.

Advocis would be pleased to offer further comment or assistance on this matter at any time in the future. To discuss any of the issues that we have raised, please contact the undersigned, or email Ed Skwarek at eskwarek@advocis.ca.

Sincerely,
Greg Pollock, M.Ed., LL.M., C.Dir., CFP
President and CEO

David Juvet, CFP, CLU, CH.F.C., CHS, FLMI, AMTC
Chair, National Board of Directors

Additional resources are included in the PDF

[1] Online at http://www.advocis.ca/regulatory-affairs/RA-submissions/2013/Modernizing-Disciplinary- Hearings-for-Insurance-Agents-and-Adjusters.pdf.

[2] According to the City of Toronto website. “Toronto ranks 4th in the 2014 PwC Cities of Opportunities Study; 6th of 56 international financial centres in the 2014 Banker IFC rankings; and 11th of 82 cities in the 2015 Global Financial Centres Index (GFCI). The city also boasts one of the highest concentrations of financial services company headquarters in the world. Toronto is where global financial decisions are made. With more than 245,000 people working in the sector, the Toronto region is the 3rd largest in North America after New York and Chicago.” City of Toronto, “Key Industry Sectors – Financial Services,” May 26, 2015. Online at: http://www1.toronto.ca/wps/portal/contentonly?vgnextoid=ea15c1b5c62ca310VgnVCM10000071d60f89RCR D&vgnextchannel=401132d0b6d1e310VgnVCM10000071d60f89RCRD.

[3] Ontario Ministry of Finance, Review of the Mandates of the Financial Services Commission of Ontario, Financial Services Tribunal and the Deposit Insurance Corporation of Ontario: Consultation Paper, April 21, 2015, p. 2. Online at http://www.fin.gov.on.ca/en/consultations/fsco-dico/fsco-dico.html.

[4] Ibid., p. 11.

[5] Ontario Expert Commission on Pensions, A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules. October 31, 2008. Online at http://www.fin.gov.on.ca/en/consultations/pension/report/.

[6] Office of the Auditor General of Ontario, “Province Should Better Protect Pension Plan Members, Auditor General Says,” December 9, 2014. Online at www.auditor.on.ca/en/news_en/14_newsreleases/2014news_3.03.pdf.

[7] Ibid.

[8] Office of the Auditor General of Ontario, Annual Report 2014 (Office of the Auditor General of Ontario), p. 7.

[9] Advocis, The Financial Advisors Association of Canada, Raising the Professional Bar: Greater Consumer Protection Through Higher Professional Standards, February 20, 2013. The proposal and related regulatory materials – including how the DAA model could be implemented – are available online at http://www.advocis.ca/raisethebar/.

[10] Ontario Ministry of Finance, Consultation Paper, p. 11.

[11] Ibid, p. 10.

[12] Auditor General of Ontario, Annual Report 2014, pp. 151-152.

[13] Ibid., p. 153.

[14] Ontario Ministry of Finance, Consultation Paper, p. 2.