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The financial industry's long path to putting the client first

Lawyer and former OSC chairman Ed Waitzer fears the ‘fiduciary duty’ proposal will languish for years.

Della Rollins/The Globe and Mail

Opposition to a proposal to create a tougher standard of care in the financial industry is leaving one of the staunchest supporters of new regulation dismayed that a long-fought battle could drag out for more years to come.

After years of study, Canada's securities commissions issued a consultation paper last week asking for comments on the idea of stiffening the legal duties owed by financial advisers to their customers when recommending investments.

While advisers are now required to recommend "suitable" investments to their clients, a proposed "fiduciary duty" rule would make it mandatory to act in the best interests of clients at all times.

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The higher duty of care could have profound implications. A fiduciary duty – similar to standards imposed on doctors and lawyers – requires always recommending the best choice for the client without regard to which product may pay more fees or incentives to the adviser.

The consultation paper from regulators takes no position on the issue, but asks for comment on key issues about whether a fiduciary duty would change anything significant about how advisers work. There is no promise that regulatory change will result from the consultation. If regulators opt to proceed, they would need to draft and publish specific proposed reforms for further comment.

The neutrality of the paper, the slow pace of movement on the issue and the strong industry opposition that has emerged to the proposal have all dismayed lawyer Ed Waitzer, a former chairman of the Ontario Securities Commission who has been championing reform.

The "fiduciary duty" idea has been around for 20 years, he says, and with the headwinds of opposition it is facing, it may languish for years to come. "This could easily become one of their intergenerational projects," he warned.

In the meantime, Mr. Waitzer said he worries that Canada's securities commissions are "ragging the puck," by writing a complex consultation paper that gives them the appearance of being busy on the file while not actually pushing ahead on reform.

The "worst of all worlds" is to keep waiting for action on an issue that will never proceed, he argues, and the better option could be to move ahead with a different idea, such as simply banning certain types of commissions for investment advisers, as Britain has done.

However, Ontario Securities Commission vice-chairman James Turner said progress is being made.

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"This is an important step to have the [regulators] go out with a consultation paper on this proposal. Clearly it's a matter on our policy agenda," Mr. Turner said. He argues the consultation is necessary because there has not been a "full canvassing of views" on the issue in Canada.

Securities regulators have had input from the investment industry, however. The Investment Industry Association of Canada, an industry organization for brokerage firms, has met with Canadian Securities Administrators officials and submitted a paper on the issue last year questioning whether reforms would have any practical value, said IIAC policy director Michelle Alexander.

"We are pleased the paper is looking at industry concerns … and they're really seriously considering whether or not a fiduciary standard should be introduced in Canada," she said. "We're pleased that they haven't decided at this point that a major overhaul is required of the statutory requirements."

The industry fears new legislative requirements could be heaped on top of newly tightened industry rules governing conflicts of interest and disclosure of fee information to clients. A fiduciary standard could be redundant at a minimum, and carries risks of unintended consequences, Ms. Alexander said.

One risk is that all commission-based transactions could be viewed as inherently conflicted, requiring a substantial shift to new sorts of arrangements whereby advisers charge annual fees for their work rather than earn fees from commissions on trades. And that could be far more expensive for many clients, she warned.

Rick Nathan, managing director of investment firm Kensington Capital Partners Ltd., said he does not believe a fiduciary duty standard would actually change how advisers deal with clients. He said the industry already sees its role as helping clients pick suitable investments.

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"I'm not sure it would make much difference," Mr. Nathan said, when asked about the issue while speaking on a panel at an OSC event on Tuesday. "Because I actually believe most advisers wouldn't understand the additional legal context … I don't think it would change their behaviour."

Mr. Waitzer argued the introduction of a fiduciary standard would have a powerful effect on how investment advisers approach their work and make recommendations to clients, noting that similar reforms have had a big impact on the work of other professionals, including pension fund trustees and corporate directors.

"It tremendously changes" how you approach your work, he said.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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