Seeking added protection for the investing public, regulators last year released several proposals for comment; one of the issues considered was the potential benefit of collecting embedded commissions.
However, after the CSA released the results of an industry-wide review of incentives and compensation offerings for representatives, the Investment Funds Institute of Canada called on the regulator to “reconsider whether there is evidence of a market failure sufficient to justify prohibiting embedded commissions.”
“Until now, CSA members have pointed to academic research here and abroad as their evidence of a market failure sufficient to justify restricting Canadian investors’ choice of fee payment methods,” Paul C. Bourque Q.C., IFIC president and CEO, said in a statement. “We commend the CSA for undertaking practical compliance surveys that looked at compensation practices in the context of Canada’s robust regulatory environment.”
Bourque went on to say that the report, titled Notice 33-318: Review of Practices Firms Use to Compensate and Provide Incentives to their Representatives, confirms that while almost all forms of compensation can potentially introduce conflicts of interest, actual conflicts that may hard clients are already covered under CSA and SRO rules.
“The Review identified twenty-seven compensation practices currently in use in Canada,” read a statement from the group. “It found that, in every one of the eighteen that housed a potential for conflict of interest, the conflicted activities are already prohibited under the existing rules, either as an unsuitable investment recommendation, a contravention of the duty to act honestly, fairly and in good faith, or a contravention of National Instrument 81-105 (the Mutual Funds Sales Practices Rule).”
Two other reports echoed the CSA’s conclusions: an MFDA paper reviewing compensation, incentives, and conflicts of interest uncovered few violations, while an update on conflicts of interest issued by IIROC in December expected that any concerns can be addressed via added guidance or amendments to current rules.
“If regulators have concerns about specific sales misconduct, existing rules give them the enforcement tools they need to address the concerns they have identified,” Bourque said. “As a result, we are asking the CSA to reconsider whether a prohibition on embedded commissions is the only option.”
Potential conflicts of interest in compensating representatives discovered
Are most financial advisors just salespeople?