Consumer groups leading charge for fund industry reform

(September 28, 2004) There’s optimism that the involvement of consumer groups will lead to substantial change in Canada’s much-maligned mutual fund industry. CARP, Canada’s Association for the Fifty-Plus, and the Small Investor Protection Association (SIPA) today officially released a report calling for numerous fund industry reforms, including the establishment of a new Investor Protection Agency.

“We want to create a sense of urgency,” said SIPA’s Ken Kivenko at a news conference today in Toronto. “The gap between Canadian and U.S. investor protection is growing and the issues are becoming increasingly serious. We intend to fill the void in investor advocacy in Canada. This is not going to be just another study.”

CARP presented the 20-page report — which includes 17 recommendations for change — to MP Tony Ianno, minister of state responsible for seniors, who promised to pass it on to his colleagues in finance for further study. “I’m optimistic we can find ways to solve some of these problems, without necessarily jumping into other people’s jurisdiction.”

Toronto advisor John De Goey, who also attended today’s news conference, says he’s pleased to see consumer groups like CARP putting pressure on politicians.

Although previous reports, such as Glorianne Stromberg’s extensive studies in the 1990s, contained similar and more detailed recommendations for reform, things are different today, De Goey believes.

“In the past, there was not a sufficient number of voters who understood the importance of this. We’re at a tipping point now, with the fund trading scandals and such. We have thousands of consumers who are going to make sure this gets on and stays on the agenda.”

But not everyone is welcoming the CARP report. Advocis, the country’s largest association of advisors, says while it commends the initiative, the study is flawed in a couple of ways.

“One, it focuses only on mutual funds,” says Advocis spokesperson Caroline Spivak. And although the report does make several advisor specific recommendations, such as annually updating “know your client” forms and disclosing all fees and compensation, there’s no mention of proficiency standards. “The real issue is establishing uniform high standards of proficiency for advisors and separating transactions from advice-giving,” Spivak says.

Still, the report could force advisors to “pull up their socks,” De Goey feels, “to be ethical, to be transparent and to put their clients first. If they start doing things that are contrary to those objectives, they will be held to account.”

In a lengthy rebuttal, the IDA says the CARP report includes a number of “redundant recommendations and inaccuracies.” For instance, CARP calls for the establishment of a central registry of industry participants, which the IDA says already exists, through the national registration database.

The IDA also takes issue with the report’s assertion that securities regulators do not seek input from investors on recommended regulation or policy reforms.

“The Canadian Securities Administrators (CSA) comprised of provincial securities commissions has a long-established public comment and review process in place,” the IDA says. “Proposed IDA rules must be approved by the CSA and only following a period of public comment and review.”

CARP recommends that undisclosed marketing arrangements that could encourage financial advisors to recommend one fund over another for personal or corporate gain should either be disclosed or prohibited.

“For many years, Canadian regulators have had rules in place that prohibit compensation arrangements that create unacceptable conflicts of interest in the sale of mutual funds,” the IDA says in response.

The brokerage industry association also says that it disagrees with CARP’s suggestion that all investigations of advisors or firms should immediately be made public.

CARP says this would permit investors to make a more informed decision on whether or not to open an account with a prospective dealer.

But the IDA believes a public announcement that an individual or firm is under investigation is unfair and can have potentially serious negative financial consequences for the respondent and could damage its reputation. “Disclosure should only be made when the investigation has established reasonable grounds to proceed with a public hearing.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(09/28/04)

Doug Watt