Fair dealing concept paper in drafting phase

(December 9, 2003) Two hundred and forty advisors have submitted comments on the Ontario Securities Commission’s (OSC) controversial fair dealing model since a special interactive Web site was set up last year. The long-overdue fair dealing concept paper is now in the drafting phase, and should be released “fairly soon,” says the OSC’s Julia Dublin.

“We’re making some final adjustments,” Dublin said last week at the Canadian Institute’s annual mutual funds symposium. “The process has taken longer than expected.”

The fair dealing model is an attempt to shift the focus of securities industry regulation from products to the advisor-client relationship, and to clearly define that relationship.

“There’s a groundswell in the industry for advisors to be freed up to evolve toward to a professional kind of relationship,” said Dublin, the OSC’s senior legal counsel. “Our model does not eliminate the sales function, but it supports the professional advisory sector.”

Under fair dealing, clients would choose from three types of advisory relations: self-managed, advisory and managed for you. “Every relationship must fall into one of these categories, because that determines the level of reliance and conduct standards flow from there,” Dublin said.

Know-your-client forms and investment policy statements would be replaced by an all-encompassing fair dealing document. “This continues to freak people out,” Dublin conceded. “The emphasis is on transparency. The courts get very upset if there’s a lack of transparency about anything in the advisory relationship.”

Investor education would also become part of an advisor’s duties in an advisory relationship.

Comments on fair dealing have been mixed. “Investors like the approach and a lot of advisors kind of like the approach,” Dublin said. “[Advisors] are concerned about conflicted compensation, they like the proposed discipline on advisor’s objectivity and they agree that current account documentation is inadequate.”

Embedded compensation and the danger of an inherent conflict of interest is a big issue, Dublin said. “There’s a lot of debate about whether the client knows what they’re paying or whether the advice is being influenced by compensation bias.”

“The easy answer is to prohibit it and make all compensation paid directly by the investor to the service provider.” Greater transparency of fees is another option, but few investors would have the patience or the required knowledge to do those kinds of calculations, Dublin said.

Another suggestion is to make the third-party compensation provider responsible for the actions of the advisor. “Creating this extra tier of liability might not be palatable for the third parties, but it’s theoretically justifiable,” she said.

One of the main objections to fair dealing is the cost of revamping current regulations. Dublin said the OSC is preparing a cost-benefit analysis, but noted that in many cases, existing rules would simply be replaced.

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Dublin also rejected complaints that the commission is trying to regulate every word advisors say and is undermining investor confidence by even suggesting that there are problems.

“A lot of investors and advisors are concerned about these issues and don’t want investor confidence to be misplaced,” she said. “We think we’ll produce a higher level of trust through this notion of fair dealing.”

Advisors also expressed concern that other provincial regulators are not currently involved in the fair dealing project. Dublin said there is interest on the part of the Canadian Securities Administrators (CSA), but adds, “We’re still in the laboratory. Once we flesh it out, then I think we’ll get our CSA colleagues and maybe some of our insurance colleagues more engaged because we don’t think we could bring this in in just one province.”

It seems clear that any implementation of fair dealing is still a long way off. Once the initial concept paper is released, the OSC will create six industry working groups, who will attempt to figure out how fair dealing could work in practice. That process is expected to last six months, Dublin said, followed by the publication of a second concept paper. Only after that would the OSC tackle draft legislation and specific rules.

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What do you think of the fair dealing model as Dublin explains it here? Will this initiative benefit you and your peers, or will it hurt your client relationships? Share your opinions about the fair dealing model in the Talvest Town Hall on Advisor.ca.

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

(12/09/03)

Doug Watt