Regulator urged to ensure banning DSCs, empowering OBSI, and ensuring CFR implementation are top of the agenda
While there’s been a lot of work done to reduce the regulatory burden on the investment industry, there hasn’t been nearly enough attention on protecting investors’ interests.
That was one of the major messages Kenmar Associates had for the Ontario Securities Commission (OSC) in a letter commenting on the regulator’s draft statement of priorities for the financial year to end on March 31, 2022.
The investor advocacy organization panned the OSC for being the sole member of the CSA to not ban deferred sales commissions (DSCs). Aside from a report from Morningstar arguing that the province’s rules on DSCs promote wealth inequality, it cited figures from the Mutual Fund Dealers Association of Canada’s (MFDA) which showed mass-market clients (those with les than $100,000 in cash and investments) hold a disproportionate amount of DSC funds in their accounts.
“Based on our reading of the comments received with respect to the OSC DSC consultation, there is ZERO investor support for the retention of the DSC option,” Kenmar said.
The group also criticized the OSC’s approach to strengthening the Ombudsman of Banking Services and Investments (OBSI), which it said has been “on the Commission’s priority list for years with no action.” It noted the Ontario Capital Markets Modernization Taskforce’s recommendations to give OBSI a binding-decision mandate, as well as increase the maximum compensation amount OBSI can recommend of $500,000.
Kenmar also urged the regulator to ensure the CSA’s client-focused reforms (CFRs) are properly implemented. Under this umbrella priority, the advocacy group said there should be uniformity between the rules of the MFDA and the Investment Industry Regulatory Organization of Canada (IIROC). The letter also called for a fulsome review of the current SRO framework, particularly given its potential to improve retail investor protection, enhance client complaint handling, and reduce investing costs.
“We are concerned that the enhanced risk profiling required by CFR is not in place for most registrants,” the group said, raising concerns that independent research on risk profiling among Canadian firms conducted in 2015 has not led to reforms or changes in business practices. As part of firms’ profiling process, Kenmar said firms should be able to map a client’s capacity for loss, on top of aligning their risk tolerance score against a risk-rated portfolio or fund.
The OSC’s work to implement a regulatory framework around issues of financial exploitation, the group added, should be done by the first quarter of next year. Aside from seniors continuing to be the target for unscrupulous salespersons, Kenmar said the COVID-19 pandemic has created prime conditions for vulnerable investors to fall victim to unethical or poor-quality advice.
The letter also suggested potential actions that were not included among the OSC’s proposed statement of priorities, including:
- Prioritizing investor compensation in settlement agreements;
- A move to electronic delivery of documents to investors, provided that the option to keep receiving paper copies is retained;
- Establishing a standard in ESG disclosure/reporting;
- Stopping the sale of A series funds to Ontarians using discount brokerages, and issuing an alert and educational materials to ensure investors who buy such funds understand their costs and rights; and
- Revisiting the OSC decision not to band embedded trailing commissions.