Tuesday, March 27, 2012

SROs Fiddle While Investors Get Burned

IIROC has recently released new information on the implementation of its chosen Customer Relationship Model (CRM). Before I add any comments let us take a look at how IIROC describes itself and the quality of their efforts.

“IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada. IIROC sets high quality regulatory and investment industry standards, protects investors and strengthens market integrity while maintaining efficient and competitive capital markets.”
This gem is found in the March 26th news release issued by IIROC.  Perhaps a less egocentric organization might have stated that it has “a mandate to set high quality regulatory and investment industry standards.....”, however IIROC appears to have declared victory.
Sadly, IIROC acts just like most self regulatory organizations (SRO). They react late, water down the regulations to reflect the desires of the dealers, and generally only act when the pressure to do something becomes embarrassing. And do not kid yourselves, these folks do not embarrass easily.
The move to clarify fees in the CRM is far too late and the ability of salespeople to call themselves advisors regardless of any qualification standards seems to go unnoticed. As to having salespeople provide better information on risk, well that is almost impossible since no credible standard exists on how to rank a mutual fund’s risk profile. In effect, the standard is that each fund can set its own risk ranking so long as they feel it is appropriate. Wow, feel safe?
The mandate to set high quality standards was never intended to read as “minimum standard that is acceptable to all stakeholders”. In fact the idea of utilizing an SRO seems to be something that is never questioned in Canada. Whether it is the Canadian Medical Association never seeming to sanction doctors until the media gets involved or the regulatory bodies that rarely expel a Certified Financial Analyst in spite of the numerous investor complaints; it seems that in Canada the major role of an SRO is to lie low, deflect criticism, and act only when forced to. It is safe to say no bold initiative ever originates with an SRO.
“So what”, you say? The net result is that Canada continues to fall further behind other nations when it comes to protecting investors. Specifically, I mean small retail investors. So what would make me happy you ask? How about some big thoughts! Some regulations that would actually drive real change and turn the industry in a different direction. Here are three ideas that would change the landscape for investors in Canada:
1-      The first is a very simple move to protect investors and is at least partially in place in a number of countries. Ban deferred sales charges (DSC, Back End Load) and trailer fees. Investors can either pay the salesperson an up-front fee or pay an on-going fee to the salesperson directly. hidden third party fees are never a good solution for investors.

2-      Require all mutual fund salespeople to become licensed to sell ETF securities. No salesperson selling mutual funds should be able to do so without providing a comparison to the top selling ETF fund in terms of performance and fees, as well as the cheapest priced mutual fund in the same category. This is a low threshold but one that is not even being talked about. Consumers do not know their options and this would force salespeople to at least acknowledge that lower cost options are available.

3-      Any person selling securities should have a fiduciary obligation to put the client’s interest before their own. Most investors already think this is the case and are shocked to find their interests are not primary and often not even secondary in the process. Salespeople currently can first look to what pays the most commission, then look to see what most benefits their parent company, and then select any fund that meets those requirements and is deemed “suitable” for the client and sell it to an unsuspecting investor.
Do I think any of these changes will happen? Actually, yes I do. They will happen when every other major country has already made similar changes. It will be very late and not likely in my lifetime. Look to Australia where governments are not afraid to challenge the financial status quo; look to the U.S. where litigation helps shape regulations; and look to Britain where government has created regulatory bodies with a true focus on protecting investors.

In Canada we can dream big......but we do not have the courage to take on the establishment....yet!


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