Transcript Promoting, preparing and Protecting YOU!.

21st Century Regulatory Environment
of the Financial Advisor
Kris Birchard, CFP, CLU, TEP - Vice Chair, Board of Directors
Banff School 2007
Advocis™, CLU™ and APA™ are trademarks of The Financial Advisors Association of Canada.
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Objectives
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Regulatory landscape of the financial advisor
Recent developments
Challenges
Proactive initiatives
Regulatory pressure points
Implications of recent regulatory trends
Protecting advisors
Regulatory Landscape
Companies (Insurers,
funds, banks)
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Federal Dept. of
Finance
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OSFI
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Provincial
Superintendents of
Financial Services
Evolution of complex
financial products
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Regulation of hedge
funds, PPNs
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Know your product
Designations
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Highest practice
standards
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Meaningful continuing
education
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Priority of the client’s
interest
Dealers / MGAs
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MFDA
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IDA
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Superintendents of
Insurance
Federal policy
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Bank Act
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Anti-money laundering
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Privacy
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Do-not-call list
Financial Advisor
Provincial Regulators
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Provincial Securities &
Insurance Acts
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Financial Commission
& Insurance Council
rules
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Securities Commission
rules & regulations
Recent developments
• Bank marketing & distribution of insurance
– Bank Act review
• Supreme Court of Canada
– Mandatory provincial licensing
• Managing conflicts - product suitability for insurance
intermediaries
– Principles based approach to regulation
• Incorporation
– Moving in the right direction
• Do-Not-Call List Rules
– Advocis obtains concessions for advisors
2006 Bank Act Review
• Consumer protection
– Sales pressure
– Privacy
• Separation of health and banking information
• Level playing field for all insurance intermediaries
– Banks’ unique position in the marketplace
– Banks’ attempt to skirt provincial regulatory authority
• Supreme Court of Canada case
The banks’ position
• CBA recommended four specific changes to the
Bank Act:
– Distribute brochures and other promotional material about
insurance products within their branches
– Provide customers with information about specific insurance
products
– Pass on relevant client information to “an insurance professional”,
with the consumer’s consent
– Make referrals to “an insurance professional” outside of the branch
• Some banks called for the ability to sell insurance in their
branches
Advocis campaign
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Banks undertook massive lobbying effort
Advocis neutralized this with an effective grassroots campaign
Advocis’ landmark survey conducted by POLLARA
White Paper released June 2006
Legislative proposals released in November 2006 – Bill C37
Advocis asked for and received commitments from all federalist
parties to maintain restrictions
• Bank Act received Royal Assent March 29, 2007
Supreme Court of Canada
• Issue: Are federally regulated banks exempt from
provincial licensing requirements to distribute credit
insurance products from their branches and through
other channels like telemarketers?
• Advocis appeared as an intervener on April 11, 2006
– Canadian Western Bank et al. v. Alberta
• Advocis argued for uniform standards of professional
conduct
– Banks argued that the province does not have jurisdiction to
regulate banks in this area as they are regulated federally
under the Bank Act
Supreme Court of Canada
• Advocis applauds the decision of the Supreme Court
of Canada released on May 31, 2007
– Court unanimously dismissed the banks’ appeal to by-pass
provincial regulation
• Major victory for Canadian consumers and advisors
– Places consumers’ interests first
– Preserved a level playing field for financial advisors
• Advocis the only association given leave to argue as
an intervener
• Court’s decision ensures a level playing field in other
financial services
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E.g. securities
Managing Conflicts of Interest
• CCIR / CISRO Industry Practices Review Committee
reviews of the industry
– Commenced in 2004
– Problems arising from US fraud cases
– No illegal practices uncovered in Canada
• Options for regulation:
– Commission Disclosure
– Restrict incentives
– Legislate priority of the clients’ interest
Insurance Regulators Are Listening!
• IPRC recommendations released February
2006
– Favours a principles-based approach and wants to
harmonize best practices across the industry
– Extremely encouraging from an advisor’s
standpoint
• Insurance regulators were considering at the onset of
their consultations introducing layers of prescriptive
regulations and even commission disclosure
IPRC’s Recommendations (February 2006)
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Priority of the client’s interest
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An intermediary must place the interest of policyholders
and prospective purchasers of insurance ahead of his or
her own interests
Disclosure of conflict or potential conflict of interest
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Consumers must receive disclosure of any actual or
potential conflict of interest that is associated with a
transaction or recommendation
Product suitability
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The recommended product must be suitable for the needs
of the consumer
Product Suitability Principle
• Principle: Recommended product must be suitable for the
needs of the consumer
– Broker / agent should conduct fact finding appropriate to the
circumstances of the client’s needs
– Needs assessment should be flexible
• Underlying risk
• Client’s objectives
• Complexity of product
• Not to be mistaken with ‘product suitability’ in the securities /
mutual fund context
– Non-prescriptive in nature
• Advocis develops tools and templates to assist advisors
Industry Must Continue to Drive Solutions
• Regulators will continue to monitor
– Should problems arise, regulators will consider taking further steps
including prescriptive rules
– Each provincial regulator will determine how best to implement
• Legislation / regulation still an option
– Newfoundland an outlier
• Ontario surveying agents on principles implementation
• Ongoing dialogue with regulators and provincial governments
essential
– Encourage harmonization across Canada
• Work with key industry stakeholders essential to ensure
consistency of principle emerges
Incorporation
• Regulators in 4 provinces have extended suspension
of MFDA Rule 2.4.1 until end of 2008
– BC, Saskatchewan, Ontario, Nova Scotia
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New Brunswick and Manitoba likely to follow suit
Alberta continues to oppose
Permanent rules not in place
Inconsistency across financial products, across
jurisdictions
Do-Not-Call List Rules
• Legislation passed in 2006
– Bill C-37, An Act to amend the Telecommunications Act
• Canadian Radio-Television and Telecommunications
Commission (CRTC), the regulator, begins developing rules
• CRTC originally did not contemplate impact on advisors in
connection with:
– Existing business relationship
• Referrals
• Large multi-faceted conglomerate versus small financial services
provider
– Transfer of book of business
• Does it constitute an “existing business relationship?”
– Penalty regime
• Individual ($1,500) vs. Corporation ($15,000)
Do-Not-Call List Rules
• CRTC Releases final rules July 2007
– To take effect when DNCL registry up and running
• Timing still uncertain
• A number of important Advocis recommendations
adopted!
– Existing business relationship
• Limited to legal entity
– Victory for small advisors on basis of level playing field
• Ability to contact someone where consent is given
– Must be express consent versus blanket consent, which is how
advisors operate
– Transfer of book of business
– Does not constitute telemarketing and is therefore exempt
Challenges
• Client Relationship Model
• Saskatchewan segregated fund
marketing guidelines
Client Relationship Model
• Formerly the Fair Dealing Model
– OSC driven
• Prescriptive regulation of financial advice
– Duty to act honestly, fairly and in good faith
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Marginalizes designations
Potential for significant increase to compliance cost
Little known benefit to consumers
Advisors shut out of policy development process
Client Relationship Model
• Registration Reform Rule – Proposed NI 31-103
– Registration requirements
– Client relationship rules and principles
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Account opening, know-your-client and suitability
Relationship disclosure (relationship disclosure document)
Record keeping
Compliance system
Complaint handling
Conflicts on interest provisions
Referral arrangements
– New more onerous MFDA / IDA rules to be put in place
Saskatchewan Segregated Fund
Marketing Guideline
• Insurance Council of Saskatchewan interprets
existing by-laws as they apply to segregated funds
– Segregated funds = mutual funds as an investment vehicle
• MFDA style compliance on sale of segregated funds
• MGAs to play an active role in compliance /
supervisory role
– Analogous to mutual fund dealer under MFDA
• Spill over into other provinces?
– Possible
Proactive initiatives
• Independent Owner Operator (IOO)
– Registration categories / business structures
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Advanced status for CE
Formal recognition of designations
Recognition of the APA
Regulatory recognition of the Best Practices Manual
– Product suitability for insurance intermediaries
– Anti-money laundering guideline for advisors
Regulatory Pressure Points
Federal departments
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Finance
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Industry Canada
Recognized SROs
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MFDA
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IDA
Provincial regulators
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13 Financial
Commissions /
Insurance Councils
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13 Securities
Commissions
Federal regulators
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FINTRAC
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CRTC
National Umbrella
Regulators
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Joint Forum
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CCIR / CISRO
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CSA
13 Provincial / Territorial
Ministries
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Finance
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Government Services
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Financial Services
Superintendents
Regulatory pressure points
• Financial advisors are on equal footing with
companies and dealers in the eyes of financial
services regulators
– Little interest in differentiation when drafting regulatory policy
– Serious repercussions for compliance costs on small advisor
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Principles vs. Rules tug of war
– Convergence to insurance regulatory regime OR towards
securities based regulation?
Implications of recent trends
• Regulatory harmonization
– Good, if it works in your favour
• Strengthening of supervisory oversight
– E.g., Client Relationship Model
– Relevancy of designations?
– Professionalism being challenged
Independent channel / small businesses
at risk
• Compliance costs
• Consumer access to financial products and
services
– Especially at lower incomes
• Barriers to entry
Protecting advisors
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Advocis at the table
However, regulators have resources and time
Other stakeholders have deep pockets
Political engagement a core competency
Grassroots
• Members engaging politicians
– Federal
• Bank distribution of insurance
– Provincial
• Political Advocacy Committees
• Opportunity for involvement
Provincial Political Advocacy Committees
• Formally established
– BC, Manitoba, Ontario, Newfoundland
• Ongoing development
– Slated for 2007-08
• Alberta, Saskatchewan, Atlantic provinces
– Chapter engagement
– Political activism / contact network
• Legislature days
Stay Informed
• Advisor Voice issued monthly
• Advocacy update in FORUM magazine
• Advocacy updates at Chapter meetings
• Visit www.advocis.ca regularly
– Advocacy page
• Send us an email at: [email protected]
If not Advocis then who?
Thank you
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