It was an historic event for the investment industry in Canada: The Canadian Securities Administrators (CSA) decided to stick with embedded commissions while at the same time establishing rules to eliminate deferred sales charges and encourage dealers and representatives to pursue the interest of their clients.
An opinion piece penned by Investment Executive (IE) said while CSA’s decision may seem to be a compromise, it is still a big win for the investment industry.
“The CSA, for its part, is trying to address investor protection concerns while limiting unintended consequences — banning DSCs and trailers to discount brokerages, but not banning embedded commissions across the board,” IE said.
It added: “At the same time, the CSA is proposing reforms that would beef up suitability and conflict of interest requirements while not introducing a statutory best interest standard in Ontario and New Brunswick, which were the only two provinces considering the measure.”
For IE, how these reforms will be viewed in the long run depends on how these rules and best interest principles will be adopted. It said that the proposals are still up for consultation, and these are still subject to further consultation with stakeholders.
However, for many investor advocates, CSA’s decision may have been a missed opportunity to create a truly client-focused investment industry.
That's the view of Rob Carrick, an industry watcher and columnist at The Globe and Mail, who believes that regulators have failed to create a standard of transparent, client-focused service and instead presented watered-down reforms.
“Regulators had been looking at whether to eliminate the practice of advisors being paid for their services through commissions embedded in the fees charged to investors holding mutual funds. The right move would have been to ban these commissions and require advisors to charge clients directly for advice, as professionals such as accountants and lawyers do," Carrick wrote in his think piece.
He stressed that while the announcement to ban embedded commissions only for online brokerage firms selling mutual funds is appropriate, it is just a "peripheral" issue. Carrick wondered why it has been a long shot for Canada's investment industry to ban such commissions when such was already eliminated in the United Kingdom and Australia.
Citing John De Goey, whom he called an "advisor and his industry’s most ferocious critic", Carrick said it seems like that industry's primary concerns when challenging regulators are its profits and liabilities.
"Embedded commissions are mostly about profit, and best interest is mostly about liability. The industry will fight tooth and nail to defend both.”
The columnist went on and talked about the prohibition of deferred sales charge (DSC) option for purchasing mutual funds, which over the years has already been declining.
For Carrick, advisors might become the biggest losers from this move.
"Both of these changes would have freshened and modernized an industry that, despite many good people, can sometimes look patronizing, evasive and predatory. It was a dream to think the industry would get out of its own way and allow something to be done about this," he said.