Some Canadian wealth management firms are not adhering to new conflict-of-interest rules, particularly when selling their own proprietary products, according to a new compliance report by an industry watchdog.
In a report released this week, the New Self-Regulatory Organization of Canada revealed that while a number of investment dealers have implemented strong controls to “identify, disclose and address” conflicts in the best interest of their clients, there are still a “few common weaknesses” involving various aspects of the conflict-of-interest rules that began in 2021.
One such weakness is that solely providing disclosure to a client does not satisfy the rules and investment dealers must implement controls to address the conflict in the client’s best interest.
While the rule applies to any type of conflict – such as third-party compensation, product recommendation, sales incentives – the New SRO review identified specific gaps by investment dealers in controls to address conflicts associated with the sale of proprietary products.
The New SRO is the amalgamation of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA).
The new rules, known as client focused reforms or CFRs, came into effect in June, 2021, and were intended to address conflict-of-interest concerns in certain situations – for instance, if an adviser’s compensation is linked to selling an institution’s proprietary products.
But the rule reforms also brought unintended consequences when several of Canada’s largest banks halted sales of third-party investment products from their financial planning arms in 2021. Certain banks shifted to only offering their own proprietary mutual funds, and clients working with financial planners are no longer able to purchase independent funds in their investment portfolios.
Shortly after, both IIROC and the MFDA, along with the Canadian Securities Administrators, launched an industry-wide compliance sweep to determine how the new rules were being implemented by investment firms – including the Big Six banks.
This involves examining conflicts associated with proprietary products and restrictions related to a firm’s product shelf.
In addition to deficiencies with proprietary products, the New SRO also found firms did not always disclose all three components of the conflict of interest to clients: the nature and extent of the conflict; the potential impact and risk that a conflict could pose to the client; and how the conflict of interest has been, or will be, addressed by the investment dealer.
And some investment firms did not adequately document their assessment of conflicts to provide evidence to regulators that they are addressing the conflict in the best interest of the client.
IIROC declined to comment on whether the review included examining the product shelves of bank-owned discount brokerages that have come under scrutiny by the industry for blocking do-it-yourself investors from purchasing low-risk cash exchange-traded funds.
The New SRO said the separate joint report – which will be released at future date – will more provide more details of the “deficiencies” identified across all investment dealers and platforms as well as some best practices observed during the sweep.
The sweep is independent of another review conducted last year by the Ontario Securities Commission on the product offerings of Canada’s largest banks. Ontario Finance Minister Peter Bethlenfalvy launched that review after he had concerns about financial institutions halting sales or “unduly” restricting sales of third-party investment funds.
The OSC submitted recommendations to him on Feb. 28, 2022. The report has not yet been released to the public. Last month, a spokesperson for the Finance Minister told The Globe and Mail that Mr. Bethlenfalvy is still reviewing the OSC’s recommendations, more than a year later.