The Canadian Securities Administrators (CSA), together with IIROC and the MFDA, have released a notice and request for comment on a series of amendments to National Instrument 31-103 and Companion Policy 31-103CP as part of their ongoing Client Relationship Model (CRM) project.
The proposed amendments would do the following:
• Enhance the current disclosure of charges in the Rule related to the operation of an account, and the making, holding and selling of investments.
• Enhance the current disclosure of the compensation received by a registered firm, particularly relating to charges such as trailing commissions and deferred sales charges, which are not always well understood by investors.
• Provide guidance in the Companion Policy on inappropriate switch transactions and the resulting compensation received by registrants, which may not be as transparent as other types of charges.
• Add a requirement to include information on the original cost of securities in the account statement.
• Add new account performance reporting requirements that would assist investors in determining how their account is performing.
The results of an investor survey conducted by the CSA last summer figured into the development of the proposals. According to the notice, the survey data showed:
• Most investors lack the information needed to make informed decisions about their accounts.
• Conveying important information in technical language “is often the same as not showing it at all because investors will tend to ignore complex data or terminology that they don’t understand.”
• Investors place a higher value on more detailed rather than more frequent reporting.
The CSA also consulted with dealers and advisors on current practices, and “learned that many registrants already provide some or all of the information required in the proposed amendments to their clients or certain groups of their clients.” The report adds that some raised concerns about the cost in time and resources the preparation of performance information would entail.
“In response to these concerns, we have provided for a phased introduction of the proposed new requirements. We believe that the potential benefits of the performance reporting proposals merit the incremental work that registrants would need to undertake to implement them,” the notice says.
Another band-aid
Dave Velanoff, president of MGI Wealth, is less than enthusiastic about this latest round of regulatory proposals. In his view, the amendments amount to putting a band-aid on the symptoms of an illness afflicting the industry, rather than performing the major surgery needed to cure the problem once and for all.
The problem, Velanoff suggests, is that the industry lacks of a set of educational and professional standards on the model of the legal and medical professions. To become a lawyer you go to law school. To become a doctor you go to medical school. And to become a financial advisor?
Velanoff argues that because this question can’t be answered in a way that mirrors what a doctor or lawyer would say—a dedicated university degree program—and because there is no industry board or association on the same level as, for example, the Canadian Medical Association, the industry ends up having to call in lawyers and accountants—who themselves are not industry experts—to handle the regulatory side of the industry, with less than desirable results.
“One advisor will have his CFP and CLU, he’s been around a long time and knows his stuff, while another was in a totally unrelated field and became a financial planner overnight,” he says. “So what do the regulators do? What would you do if you were them? They don’t understand the industry so every time they see a problem they’ll just plug a hole with another rule—they’re forced to manage by the lowest common denominator.”
Velanoff emphasizes that the target of his criticism is not the lawyers and accountants serving as regulators. “They don’t have a choice—they’ve been put in a tough position. They’ve been asked to regulate something they’ve never done for a living.”
“This particular release, in addition to the many others we experience in our industry, comes back to the lack of professional status from where professional status is truly recognized, and that is at the university level—a degree and maybe a degree beyond a degree that demands adherence to a financial services code of professional conduct. The adherence to a code and the six figures that the advisor has invested to get the degree will eliminate the need for many of these rules,” Velanoff concludes.