Duty of Care: How Much is Enough?

Over the past few years, IFB, along with others, has promoted “the value of advice” campaign. Now you may notice ads in the National Post, and other major publications, that cite further studies supporting the importance of financial advisors, like you, in helping Canadians make sound decisions to secure their financial future. This research showed that many clients were not only very satisfied with their advisor but trusted the advice they received, believed that their advisor added value beyond just market performance and was crucial to them meeting their financial goals. We know you know that, but unfortunately the “bad apples” in the industry – those people who defraud unsuspecting investors by misrepresenting themselves and the investment they are promoting – alongside the media attention these cases get – cast the entire industry under a veil of suspicion.

One solution proposed by Canadian securities regulators is to require every licensed advisor who provides advice to retail investors to be bound by law to put the interest of the client first and ahead of their own. While this may seem on the surface a simple and worthy solution, what it means in practice is that recommending a suitable investment will not be enough. You would need to be able to prove that the investment was not only suitable but the best choice, from an array of choices. This raises a number of practical questions, for example, how will this apply to mutual fund licensed advisors who are restricted in the number of products they can sell and further restricted by the approved products on their dealer’s shelf?

A best interest duty also means advisors would need to avoid conflicts of interest. Managing or disclosing conflicts would not be enough. Which brings us to the second major paper securities regulators have released – one which looks at mutual fund fees and how advisors are paid to sell them. This paper suggests that disclosing fees to clients and how these fees affect their investment’s performance may not be enough. Why? Because these fees may mean advisors recommend a fund to clients which meets the suitability test, but pays the advisor a higher commission than another suitable fund. Regulators see this as a conflict that may not be fair to investors and wonder if Canada should be looking at banning commissions, embedded fees and trailer fees altogether, like some other countries have done recently.

While nothing is going to happen overnight, these are 2 major consultations that are clearly intertwined in a way that we think cannot be unbundled. Separate or together, they have the potential to significantly change the securities/mutual fund industry in the future and your relationships with your clients.

Susan Allemang, Regulatory Affairs

Investor fraud takes physical and emotional toll on victims

One has to feel sorry for Bill Dolan. He was victimized for almost $1 million by fraudster Paul Yoannou and has since been under medical and psychological care. Today’s newspapers tell of Yoannou receiving a 6 year prison term for fraud which he admitted to. MFDA is taking him on as well alleging that he stole over $11 million from 55 people.

Yoannou, who was a registered salesperson with Investors Group, admitted in court to bilking his clients of more than $6 million over a 7 year period. Most have been reimbursed by Investors Group according to reports, but not poor Bill Dolan and a few others.

The big difference between Dolan and those reimbursed by Investors Group is that he was never recorded as a customer of that company as those who were reimbursed were.

Although news reports say Dolan is “fighting” Investors, we don’t know what avenue he is taking – i.e. if it’s through a lawsuit, through MFDA or other means. It’ll be interesting to see how that all unfolds.

Although the concept of ‘independent advisors’ is seriously lacking on the mutual fund side of the business, it seems to us that advisors with companies like Investors Group are viewed as being more ‘captive’ than those with independent dealers. Dolan says he always believed that he was a client of Investors Group, although it appears that his investing with Yoannou was through a personal relationship with him.

Another important issue here is that clients foolishly made out cheques to Yoannou rather than Investors Group.

John Whaley, Executive Director

More on Crowdfunding

Last August, IFB Executive Director John Whaley posted a blog on the growing pressure to permit crowdfunding as an alternate means to raise capital for startup companies. He quoted an article in The Globe & Mail that defined crowdfunding as “a money raising strategy that uses social media to round up relatively small contributions from multiple people. And, that “using it as a means to purchase shares in closely held companies has been essentially illegal in Canada because of strict limits on the number of investors companies can take on without listing on a stock exchange, and provisions that demand that private companies can sell stakes only to “accredited” investors.”

Now, according to a further article in yesterday’s Globe and Mail, it appears that the Ontario Securities Commission is responding to that pressure and is considering an exemption to the Securities Act that would permit anyone to invest in such opportunities, not just “accredited investors”. A similar move was made in the US recently. Announcement of a public consultation to consider the exemption is expected before year-end.

We expect the debate will pit those in favour of innovative, more lightly regulated methods to raise capital against the concerns of those who see the exemption as reducing protection for investors against potentially fraudulent situations.

Susan Allemang, Regulatory Affairs

Crowdfunding

We’re often reminded by practitioners in this industry that over-regulation and its consequent cost are negatively impacting not only advisors, but perhaps more widely, issuers and, perhaps most ironically, the consumer they’re intended to protect. This is particularly seen on the securities side of the business.

It’s always been difficult to see how this propensity to regulate can be tempered, let alone reversed.

It was initially encouraging a few years ago when the securities regulators seemed to  come to the realization that prospectuses had become way too complex and lengthy for the average investor to understand (or even read). There was hope that this would bring about an even more ‘simplified version’ of the prospectus But alas, the CSA just couldn’t bring itself to reduce the amount of required disclosure. Instead they added more disclosure in the form of a new document called “Fund Facts”. This, of course, required more consultations and regulation to get done.

Now, we see that there’s a force building that just may have the strength to make change.  ‘Crowdfunding’.

The Globe & Mail ran an article last week on this phenomenon and defined it to be “a money raising strategy that uses social media to round up relatively small contributions from multiple people.”

The Globe article says that:

“Canadian Internet and technology entrepreneurs are gathering a volunteer army of lobbyists to force provinces to loosen restrictions on purchasing shares in closely held companies.”

And

“At stake is access to hundreds of millions of dollars in financing for Canadian start-ups.. (as) Canadian entrepreneurs see crowdfunding as a way to get good ideas out of the garage and into the marketplace. But crowdfunding’s potential will be limited until provincial regulators loosen their investor-protection regimes.

Raising equity through crowdfunding is essentially illegal in Canada because of strict limits on the number of investors companies can take on without listing on a stock exchange, and provisions that demand that private companies can sell stakes only to “accredited” investors.”

It’s well worth a read.

John Whaley, Executive Director

New Directors, New Direction

Yesterday, our Annual Meeting was held at a hotel near the Toronto Airport. For those of you who have never attended the AGM, it’s where we meet to hear the financial position of the Association, get an overview of where IFB has been over the past year and where it’s headed in the coming months, and fill any vacancies that arise on the Board.

This year, two of our long-time Board members stepped down after fulfilling 3 consecutive terms of office – the maximum allowable under our By-laws. Both Merlin Chouinard and Scott Findlay served on the Board from 2003 to 2012, and each contributed greatly to the association during that time.  Merlin served on the Executive Committee for all of the years that he was a Board member, and was President from 2005 – 2011.  Scott served as Director for British Columbia, and has been instrumental in establishing the B.C. Summit as a successful event in Vancouver (and will continue to do so as an IFB member).

While we’ll miss both of these gentlemen, we were delighted to welcome 3 new Directors who, we hope, will bring a fresh perspective to the organization.

• Doug Biehn, of Humboldt, SK, will be filling Merlin’s role as regional Director for Manitoba and Saskatchewan.  Doug brings to the Board a background in life insurance, financial planning, and mutual funds, and currently operates an independent practice in ‘The Potash Capital of Canada’.
• Murray Coulter, of London, ON, is a long-time member who decided to throw his hat in the ring this year so that he could ‘give back’ to an industry that has provided him with a long and fruitful career.  In fact, Murray was one of the first ‘dual licensed’ brokers in the province, so his roots in independent distribution go very deep.
• Scott Low, of Vancouver, BC, has a special interest in bringing new agents into the business, and operates an LLQP training facility that trains hundreds of new entrants each year.  Scott’s background is entrepreneurial, which made independent brokerage the perfect fit for him when he decided to switch career paths in 1996.

In addition to these 3 new Board members, John Dargie was re-elected to a second 3 year term as Director, and then was re-elected to the position of Chairman at the subsequent Board meeting.  In his remarks to the Board, John indicated that he saw membership growth as the key to the future success of the organization, and Executive Director John Whaley reported on a number of new membership initiatives that it is hoped will attract new members over the coming months.

Nancy Allan, Member Communications

The Truth, the Whole Truth, and Nothing But the Truth

In the years that I’ve been a staff member at IFB, I’ve learned a lot about the continuing education requirements for the various jurisdictions and designations.  As a result, if you call the office with a question about CE, you’ll likely be transferred to me.

I get an average of 2 calls a week on the subject, and for the most part members have fairly similar issues.  By far the most common inquiry comes from those who are approaching the renewal date for their life insurance license and find themselves to be short of hours.  Usually, the caller is just short an hour or two and will be able to make up the shortfall relatively easily. For these members, we can provide helpful advice on where to pick up an hour or two. In addition to our Summit program and the smaller regional events that IFB holds, members can earn 2 hours of CE just by doing on online e-learning modules.  We can also point you in the direction of some online providers or even try to help you find an MGA meeting or company event in your area that’s offering CE credits.

Of course, sometimes the caller is so close to their renewal date or so far behind in earning their CE hours that there’s just no way they can make it up before license renewal.  For these members, our primary piece of advice is always the same:  do not, under any circumstances, misrepresent yourself on your life insurance license renewal application.  You will be asked to certify that you’ve met your CE requirement, and if you haven’t then it is vitally important that you come clean on your application – or risk some serious consequences.

It’s been my experience that most life insurance regulators will show some leniency  – or, at the very least, will be less punitive — if a licensee is pro-active and reports their shortfall promptly. This is particularly true if this reporting is accompanied by a written plan for how that shortfall will be made up in a reasonable period of time.  For example, I have often spoken to members who are short a few hours, but who have a license expiry date that is a few days prior to the IFB Toronto Summit.  In those cases, they have been able to register for the Summit and then go to the Financial Services Commission of Ontario with a written promise to attend the Summit and apply the hours earned at it toward the shortfall.

Last week I had a call from someone who was being audited by their life insurance regulator for CE compliance.  This person had indicated on their life license renewal that they’d completed all their required CE hours, but, they somewhat reluctantly confessed, they ‘forgot’ that they’d actually neglected to complete any of those hours.  Now they auditors were knocking at her door – and she found herself in a pretty difficult jam.  ‘What should I do?’, she asked?

My advice, as always, was to come clean with the regulator.  While I think that the ‘I Forgot’ excuse is probably not going to get this advisor too far, being open and honest – and then facing the consequences – is going to have a far more favourable outcome than getting deeper into a bad situation.  The fact is that anything you certify on your license application is binding, and the regulator can and does conduct random audits each year in order to verify compliance.  Those found to be noncompliant can be subject to disciplinary action ranging from warnings to outright license suspension.

The moral of the story?  Keep on top of your CE obligations, as well as all other licensing requirements.  Your livelihood depends on it.

 Nancy Allan, Member Communications

IFB objects to securities regulators funding investor advocacy group…

IFB has written a letter to Dwight Duncan, Ontario’s Minister of Finance, objecting to recent announcements by the Ontario Securities Commission (OSC) and Investment Industry Regulatory Organization of Canada (IIROC) that they have committed an additional $1.7 million in funding to the investor advocacy group, FAIR Canada.  Despite FAIR having been originally provided with $3.75 million in seed money from the OSC and IIROC to commence operations, it seems not to have developed a plan to be financially independent of these securities regulators.  In this regard, we observed, FAIR is the only association which advocates before the OSC and IIROC in which these regulators have a financial interest – and we believe this is inappropriate.  Investor advocacy and developing tools to promote financial literacy are stated objectives of the OSC and under its mandate.  Why, then, is it funding a separately managed association, which has no accountability to the OSC, yet shares the same goals?

We have asked the Minister to review the situation and require FAIR to develop an ongoing financial plan so it can meet its claim on its website that “FAIR Canada is independent of government, regulators and the financial industry”.  Click here to read our full letter to the Minister of Finance.

Susan Allemang, Regulatory Affairs

New Life License harmonized standard proposed…

Yesterday I had the opportunity to attend a meeting hosted by the Canadian Insurance Services Regulatory Organizations (CISRO), where they explained their plans to establish a harmonized national life insurance agent licensing education program that will see the participation of every jurisdiction in Canada.

The meeting was chaired by Ron Fullan, Chair of CISRO and Executive Director of the Insurance Councils of Saskatchewan.  A number of other CISRO member provincial regulators were in attendance, including Gerry Matier from the BC Insurance Council, Grant Swanson from FSCO, Joanne Abram from the Alberta Insurance Council, New Brunswick Deputy Superintendent of Insurance David Weir, and various representatives from the AMF.  There was also widespread attendance from the life insurance industry, including other regulators, trade associations, insurance company reps and private course providers.

While the harmonized program is intended to apply to all jurisdictions, including Quebec, Mr. Fullan said that it is not intended to raise the entry bar for new applicants, as was the case when the original LLQP was introduced.  The new program will feature a curriculum design that combines the LLQP with the AMF’s documents, will use consistent terminology and move to a modified open book modular exam format.  There will be no change to the current exam delivery in that each province/territory retains responsibility for oversight and no changes are expected to the current licensing structure.

More details are expected to be provided as CISRO moves closer to the September 2015 implementation date.

Susan Allemang, Regulatory Affairs

MFDA misses an opportunity for change

I see in a recent Bulletin that the MFDA board has decided against going a new direction with leadership of that Association when Larry Waite leaves this fall. Instead of a change, it decided to promote Executive Vice-president Mark Gordon to be President and CEO.

The Bulletin doesn’t go behind the scenes to tell if they even considered change or if they just approved what was in the ‘succession plan’. However, the description of Mark’s background in the announcement suggests that it was the latter. He’s described as having been one of the two initial employees when MFDA was first set up in 1998 (I’m assuming the other one was Larry).

I don’t want to knock Mark – I’m sure he knows what he’s doing and is well versed in MFDA procedures, etc. However, this may be the very reason to consider change.

From what we hear from members, dealers and others in the industry, MFDA doesn’t have the best reputation for flexibility, openness, or fairness. In light of this, perhaps the board might have considered bringing someone in from outside as president who might bring MFDA a new perspective (with Mark’s support in his current position as EVP).

The OSC (from which both Larry and Mark came from) has a policy of limiting their CEO position to a maximum of 5 years. They generally bring in people from outside OSC who know the industry from other perspectives. Such a move might have been good here particularly with an association with a reputation like MFDA’s.

Hopefully, now that he has the opportunity, Mark will change direction and sponsor some needed changes.

John Whaley, Executive Director