The Investment Funds Institute of Canada (IFIC) has filed its submission in response to the proposed client-focused reforms from the Canadian Securities Administrators (CSA).
“The investment fund industry is supportive of many of the Client Focused Reforms and shares the CSA’s commitment to better aligning the interests of clients and registrants, improving outcomes for clients, and enhancing investor protection,” said IFIC President and CEO Paul Bourque. He added that the institute is asking for clarifications and making recommendations to “support a practical and effective implementation of the reforms.”
The IFIC’s submission highlighted three concerns, the first of which was a possible “unintended consequence of reducing investor choice in products and services.”
Focusing on the regulators’ proposed know-your-product requirement to compare products with similar ones in the market, the group said firms would narrow their product shelves in order to manage their compliance requirements. In much the same way, narrowing their product shelves would allow firms to help registered individuals comply with the proposed requirement to compare products with similar ones on the firm’s product shelf.
“[G]uidance related to the know-your-product obligations … should be aligned with existing guidance from the self-regulatory organizations,” IFIC said as a recommendation.
The IFIC also contended that the reforms’ implementation costs would have a disproportionate impact on smaller firms, leaving investors with fewer choices. To avoid the possibility of small players exiting the market or a segment of the market, the group said there should be “certain critical changes and clarifications” to make the implementation costs more manageable.
For its second concern, the group argued that the reforms apparently assumed better investment outcomes are only achievable through lower-cost products and services. “While we agree that costs affect client returns, we do not agree that costs are the sole or primary determinant of good outcomes,” the IFIC said, adding that focusing too much on costs may result in fewer choices for investors.
The group focused on a clause in the reforms saying that registrants are expected to “trade, or recommend, the lowest cost security available to the client,” which it said may be misinterpreted as a direction to choose the lowest-cost product outright from among multiple options. The sentence after that clause acknowledges that “there may be reasons why a specific higher cost security available at the firm may be better for a client than other suitable securities available at the firm.”
As a third concern, the IFIC said it seeks a workable approach to resolving conflicts of interest in the best interests of clients. In particular, it suggested that only material conflicts of interests must be disclosed, with the alternative resulting in “overloading investors with disclosure” that is “not helpful to informed or timely decision making.”
The group also argued against treating disclosure as not being sufficient to address conflicts of interest. “The proposed approach applies a different standard to registrants in the management of conflicts of interest than the standard applicable to fiduciaries under the common law fiduciary duty,” it said. “We request the CSA amend the Proposals to state explicitly that disclosure can be an effective mitigant in some circumstances.”
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