Fair dealing model fails — Advocis

(January 30, 2004) Yesterday’s release of the fair dealing model concept paper by the Ontario Securities Commission (OSC) has been met with a heated response from Advocis.

“This smacks of regulatory opportunism in an area where the OSC has no experience or qualifications,” said Steve Howard, president and CEO of Advocis. “It seems more interested in extending its authority than in addressing the fundamental systemic problems.”

He says the best practices recommended under fair dealing would actually erode the standards already in place under various self-regulating organizations (SROs). His real concern is that standards will be brought down to the lowest common denominator and that OSC should use the highest standards as a starting point.

“The existing accreditation process provides assurance to consumers that they can rely on the advice they receive,” said Howard. “What the fair dealing model lacks, in our view, is a definition of what is ‘good advice’ and who’s qualified to give it.”

Howard says one of the key failings under fair dealing is that compliance monitoring would remain in the hands of dealer firms. He says the approach taken assumes advisors to be the employees of big banks or securities firms, ignoring the thousands of independent advisors. That independence offers some of the best protection the client could ask for.

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“What they’re ignoring is the need to position the advisor independently and to have the advisor operate in the consumer’s best interest,” he says. “The shift they should have made is to shift the model to one where the advisor works with a more independent-minded attitude. To do that is simple — simply require the advisor to have professional qualifications and live up to professional standards.”

Howard says the OSC has ignored the existing organizations best suited to the implementation of such a best-practices model. The issue of whether an advisor is an employee or is independent is reflected in the organizations he says the OSC is choosing to work with.

“The IDA is not an SRO — it’s conflicted between whether it’s a trade association or it’s a regulating organization, because companies are the members, not advisors,” Howard says. “Wouldn’t it have made more sense to push this model out to where the advisor community is recognized and overseen?”

He says the SROs the OSC should be working with are the Financial Planning Standards Council (FPSC), the Canadian Life Underwriters (CLU) Institute or the Association for Investment Management and Research (AIMR).

“If you look at the FPSC and the CLU Institute, they’ve defined best practices,” he says. “Their best practices incorporate everything that is in the fair dealing model, but more important, their best practices were developed with reference to what were the errors and omissions claims that we are actually being experienced. Where is that kind of stuff in the fair dealing model? It’s nowhere to be found.”

But Julia Dublin, senior legal council at the OSC, defends the regulators move, saying it was about time the commission caught up to the realities of the financial industry.

“If we’re criticizing anybody, we’re criticizing ourselves,” she says. “We’re saying our regulatory regime — that we’re living with and trying to manage and administer — is out of sync with the business model the industry has evolved into. The [four] pillars have been down for nearly 20 years and they’re not down at the regulatory level.”

Because so many products, each governed by a different regulator, can converge in a single account, Dublin says the proposed model would streamline reporting for advisors.

“An individual advisor can be reporting to three regulators, if not more, in respect to the same client conversation and the same client account,” she says. “We think we have the potential to make that a little more efficient without anybody losing their responsibilities.”

She says the existing SROs are free to participate in the continuing consultations on fair dealing and the OSC will need their co-operation for the implementation of the new model.

“It’s not, as some people have suggested, a blueprint for eliminating all SROs,” Dublin says. “SROs don’t have to be single-product based. The value of self-regulation doesn’t change. The role of SROs will not change by moving away from a product-based regulatory model.”

But she admits, “An industry that is no longer product-based becomes problematic, in a way, for product-based SROs.”

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What do you think about this matter? Is the fair dealing model an unnecessary level of regulation? Or will it improve investor confidence? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(01/30/04)