Regulator has second thoughts on eliminating commissions

One of the biggest worries for Canadian securities regulators when it comes to eliminating commissions is the ‘gap’ in advice that’s occurred in other jurisdictions where they’ve done so

The Financial Conduct Authority’s acting CEO let the cat out of the bag last week and the possible repercussions could be felt across the pond here in Canada.

“We do not want to go back to a world where we had the problems of the pre-RDR, what we do want to look at is actually what is the best way of delivering advice and guidance across the market so I wouldn’t rule out that there may be some element of commission, but we are not going to reverse the RDR,” acting FCA CEO Tracey McDermott told the BBC’s Money Box program Saturday.

Investor advocates across Canada must be shaking in their boots thinking about the very possibility. However, the admission by McDermott is hardly news.

In the fall WP reported that the FCA had established the Financial Advice Market Review (FAMR) to study how the elimination of embedded commissions has reduced the ability of less wealthy clients to obtain investment advice.

“[This] experiment (of eliminating embedded comp.) has inevitably resulted in rising advice costs, reduced adviser numbers and a significant reduction in the delivery of financial advice,” Richard Bishop, a practicing financial advisor in the UK and Coventry University College lecturer, write in a scathing op-ed in the Financial Times last September. “The FCA has proven to be a very expensive way of delivering regulation in the UK; it may be the case that the implementation of the FAMR requires a new regulator, not a new regulatory approach.”

If the UK, one of the role models for financial reform, is willing to consider a return to commission-based compensation, it seems only fitting that Canada put the brakes on any hasty move to eliminate them.

Even Ken Kivenko, a member of the OSC’s Investor Advisory Panel, and a big supporter of regulatory reform, is quick to point out some of the inequities of a move from commission-based accounts to fee-based ones.

In a September WP article Kivenko discussed his own personal situation where he moved to an online discount broker rather than move to a fee-based model where is full-service broker would earn four times the fees he’d normally paid the broker under a commission-based structure.

“Really, in a way it’s an unsuitable recommendation,” Kivenko said. “If IIROC was sharp they would say it’s not only recommendations to buy or sell or even to borrow that are unsuitable but also putting someone in the wrong type of account is unsuitable.”

It appears the FCA have arrived at the very same conclusion.