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21 st Century Regulatory Environment of the Financial Advisor. Kris Birchard, CFP, CLU, TEP - Vice Chair, Board of Directors Banff School 2007. Objectives. Regulatory landscape of the financial advisor Recent developments Challenges Proactive initiatives Regulatory pressure points

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21 st century regulatory environment of the financial advisor

21st Century Regulatory Environmentof the Financial Advisor

Kris Birchard, CFP, CLU, TEP - Vice Chair, Board of Directors

Banff School 2007

  • Regulatory landscape of the financial advisor
  • Recent developments
  • Challenges
  • Proactive initiatives
  • Regulatory pressure points
  • Implications of recent regulatory trends
  • Protecting advisors
regulatory landscape
Regulatory Landscape

Companies (Insurers, funds, banks)

  • Federal Dept. of Finance
  • OSFI
  • Provincial Superintendents of Financial Services

Dealers / MGAs

  • MFDA
  • IDA
  • Superintendents of Insurance

Federal policy

  • Bank Act
  • Anti-money laundering
  • Privacy
  • Do-not-call list

Evolution of complex financial products

  • Regulation of hedge funds, PPNs
  • Know your product

Provincial Regulators

  • Provincial Securities & Insurance Acts
  • Financial Commission & Insurance Council rules
  • Securities Commission rules & regulations


  • Highest practice standards
  • Meaningful continuing education
  • Priority of the client’s interest

Financial Advisor

recent developments
Recent developments
  • Bank marketing & distribution of insurance
    • Bank Act review
  • Supreme Court of Canada
    • Mandatory provincial licensing
  • Managing conflicts - product suitability for insurance intermediaries
    • Principles based approach to regulation
  • Incorporation
    • Moving in the right direction
  • Do-Not-Call List Rules
    • Advocis obtains concessions for advisors
2006 bank act review
2006 Bank Act Review
  • Consumer protection
    • Sales pressure
    • Privacy
      • Separation of health and banking information
  • Level playing field for all insurance intermediaries
    • Banks’ unique position in the marketplace
    • Banks’ attempt to skirt provincial regulatory authority
      • Supreme Court of Canada case
the banks position
The banks’ position
  • CBA recommended four specific changes to the Bank Act:
    • Distribute brochures and other promotional material about insurance products within their branches
    • Provide customers with information about specific insurance products
    • Pass on relevant client information to “an insurance professional”, with the consumer’s consent
    • Make referrals to “an insurance professional” outside of the branch
  • Some banks called for the ability to sell insurance in their branches
advocis campaign
Advocis campaign
  • Banks undertook massive lobbying effort
  • Advocis neutralized this with an effective grassroots campaign
  • Advocis’ landmark survey conducted by POLLARA
  • White Paper released June 2006
  • Legislative proposals released in November 2006 – Bill C37
  • Advocis asked for and received commitments from all federalist parties to maintain restrictions
  • Bank Act received Royal Assent March 29, 2007
supreme court of canada
Supreme Court of Canada
  • Issue: Are federally regulated banks exempt from provincial licensing requirements to distribute credit insurance products from their branches and through other channels like telemarketers?
  • Advocis appeared as an intervener on April 11, 2006
    • Canadian Western Bank et al. v. Alberta
  • Advocis argued for uniform standards of professional conduct
    • Banks argued that the province does not have jurisdiction to regulate banks in this area as they are regulated federally under the Bank Act
supreme court of canada9
Supreme Court of Canada
  • Advocis applauds the decision of the Supreme Court of Canada released on May 31, 2007
    • Court unanimously dismissed the banks’ appeal to by-pass provincial regulation
  • Major victory for Canadian consumers and advisors
    • Places consumers’ interests first
    • Preserved a level playing field for financial advisors
  • Advocis the only association given leave to argue as an intervener
  • Court’s decision ensures a level playing field in other financial services
    • E.g. securities
managing conflicts of interest
Managing Conflicts of Interest
  • CCIR / CISRO Industry Practices Review Committee reviews of the industry
    • Commenced in 2004
    • Problems arising from US fraud cases
    • No illegal practices uncovered in Canada
  • Options for regulation:
    • Commission Disclosure
    • Restrict incentives
    • Legislate priority of the clients’ interest
insurance regulators are listening
Insurance Regulators Are Listening!
  • IPRC recommendations released February 2006
    • Favours a principles-based approach and wants to harmonize best practices across the industry
    • Extremely encouraging from an advisor’s standpoint
      • Insurance regulators were considering at the onset of their consultations introducing layers of prescriptive regulations and even commission disclosure
iprc s recommendations february 2006
IPRC’s Recommendations (February 2006)
  • Priority of the client’s interest
    • An intermediary must place the interest of policyholders and prospective purchasers of insurance ahead of his or her own interests
  • Disclosure of conflict or potential conflict of interest
    • Consumers must receive disclosure of any actual or potential conflict of interest that is associated with a transaction or recommendation
  • Product suitability
    • The recommended product must be suitable for the needs of the consumer
product suitability principle
Product Suitability Principle
  • Principle: Recommended product must be suitable for the needs of the consumer
    • Broker / agent should conduct fact finding appropriate to the circumstances of the client’s needs
    • Needs assessment should be flexible
      • Underlying risk
      • Client’s objectives
      • Complexity of product
  • Not to be mistaken with ‘product suitability’ in the securities / mutual fund context
    • Non-prescriptive in nature
  • Advocis develops tools and templates to assist advisors
industry must continue to drive solutions
Industry Must Continue to Drive Solutions
  • Regulators will continue to monitor
    • Should problems arise, regulators will consider taking further steps including prescriptive rules
    • Each provincial regulator will determine how best to implement
      • Legislation / regulation still an option
    • Newfoundland an outlier
  • Ontario surveying agents on principles implementation
  • Ongoing dialogue with regulators and provincial governments essential
    • Encourage harmonization across Canada
  • Work with key industry stakeholders essential to ensure consistency of principle emerges
  • Regulators in 4 provinces have extended suspension of MFDA Rule 2.4.1 until end of 2008
    • BC, Saskatchewan, Ontario, Nova Scotia
  • New Brunswick and Manitoba likely to follow suit
  • Alberta continues to oppose
  • Permanent rules not in place
  • Inconsistency across financial products, across jurisdictions
do not call list rules
Do-Not-Call List Rules
  • Legislation passed in 2006
    • Bill C-37, An Act to amend the Telecommunications Act
  • Canadian Radio-Television and Telecommunications Commission (CRTC), the regulator, begins developing rules
  • CRTC originally did not contemplate impact on advisors in connection with:
    • Existing business relationship
      • Referrals
      • Large multi-faceted conglomerate versus small financial services provider
    • Transfer of book of business
      • Does it constitute an “existing business relationship?”
    • Penalty regime
      • Individual ($1,500) vs. Corporation ($15,000)
do not call list rules18
Do-Not-Call List Rules
  • CRTC Releases final rules July 2007
    • To take effect when DNCL registry up and running
      • Timing still uncertain
  • A number of important Advocis recommendations adopted!
    • Existing business relationship
      • Limited to legal entity
        • Victory for small advisors on basis of level playing field
      • Ability to contact someone where consent is given
        • Must be express consent versus blanket consent, which is how advisors operate
    • Transfer of book of business
        • Does not constitute telemarketing and is therefore exempt
  • Client Relationship Model
  • Saskatchewan segregated fund marketing guidelines
client relationship model
Client Relationship Model
  • Formerly the Fair Dealing Model
    • OSC driven
  • Prescriptive regulation of financial advice
    • Duty to act honestly, fairly and in good faith
  • Marginalizes designations
  • Potential for significant increase to compliance cost
  • Little known benefit to consumers
  • Advisors shut out of policy development process
client relationship model21
Client Relationship Model
  • Registration Reform Rule – Proposed NI 31-103
    • Registration requirements
    • Client relationship rules and principles
      • Account opening, know-your-client and suitability
      • Relationship disclosure (relationship disclosure document)
      • Record keeping
      • Compliance system
      • Complaint handling
      • Conflicts on interest provisions
      • Referral arrangements
    • New more onerous MFDA / IDA rules to be put in place
saskatchewan segregated fund marketing guideline
Saskatchewan Segregated Fund Marketing Guideline
  • Insurance Council of Saskatchewan interprets existing by-laws as they apply to segregated funds
    • Segregated funds = mutual funds as an investment vehicle
  • MFDA style compliance on sale of segregated funds
  • MGAs to play an active role in compliance / supervisory role
    • Analogous to mutual fund dealer under MFDA
  • Spill over into other provinces?
    • Possible
proactive initiatives
Proactive initiatives
  • Independent Owner Operator (IOO)
    • Registration categories / business structures
  • Advanced status for CE
  • Formal recognition of designations
  • Recognition of the APA
  • Regulatory recognition of the Best Practices Manual
    • Product suitability for insurance intermediaries
    • Anti-money laundering guideline for advisors
regulatory pressure points
Regulatory Pressure Points

Federal regulators

  • CRTC

Federal departments

  • Finance
  • Industry Canada

National Umbrella Regulators

  • Joint Forum
  • CSA

Recognized SROs

  • MFDA
  • IDA

Provincial regulators

  • 13 Financial Commissions / Insurance Councils
  • 13 Securities Commissions

13 Provincial / Territorial Ministries

  • Finance
  • Government Services
  • Financial Services Superintendents
regulatory pressure points25
Regulatory pressure points
  • Financial advisors are on equal footing with companies and dealers in the eyes of financial services regulators
    • Little interest in differentiation when drafting regulatory policy
    • Serious repercussions for compliance costs on small advisor
  • Principles vs. Rules tug of war
    • Convergence to insurance regulatory regime OR towards securities based regulation?
implications of recent trends
Implications of recent trends
  • Regulatory harmonization
    • Good, if it works in your favour
  • Strengthening of supervisory oversight
    • E.g., Client Relationship Model
    • Relevancy of designations?
    • Professionalism being challenged
independent channel small businesses at risk
Independent channel / small businesses at risk
  • Compliance costs
  • Consumer access to financial products and services
    • Especially at lower incomes
  • Barriers to entry
protecting advisors
Protecting advisors
  • Advocis at the table
  • However, regulators have resources and time
  • Other stakeholders have deep pockets
  • Political engagement a core competency
  • Members engaging politicians
    • Federal
      • Bank distribution of insurance
    • Provincial
      • Political Advocacy Committees
  • Opportunity for involvement
provincial political advocacy committees
Provincial Political Advocacy Committees
  • Formally established
    • BC, Manitoba, Ontario, Newfoundland
  • Ongoing development
    • Slated for 2007-08
      • Alberta, Saskatchewan, Atlantic provinces
    • Chapter engagement
    • Political activism / contact network
  • Legislature days
stay informed
Stay Informed
  • Advisor Voice issued monthly
  • Advocacy update in FORUM magazine
  • Advocacy updates at Chapter meetings
  • Visit www.advocis.ca regularly
    • Advocacy page
  • Send us an email at: regulatoryaffairs@advocis.ca

If not Advocis then who?

Thank you