21st Century Regulatory Environment of the Financial Advisor

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21st Century Regulatory Environmentof the
Financial Advisor

• Kris Birchard, CFP, CLU, TEP - Vice Chair, Board
  of Directors
• Banff School 2007

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Objectives

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

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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

• Designations
• Highest practice standards
• Meaningful continuing education
• Priority of the clients interest

Financial Advisor
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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

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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

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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 consumers
  consent
• Make referrals to an insurance professional
  outside of the branch
• Some banks called for the ability to sell
  insurance in their branches

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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

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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

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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
• Courts decision ensures a level playing field in
  other financial services
• E.g. securities

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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

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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 advisors
  standpoint
• Insurance regulators were considering at the
  onset of their consultations introducing layers
  of prescriptive regulations and even commission
  disclosure

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IPRCs Recommendations (February 2006)

• Priority of the clients 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

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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 clients
  needs
• Needs assessment should be flexible
• Underlying risk
• Clients 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

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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

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Incorporation

• 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

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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)

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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

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Challenges

• Client Relationship Model
• Saskatchewan segregated fund marketing guidelines

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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

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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

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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

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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

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Regulatory Pressure Points

• Federal regulators
• FINTRAC
• CRTC

• Federal departments
• Finance
• Industry Canada

• National Umbrella Regulators
• Joint Forum
• CCIR / CISRO
• 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

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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?

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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

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Independent channel / small businesses at risk

• Compliance costs
• Consumer access to financial products and
  services
• Especially at lower incomes
• Barriers to entry

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Protecting advisors

• Advocis at the table
• However, regulators have resources and time
• Other stakeholders have deep pockets
• Political engagement a core competency

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Grassroots

• Members engaging politicians
• Federal
• Bank distribution of insurance
• Provincial
• Political Advocacy Committees
• Opportunity for involvement

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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

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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_at_advocis.ca

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