Ten years after Lehman Brothers’ collapse, the global financial system is arguably much safer, thanks to tighter lending standards and higher bank reserves.
For the rest of us – savers, investors and retirees – it remains a world of uncertainty, vulnerability and risk. And conditions may be getting worse as governments and regulators backpedal on consumer protection.
In the United States, the Donald Trump administration is rolling back a spate of Barack Obama-era consumer protections and regulators are going easier on financial institutions who mistreat their clients. A recent U.S. court decision struck down a rule that would have required financial advisers managing retirement accounts to put their clients’ “best interests” ahead of their own.
Here in Canada, two recent moves by regulators and financial institutions could similarly make managing money more perilous for individuals. The Ombudsman for Banking Services and Investments (OBSI), the country’s independent arbiter of customer complaints, was dealt a potentially fatal blow last week when the Bank of Nova Scotia joined Royal Bank of Canada and Toronto-Dominion Bank in fleeing the organization in favour of a private dispute-settlement company. That leaves just two of Canada’s Big Five Banks – Bank of Montreal and Canadian Imperial Bank of Commerce to underpin the ombudsman, which settled nearly 350 cases in 2017 and paid out more than $165,000 to clients.
Scotiabank insisted its departure is about improving “customer experience.” But given that the bank was the leading target of banking complaints last year, it looks suspiciously like a way to try to find a more agreeable arbiter, leaving customers with less leverage.
Perhaps the more worrying development was the decision in June by provincial securities regulators to abandon the idea of forcing financial advisers to make investment decisions in the “best interests” of their clients, as lawyers and accountants must. Regulators also decided not to ban the practice of advisers getting paid for their services by taking a cut of the embedded fees charged to mutual fund investors.
The Canadian Securities Administrators – the umbrella organization for the country’s provincial securities watchdogs – opted instead for a more limited set of proposed rules to bolster investor protection and mitigate potential conflicts of interest.
The rejected stricter rules had been fiercely resisted by financial institutions, who argued that the changes would have made financial advice less affordable for investors.
And regulators backed off.
If the provinces and the financial services industry won’t stand up for the little guy, perhaps Ottawa should.
The federal government requires that banks have some kind of outside dispute-settlement regime available to clients. The government doesn’t require that it be OBSI. It should.
And if provincial regulators don’t have the guts to take on the financial services industry over the “best interest” standard, the federal government should take up the cause. Australia imposed a legally binding “best interests” duty for financial advisers in 2013, and the sky did not fall. Likewise, Britain and Australia have banned embedded mutual fund commissions – again, with no apparent negative repercussions for investors.
Prime Minister Justin Trudeau has made fighting for the middle class his mantra. And what could be more middle class than embracing world-class investor and consumer protection laws?
Unfortunately, the Liberals have so far shown little interest in the issue.
To be fair, Ottawa’s ability to legislate in this area is hampered by the absence of a national securities regulator – the model that exists in most other countries.
Efforts to meld Canada’s patchwork system of provincial securities regulators into a national regulator remain elusive.
The Harper government revitalized the cause after the financial crisis, eventually leading to the creation of a co-operative, pan-Canadian regulator, dubbed the Capital Markets Regulatory Authority. But the agency’s launch, targeted for this year, has been mired in legal challenges, delays and interprovincial squabbles.
So far just five provinces and one territory – Ontario, British Columbia, Saskatchewan, Prince Edward Island, New Brunswick and the Yukon – are on board, with Nova Scotia close to joining. But Quebec and Alberta still staunchly oppose the plan, with the former now embroiled in a legal showdown with Ottawa. The Quebec Court of Appeal struck down the revised model in 2017, leading to an appeal before the Supreme Court of Canada. The Supreme Court heard the case earlier this year, and a decision is still pending.
If the national regulator gets the green light, improved investor protection should be a priority