Embedded commission bans, best-interest standard unpopular: IFIC

Study suggests financial regulators worldwide prefer another method to protect investors

Embedded commission bans, best-interest standard unpopular: IFIC
Noting Canadian financial industry regulators’ increasing use of other countries as models for best practices, the Investment Funds Institute of Canada (IFIC) has released a report outlining different measures adopted by securities watchdogs worldwide.

The study, titled Global Regulatory Developments and Impacts (April 2017), surveyed 16 countries and tallied the enforcement and regulatory practices adopted in each jurisdiction.

“The summary reveals considerable variations and inconsistencies in the types of products being regulated, with some jurisdictions only imposing restrictions on investment products, while others cover virtually all deposit, insurance, investment, mortgage and other commission-driven products,” the group said in a statement.

Potential conflicts of interest were also addressed in different ways that indicate varying market characteristics, which according to the IFIC suggests that there is no “silver bullet.”

One major example involved embedded commission bans. Among the securities regulators surveyed, just four — Australia, the Netherlands, the UK, and South Africa, representing only 13% of the $39.4 trillion in mutual fund assets worldwide — opted to proceed after evaluating the measure. Three of those cases were precipitated by unique events: insurance and mortgage misselling scandals in the UK and the Netherlands, and the collapse of three major financial firms in Australia.

Seven regulators in seven countries have ruled out a total ban on embedded commissions. Europe is proposing to prohibit independent advisors from such compensation; independent advice represents only 11% of the European fund industry in terms of assets.

The review also revealed limited application of a best-interest standard. Australia was the only country found to adopt a broad statutory best-interest standard for advisors selling retail funds. The fiduciary rule proposed in the US by the Department of Labor (DOL), which is set to take effect on June 9, governs only advisors that handle retirement accounts.

Out of the 16 countries surveyed, 15 were reported to have enhanced disclosure as a key element in newly developed financial principles and policies, with the US being the sole exception. Most disclosures have come in the form of detailed information on fees and commissions, much like what’s mandated under CRM2 in Canada.

The report also notes the importance of looking at impacts of sweeping regulatory changes in other markets. For example, the UK’s Financial Conduct Authority (FCA) launched a Financial Advice Market Review (FAMR), which found that while the quality of financial advice improved after embedded commissions were banned, access to advice has become limited primarily to the more affluent.

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