What’s loved and loathed about CSA’s latest proposals

In its proposals announced Thursday to ban DSC, keep other types of embedded commissions and institute several client-focused reforms, the Canadian Securities Administrators (CSA) are offering an approach that it says is more “scalable” and less “overarching” than a best interest standard.

The DSC ban “was expected, and will not come as a surprise to anybody,” says Prema Thiele, partner at Borden Ladner Gervais in Toronto. Investor groups may be taken aback by the CSA’s decision on embedded commissions, she says, which seems to suggest “that industry folks were listened to.”

“I love this DSC ban,” says Brian Hein, of Calgary-based Hein Financial Group. “I think [it’s] a great idea and it will solve a bunch of [regulators’] problems and a bunch of complaints from clients that the industry gets.” He hasn’t used DSC for decades, he adds.

On keeping embedded commissions, he’s also positive—he discussed such commissions in an April 2017 comment letter on CSA’s earlier consultation. On the current reforms, he says, “I don’t think embedded commissions [are] the culprit. I don’t have any dog in that fight either, but I don’t think that, provided people are getting advice, advisors getting paid with embedded commissions is such a bad thing.” Unlike DSC, he says, they don’t negatively affect clients’ investment decisions, and they aren’t fees that clients forget about.

Read: DSC ban, multiple conduct changes coming from CSA

“I didn’t have a problem with [DSC] to begin with,” says Brad Brain, portfolio manager at Brad Brain Financial Planning and Aligned Capital Partners. The decision is more to do with “the optics of making the [embedded commissions] decision look good if you’re a regulator, versus it being a long-standing problem.”

And Brain’s happy embedded commissions are still an option. “Some people say this isn’t the right direction, and I don’t agree. I am totally happy with embedded commissions because [they] work,” he says, addressing CSA’s current release but also noting that 60% of his clients are fee-for-service.

“The idea of these being a conflict of interest is a superficial analysis,” Brain says. For one couple in their 50s who’s behind on saving for retirement and has fewer assets, for example, embedded commissions allow him to continue to help them. Also, “if somebody has $40,000 and I can set them up in an A-class mutual fund, and I have a 1% trailer go to my firm and part of that money comes to me, the infrastructure is in place [to help].” Some investors “hate” fee-for-service or it doesn’t work, he adds.

Torys senior associate Rebecca Wise says investor advocates wanted a full abolition on embedded commissions. “It’s clear that hasn’t happened, so what they were looking for has been significantly scaled back. That will be perceived to be a loss.” However, the proposed rules haven’t come out, so “we’ll have to wait to assess the full impact. And, there’s still some additional regulation on the industry that wasn’t there.”

Client-focused reforms

On the client-focused reforms, one surprising element was CSA’s restriction of certain referral agreements, under part 13 of NI 31-103, says Thiele. “I was very surprised. I had understood that there was a process in place to review referral arrangements and how they’re working. A lot of clients have asked about that, but they haven’t participated in discussions as to what the rules could look like and what current structures exist. To come now with very, very prescriptive proposals, I wonder where this has emanated from.”

CSA’s proposals limit referral fees, saying such fees cannot continue for longer than 36 months, exceed 25% of the fees or commissions collected from the client by the party who received the referral, or increase what would otherwise be paid by a client to that registrant for the same product or service. The proposals also address the definition of such arrangements, how terms are agreed upon, and how fees are recorded.

In its client-focused reforms document, CSA says it plans to both “impose new requirements” and “codify best practices set out in existing CSA and SRO guidance.” However, it’s also worked with the Ontario Securities Commission and New Brunswick regulator to develop an approach that “infuses the client’s best interest into the conflicts of interest and suitability reforms.”

This mixed approach will likely lead to mixed views on the overall industry impact of CSA’s list of amendments of NI 31-103.

Wise sees the amendments as mainly a codification exercise. “In many cases, they’re probably just codifying practices that already exist at responsible firms. For example, clients’ interests are normally put first in suitability determinations.” For KYP expectations, more rules are being put around what has been “principles-based guidance.”

This “takes away some of shock of how much seems to be going on” regarding industry changes and regulatory shifts, Wise says.

Read: What it really means to put clients first

Thiele says it’s worth analyzing CSA’s word choices. “Certainly there’s one side of me that’s saying there’s no best interest standard enunciated per se and there’s no prescription on titles in the same way—though that’s still part of a separate project. But, to me, the devil will be in the details.”

For example, in the wording of the suitability requirements, “CSA itself says it plans to make extensive changes.” What also caught her eye, she says, are measures related to “portfolio-level suitability analysis” and better measurement of the impact of costs.

Regarding the use of titles, says Thiele, “I almost feel like there’s a back door of the whole titles [debate].” The key terms are related to how advisors won’t be able to hold their services out in a manner that could mislead an investor as to their proficiency, services and product options, she adds, saying, “How is that different, other than we’ve gone from prescriptive requirements to […] a principles-based approach?”

Both Brain and Hein aren’t worried about the client-focused reforms, however. Brain loves what he refers to as “the crackdown on titles,” while Hein isn’t fazed by the prospect of additional disclosure rules. “When it comes to relationship disclosure, proprietary product and stuff like that, I think there will be some pushback from banks, for example, but I don’t think an independent advisor will have much problem.”

In fact, both advisors want CRM3 to be ushered in, to address more than dealer fees. “CRM2 is a half-hearted attempt with no positive outcome,” says Brain. “The only thing that makes sense is [to] tell people what they’re actually paying,” and CRM2 doesn’t achieve that.

For now, what remains to be seen is what happens throughout the consultation periods and, in the end, how firms needs to adapt. Says Thiele: “The regulatory changes are still ambitious and, potentially, have significant implications for how firms will carry on an advisory model in terms of actually complying with the prescription of the requirements here.”

Read: Regulatory developments you should follow: timeline