Invoking a rarely used section of the Ontario Securities Act, Ontario Finance Minister Peter Bethlenfalvy has asked the OSC to undertake an analysis of the banks’ actions and report back findings and recommendations by Feb. 28, 2022.Chris Young/The Canadian Press
Ontario’s Finance Minister is calling on the province’s securities watchdog to review a move by several of Canada’s largest banks to stop the sale of third-party investment products by their financial planning divisions.
In a letter sent to the Ontario Securities Commission, Peter Bethlenfalvy said he has “concerns” about some of Ontario’s largest financial institutions halting sales or “unduly” restricting sales of third-party investment funds.
“It appears that these actions would result in a narrowing of investment products offered to investors,” Mr. Bethlenfalvy wrote. “This practice would run counter to the underlying intent of the [client-focused reforms], which is to mitigate conflicts of interest and ensure that investors have access to the products that best serve their needs.”
Invoking a rarely used section of the Ontario Securities Act, the minister has asked the OSC to undertake an analysis of the banks’ actions and report back findings and recommendations by Feb. 28, 2022.
The issue of banks removing third-party funds from their product shelves erupted earlier this year when Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce notified clients in their financial planning businesses that advisers will no longer sell third-party funds for any investment portfolios. (The changes do not apply to any of the banks’ full-service brokerage accounts or do-it-yourself investing clients.)
The banks said they made the changes in response to new regulations – known as client-focused reforms (CFRs) – that are slowly being rolled out to the industry in stages and will require advisers to have deeper knowledge of the funds they recommend to clients.
Changes to the know-your-product (KYP) rule will come into effect at the end of 2021, and were intended in part to address conflict-of-interest concerns in certain situations, including if an adviser’s compensation is linked to selling an institution’s proprietary products. But banks said the KYP rule changes would require advisers to have more training on an array of third-party investment funds, and said it was easier to limit sales of those products instead.
Shortly after The Globe and Mail reported in early September that several of Canada’s largest banks had halted sales of third-party investment products, the OSC contacted Canada’s big banks to ask for more information about their plans to stop selling other companies’ investment funds in favour of narrowing their focus to their own proprietary shelves of funds.
OSC chair Grant Vingoe told a virtual audience at the commission’s annual Dialogue 2021 conference on Tuesday that he reacted “viscerally” when he heard the banks’ initial explanation for cutting back on the availability of those products. Mr. Vingoe said he was told that the new KYP requirements, which require advisers to be trained to know the characteristics of the products on their shelf and suitability for particular investors, were too onerous.
“With all the technology being brought to bear and the skills of the adviser community, I couldn’t accept the proposition that bank-owned dealers couldn’t train their staff and professionalize their staff to include a reasonable range of independent products,” Mr. Vingoe said.
The OSC has already begun conducting examinations to see to what extent banks are restricting sales.
“Obviously, proprietary products will be more profitable because they’re keeping in-house all of the benefit,” Mr. Vingoe said. “But we have to examine the consequences to investors. We have to also examine the consequences, too, to the entire ecosystem that squeezes out new and emerging and really valuable alternatives for clients.”
“We have to consider the long-term economic implications, such as if the shelves are unduly constricted over time, it seems almost inevitable that costs to investors will increase because of a monopolization effect.”
In his letter to Mr. Vingoe, Mr. Bethlenfalvy also instructed to the OSC to re-examine the issue of tied selling – a practice that is supposed to be prohibited, whereby big banks will sometimes require corporate borrowers to also use the bank’s underwriting and advisory services. The practice is seen as unfair by smaller, independent investment banks, who say they can’t compete with such inducements.
A task force struck by the Ontario provincial government in 2020 called on the province to introduce an explicit ban on what it called “coercive” tied selling.
Also on Tuesday, Mr. Vingoe signalled that the OSC is looking to expand its enforcement related to stock promoters who use social media, but with insufficient disclosure.
In the spring, the British Columbia Securities Commission announced that it was moving ahead with new rules that would target individuals who use platforms such as Twitter, Reddit and YouTube to increase or decrease share prices without disclosing their positions in those stocks.
“We’re looking at that in Ontario as well,” Mr. Vingoe said. He said that such activity might require people to register with the OSC, and that in other cases, the regulator will need to “disrupt” those sorts of social-media posts. Although he did not specify what he meant by “disrupt,” he said the OSC needs to “call it out when we see it.”
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