Financial planning gets a regulator

The Investment Industry Regulatory Organization has become the first regulator to propose rules about how its members supervise the non-securities related — or “financial planning” — business of their advisors. While the rules are broad in definition, they could potentially change the way dually licensed advisors do business.

The proposed rule, which was introduced at the end of July and is being sent to the provincial security commissions for review, has two purposes. It seeks to ensure that minimum education and proficiency standards are met by those providing financial planning services for a dealer member and that those dealer members ensure minimum standards are met in the supervision of employees or agents providing financial planning services.

“This is really to provide a framework for the providing of financial planning. That’s the whole sum of it,” says Richard Corner, vice-president of member regulation policy for IIROC. “There are no mandatory proficiency requirements, just a guidance note that has proficiency considerations listed.”

The proficiency guidelines shouldn’t be much of a concern for advisors who engage in financial planning. Almost all of the major designations and educational credentials from the Canadian securities course to the CFP are accepted as good bases for proficiency.

As for written policies and procedures, dealers will have flexibility in using literature from numerous sources, including the CFP Financial Planning Practice Standards, Principles & Practices for the Sale of Products & Services in the Financial Sector, sponsored by the Joint Forum of Market Regulators, or Advocis’s Best Practices Manual.

What isn’t clear is how dealers will apply these proficiency guidelines to their member advisors and what exactly will be considered financial planning. Depending on the standards applied, it’s conceivable that non-securities business such as tax and estate planning or insurance planning would fall under the tighter supervision of the IIROC dealer firm that an advisor is registered with.

Julia Dublin, a Toronto-based barrister and solicitor with Aylesworth LLP, doesn’t think there will be much of an impact for IIROC advisors because the definition and proficiencies are so broad.

“If someone is calling themselves a financial planner and they are an agent of an IIROC member — and are therefore following the specific many-steps process and delivering the sort of self-funded pension — they will be required to have some kind of additional type of proficiency and some sort of compliance documentation process in place,” she says. “If you look at IIROC’s definition of financial planning, it’s not really a definition of financial planning; it’s more like a marketing statement. It’s not, from the point of view of a lawyer, much of a definition.”

It also grants exemptions to advisors who offer planning advice but specifically focus their business on investments. These types of advisors are not considered financial planners under the rule.

“It carves out whatever an activity might be if it has to do with the sale of a product — so it kind of lets the big producers off the hook,” Dublin says.

However, it could be another story for IIROC-licensed advisors who have expanded their business into insurance or tax planning, says Prema Thiele, a partner at Borden Ladner Gervais in Toronto.

“What the regulators have found is that it’s very difficult to define what is ‘financial planning’, therefore very difficult to divorce those sorts of services that are provided by these types of firms,” she says. “Does it cover financial planning services outside of the securities universe of financial planning? I would say absolutely because to me a financial plan is all of that. It talks about all sorts of different things. They certainly want the whole activity to come under this rule. That’s how I read it.”

For Ami Maishlish, an industry observer, this is a worrisome development. Maishlish is concerned that with this rule, dealer firms will have the ability to dictate to advisors how they conduct their insurance business. There could be spillover that would affect insurance advisors who have a relationship with IIROC registrant advisors.

“If an insurance advisor is doing his job right, he’ll research the market and make suggestions to you. In the course of doing his work, he’s establishing what the situation is and what the need is. If you look at the IIROC proposal, you will see that they consider that to be financial planning,” he says. “If the intermediary happens to be holding a mutual fund salesman’s license under a dealership that is an IIROC member, all of a sudden if the insurance person wants to do even simple fact-finding or general recommendation, he must be approved by the dealer to do that.”

Maishlish says this could create a new system of de facto captive agents within the IIROC system, limited by the dealership in its selection of product advice.

“My biggest concern is the independent advice that a consumer has a right to is being compromised by regulation like this. I have no problem with the education requirement, and I actually encourage that. I have no problem with the ethics requirements, and I encourage that,” he says. “I do have a problem with a dealer that has a vested interest in meeting contract volumes and so forth controlling what is going to be presented to the consumer. I call that censorship without cause.”

IIROC says it is in no way expanding its jurisdiction beyond its membership. These rules will apply only to advisors who are registrants of IIROC member firms. Nevertheless, Thiele suspects that other regulators and insurance advocacy groups may be looking for more clarification on the proposed rule during the comment period.

“They are not purporting to regulate the provision of insurance per se. They are not usurping the FSCO [Financial Services Commission of Ontario] or the registered insurance brokers or anything like that in terms of the regulation of the advice on insurance,” Thiele says. “Let’s not say that all of a sudden the IIROC is regulating the distribution of insurance in the provinces — that’s not what it’s doing here. I wouldn’t be at all surprised to see clarification comments coming from other regulatory constituents in the marketplace and the industry associations on the insurance side.”

Thiele says that IIROC’s attempt to give a definition is interesting, though, since no such rules exist anywhere for provincial securities commissions. Usually IIROC’s rules are made in response to changes in provincial security regulation.

“There has always been a question as to whether these sorts of businesses [financial planning] can be conducted within a dealer, or does it have to be regulated differently for members? That was sort of left as a policy decision for member regulators,” she says.

She expects that now that IIROC has set the precedent, though, other regulators, most notably the MFDA, will follow suit with a similar rule.

“I’m sure you’ll see following this rule a revised rule coming from the MFDA of similar sorts,” she says.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(08/14/08)