Advisors will be looking for regulatory loopholes, says industry vet

Advisors will be looking for regulatory loopholes, says industry vet

Advisors will be looking for regulatory loopholes, says industry vet Five per cent of advisors will commit regulatory arbitrage as they look to get around any move by the OSC to ban embedded commissions, predicts one industry veteran.
 
“I’ve been doing this for 20-odd years and we’re finally getting around the point of recognizing that this is important,” DeGoey told WP, highlighting that many commission-based players are selling segregated funds to sidestep regulations. “A lot of them will end up committing regulatory arbitrage but that’s just the way it is. It’s unfortunate, but not surprising.”
 
His comments come as speculation suggests that some advisors will give up their investment licenses to sell insurance products such as segregated funds, which don’t carry the same requirements for disclosure as mutual funds. Firms and individuals licensed to sell insurance are regulated by provincial insurance regulators such as FSCO but are out of reach of provincial securities regulators like the OSC.
 
While CRM2 regulations will shed light on some of the questionable business practices for a few advisors, wagered DeGoey, they won’t punish others for misleading clients.
 
He cites a tenuous partnership and co-ordination between insurance regulators and the provincial securities regulators as the necessary loopholes advisors need for regulatory arbitrage. Still, an across-the-board elimination of commission-based advice and the injection of a fiduciary standard could nip that in the bud.
 
Still, that won’t come soon enough. In consideration of next year’s full implementation of CRM2, many advisors are pushing mutual fund sales under a deferred sales charge (DSC), charge some industry insiders, because those deals trigger a bigger upfront commission, leaving advisors to disclose relatively small trailers later on, under CRM2.
 
The DSC commission will be excluded from the commission report if it was paid more than a year prior to the first report in 2017.
 
“CRM2 should have an impact against that and I think the OSC should just get on with it already. They’re waiting until next March but there is no need to wait in my opinion,” he said. “It don’t see much co-operation coming between the two entities. For insurance, it gives them a chance to gather advisors and keeps them as the low-hanging fruit, while gaining market share and revenue.” 
2 Comments
  • Ken kivenko 2015-04-14 4:23:22 PM
    No doubt this is happening and it may amount to more than 5%.This is yet one more reason titles need to be controlled. Advisers work for clients, salespersons work to create sales.Governments need to come to grips with regulatory arbitrage or Main Street will pay a heavy price.
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  • Curtis Findlay, CFP 2015-04-14 7:11:01 PM
    I don't disagree with the general theme that regulatory arbitrage is one potential outcome of CRM2. But, there is more to consider.
    I do worry that in attempts to close "loopholes" regulators may damage an otherwise terrific product embraced by many consumers.
    Over the past several years I've often noted the commentators regarding segregated funds are not strongly associated with the insurance industry. Could they describe in detail the differences between a mutual fund and a deferred variable annuity contract? Some, maybe. Could they list specific benefits that drive consumers to want to own these investments rather than securities? Some, maybe. Have they ever recommended consumers use them to satisfy their specific needs? Or, perhaps they are product biased themselves? Perhaps the industry shouldn't be so quick to ask non-jurisdictional security regulators to intervene.
    Besides, there are other securities specific regulatory arbitrage events occurring, not least of which is the trend to leave the registration behind and receive referring fees from portfolio managers. One can argue that the fee-only movement is supported by advisors dropping their registrations. Those referring fees look a lot like trailer earnings to me. Disclosed or not, those fees impact results. A much deeper discussion will take place over coming weeks and months, I'm sure.
    I believe the majority of MFDA advisors embrace CRM2 and are not as threatened by disclosing fees as many commentators believe. I wonder if some of the fee-only advisors will be able to defend their revenues as well?
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