Fair dealing’s advisor committee takes summer break

(July 26, 2004) When the Ontario Securities Commission released its fair dealing model earlier this year, it also set up six industry working groups to work through the concept paper. Toronto advisor John De Goey gave Advisor.ca an inside look at the advisor transition committee, which is currently on a summer hiatus.

“Our committee talks about how advisors would make the transition to fair dealing, so we talk about using fair dealing documents, the disclosure of compensation, the alignment of interest between advisors and clients and letters of engagement so that both parties know what their rights and obligations are,” De Goey says.

De Goey, an author and senior financial advisor with Assante in Toronto, has also been taking the fair dealing document for a test drive, showing it to prospective clients to see how it would work in practice.

Not surprisingly, the biggest controversy the advisor transition committee has faced surrounds compensation, specifically the OSC’s suggestion that third-party or embedded compensation either be subjected to increased disclosure or prohibited outright.

It’s no secret that De Goey favours the latter option, but he admits he’s in the minority. “Embedded compensation creates bias, so disclosing the bias is not as good as eliminating the bias,” he maintains.

“The impression has taken hold, and many advisors have perpetuated the myth, that advice is free,” he says. “Advisors are going to have to admit that compensation is a factor in the recommendations they make and that advice is not free.”

Despite his strong beliefs, De Goey concedes that he has lost the argument on outlawing embedded compensation and is now turning his sights on more and better disclosure, suggesting that prospectuses and fund statements contain large warnings about performance and risk, similar in tone to the stark warnings on cigarette packages.

Looking at the bigger fair dealing picture, De Goey reports that the Ontario initiative is getting some support in the rest of Canada, including B.C. and — perhaps surprisingly — Quebec.

“B.C. has floated the trial balloon of principles-based regulation, which is quite similar to the OSC’s advice-based model,” he says. “Quebec is the only province that actually regulates financial advice and they’ve been saying all along that it’s not about product, it’s about advice and the rest of the country is finally getting it.”

But fair dealing’s fortunes are closely tied to other projects aimed at harmonizing securities regulation in Canada and that’s one of the reasons the advisor transition committee has decided to take a break until the fall.

“We were told to come back in September when we’ve got a better sense of the lay of the land politically in terms of harmonization,” De Goey says, suggesting that the federal government will first allow the provinces to make an attempt at getting together on securities regulation before stepping in and imposing a solution.

“In a minority situation, the preference would be to let the provinces work something out. But if they can’t, I believe the political will exists to impose a single regulator if the passport model fails.”

The fair dealing model could end up as the de facto framework if, and when, politicians can agree on a harmonization process, De Goey believes. But that’s a process that could take several years.

In the meantime, De Goey expects that harmonization and fair dealing will continue on parallel tracks as regulators work towards reforming the country’s fractured system.

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