Ontario regulator unveils fair dealing model

(January 29, 2004) The Ontario Securities Commission (OSC) unveiled its “fair dealing” concept paper today, outlining its plan for a transition from product-based regulation to relationship-based rules.

“It’s really just a change in our focus, rather than increasing the scope of what we regulate,” said Julia Dublin, senior legal counsel for the OSC. “The fact is there’s nothing we’d be prescribing that we don’t already have rules that govern. The point of fair dealing is [the rules] are not as focused on the essence of what is unchanging — and therefore should be the charge of the regulatory system.”

The new regulations would classify client relationships as self-managed, advisory or managed-for-you, with varying levels of responsibility allocated between the advisor and the client.

“The fair dealing model really hails what are largely the best practices that we’ve found in various places in the industry,” says Paul Bates, an OSC commissioner. He believes the fair dealing model will become a benchmark worthy of export not only to the rest of Canada, but abroad.

“One of the outcomes that we will be able to measure as this becomes a reality is we will see fewer lengthy disputes,” Bates says. “Hopefully it will be more straightforward — there will be greater clarity, greater articulation of expectations and therefore a better understanding of what’s happened.”

The OSC says the model was designed to reflect three principles:

• There should be a clear allocation of responsibilities.
• All dealings with retail investors should be transparent.
• Any conflicts of interest should be managed to avoid self-serving outcomes.

The second principle could pose the biggest implementation problems, as it will require a great deal of data-gathering and number-crunching. Account statements would be required to include a personalized performance summary, the aggregated costs of compensation and an analysis of the portfolio’s risk level.

Service providers would be required to disclose all costs associated with a given transaction, including their own compensation. Similarly, firms executing mutual fund sales would be required to disclose their compensation as well, including any third-party benefits received.

Also, the model requires advisors to explain the risks involved in every transaction and the impact it will have on the client’s portfolio, before it is carried out.

The next stop for fair dealing is a six-month round of discussions with six working groups representing various industry participants. These discussions will further refine the model and determine which changes could be made first.

The paper will also be studied across the country, with Canadian Securities Administrators member chairs receiving advance copies.

“We have no intention to go alone on this thing,” says Charlie MacFarlane, executive director of the OSC. “We recognize that this is a big enough change, an important enough change and the right change, that we need to have the rest of the country onside. I think there is a lot of support for the principles that we’re underscoring in the paper.”

He says implementation period will take two and a half to three years, starting with the easiest changes which will have the greatest positive impact in 2005.