In 2017, the Investment Funds Institute of Canada (IFIC) published a report examining the latest regulatory developments around the globe. The report tracks the initiatives and efforts of 16 key international markets on how they have addressed potential conflicts of interest in the sale of investment products to the public.
While the 16 countries and regions included in the report do share some similarities in their approach to addressing issues of investor protection and conflicts of interest, there is a general lack of consensus on “the perfect solution”.
The most common regulatory initiatives identified in the report were: requiring enhanced disclosure to investors, carrying out targeted reforms to improve the advisor client relationship, imposing a fiduciary duty or best interest standard on advisors, and banning embedded commissions.
A deeper dive into the regulatory initiatives
From the analysis, the report identifies several significant trends:
- A limited number of jurisdictions have chosen to ban embedded commissions
Considered to be the most extreme measure, only four jurisdictions (Australia, the Netherlands, the U.K. and South Africa) have made the decision to ban embedded commissions. The report identifies several countries (i.e. Sweden, Hong Kong, Germany, New Zealand, and Singapore) that have contemplated this option but have rejected the notion of a total ban on embedded commissions.
Canadian regulators have yet to determine whether they will proceed down this route.
- The majority of markets have not imposed a fiduciary or best interest standard
Of the countries studied in the report, only Australia has adopted a broad statutory best interest standard in place for advisors involved in selling funds to investors.
Although the U.S. introduced regulations to require advisors to follow fiduciary standards when providing advice to retirement accounts, it has yet to be fully implemented.
In Canada, there is a lack of agreement amongst the provincial and territorial securities commissions on whether a best interest standard should be imposed on advisors.
- Enhanced disclosure is a preferred solution for most jurisdictions
Aside from the U.S., every other country or region in the report has adopted initiatives to increase transparency and enhance disclosure to investors. This disclosure has primarily been in the form of providing more detailed information to investors regarding the fees and commissions they pay.
In the past few years, Canada has introduced several regulatory changes that have improved transparency through disclosure. These initiatives include point of sale and client relationship model (CRM1 and 2) regulation. Investors now receive detailed annual reporting of their investments that includes both fees and performance.
- It is too early to determine the impact of those markets that have made sweeping changes
It is still early days for most of the regulatory initiatives resulting in insufficient data to evaluate their true impact on the industry and investors. However, some research has been conducted in select jurisdictions; this early evidence can offer insights to other regulators that are considering similar reforms.
- Targeted reforms may be a better way to limit unintended consequences
There is concern that unintended consequences, including higher costs for investors, fewer product choices, or reduced access to expert advice, may result from the implementation of regulatory changes. Utilizing targeted reforms appear to be a better way to address the issues at hand while limiting potential unintended consequences.
What does it all mean going forward?
In Canada, regulators often look at other nations to understand how they regulate their industries and the measures they introduce. It’s important to note that each of Canada’s 10 provinces and 3 territories has its own regulatory body. There’s a concerted effort to harmonize securities regulation across the country, under the umbrella organization, the Canadian Securities Administrators (CSA).
The CSA’s regulatory changes have focused on transparency and disclosure. But they have also launched consultations into whether other actions, such as banning embedded commissions and imposing a regulatory best interest standard, would be warranted. More understanding of the issues and consideration of the alternatives is needed to ensure investors benefit from any regulatory changes. The landscape continues to evolve for both the industry and investors.
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