a ;duciary duty, so courts may no longer rely on existing jurisprudence in that area. ;e Jurisdictions with Concerns about a BIS
are uncertain how regulators or the courts will interpret a standard
that on the one hand expressly requires conduct in the client’s best
interest and the avoidance of material con;icts, but in other cases
permits conduct that may not be in the client’s best interest as long
as there is disclosure.
;ere are also tensions between the proposed standard and more
speci;c regulatory requirements, which may create uncertainty for
registrants. In some cases, speci;c requirements contemplate
conduct that seems inconsistent with the proposed standard. For
example, currently ;rms that sell only proprietary products can
meet their suitability requirement provided they ensure any
recommendation they make to purchase a security from their
product list is suitable for the client. However, under a best interest
standard, that recommendation may not be in the client’s best
interest, as it may be in the client’s best interest to invest in a
non-proprietary product. ;e ;rm’s recommendation would
therefore appear not to comply with the requirement to act in the
client’s best interest.
Other regulators that have implemented a best interest standard
have faced challenges with the uncertainty it creates. When Australia introduced its statutory best interest standard, it included a
“safe harbour” if registrants followed certain prescribed steps. One
of the elements of the safe harbour was that registrants take “any
other steps that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given
the client’s relevant circumstances”. In 2014, a new government
proposed a bill that included removal of this language, following
its commitments to reduce compliance costs for the ;nancial
services industry and for consumers who seek advice. ;e government was concerned that the catch-all provision created signi;cant
legal uncertainty and rendered the safe harbour unworkable for
registrants because it was too open-ended.
Because it does not establish a clear standard for registrants to
follow or for regulators or courts to enforce, it is uncertain whether
the proposed standard will drive better behavior by registrants and
at what cost any changes in behaviour will come. It is not clear
how registrants would modify their behaviour to comply with
their interpretation of what the standard requires or whether their
responses will improve outcomes for investors.
;e CRM2 and Point of Sale Initiatives are intended to
improve communication in the client-registrant relationship
around costs and investment performance. ;eir e;ectiveness
should be measured before we [BCSC] consider a best interest
Both industry and regulators have made signi;cant e;ort to
implement the CSA’s CRM2 and Point of Sale reforms. Before
proceeding with consideration of a best interest standard, the
Jurisdictions with Concerns about a BIS believe that we should
determine whether those reforms are e;ective. ;ese changes are
intended to advance clients’ understanding of how their portfolio
is performing and what they are paying their registrants. No other
regulatory regime has imposed these signi;cant types of reforms.
;e BCSC is leading a CSA project to measure the impact of
CRM2 and Point of Sale disclosure reforms, including their
impact on registrant behavior and client understanding of the cost
and performance of their investments. ;is project is in the
planning stage and will run through 2018.
Only if the Jurisdictions with Concerns about a BIS determine
that, together, the CRM2, Point of Sale and proposed targeted
reforms are not e;ective, should we then revisit the question of
imposing a best interest standard and how that standard should be
Other jurisdictions that have implemented a best interest
standard have done so in conjunction with targeted reforms
prohibiting certain con;icted compensation models.
;e proposed standard is unlikely to be e;ective without more
fundamental changes to the Canadian securities industry, including reforms to compensation structures. In the U.K. and Australia,
for example, reforms speci;c to compensation structures were
implemented in addition to a quali;ed best interest standard. Work
is being done by the CSA’s mutual fund fee project in this area.
;e proposed standard may impact interpretation of existing
;duciary standards for certain registrants, i.e. portfolio
managers and investment fund managers.
By applying the proposed standard to all registrants, regardless of
the actual nature of the relationship between the registrant and its
clients, the Jurisdictions with Concerns about a BIS believe that
we risk diminishing the standard currently set out in some jurisdictions’ securities laws requiring portfolio managers and dealers with
discretionary authority and investment fund managers to act in
the best interest of their clients.
;ese laws refer to registrants having to act in the client’s best
interest and are intended to establish true ;duciary standards. ;e
Jurisdictions with Concerns about a BIS think adopting a standard
that requires other registrants to also act in their client’s best
interest, but that is quali;ed to mean something less than a full
;duciary standard may impact the interpretation of the words
“best interest” as they apply elsewhere.
BEST INTEREST STANDARD - THE CASE AGAINST (Cont.)
BRIEFING NOTE FOR THE PCMA’S PRESENTATION AT QUEEN'S PARK ON MARCH 9, 2017