With 2012 drawing to a close and a new year imminent, FAIR Canada has drafted a wish list of investor protection improvements it would like to see implemented in the coming year:
1. Implement a best interests standard
There is a distinct expectations gap between what is required of "advisors" and what is expected by consumers. Consumers are led to believe that advisors make recommendations in their best interest, but no such standard is actually in place. Often, consumers are unaware that the financial services providers that they receive "advice" from are simply salespeople pushing high-cost financial products. When things go awry, advisors' defense is that the investments were "suitable", which is a much lower standard. FAIR Canada wishes that "advisors" were required to provide advice that is in the consumer's best interest, in line with consumer expectations.
2. Ban all forms of third-party embedded commissions (particularly trailing commissions) and encourage real price competition between mutual funds
Trailing commissions carry serious potential for conflicts of interest and present high, opaque costs to consumers. Mutual funds are marketed by manufacturers to "advisors" on the basis of how much advisors will earn in commissions - a perverse form of price competition where there are incentives to create more expensive products in order to increase compensation to incentivize advisors to sell their products. FAIR Canada wishes that securities regulators would seriously consider banning trailing commissions.
At an absolute minimum, investors should be told of any costs or fees (including specifics about trailing commissions) clearly and in plain language both before they invest (in Fund Facts) and after (in annual cost reports). The investment fund industry's continued opposition to the disclosure of trailing commissions is an indication that the industry worries that if investors were aware of these costs they would question what services they received for the money they paid and would seek lower-cost alternatives.
3. Protect consumers from leveraged speculation in investment products
FAIR Canada is concerned about systemic risks presented by leverage in retail customers' investment accounts. We are concerned that some financial institutions irresponsibly promote borrowing to invest as an investment strategy despite the fact that in the vast majority of cases it is not appropriate for the consumer and despite the fact that Canadians are already heavily indebted. We have raised with securities regulators the issue of inappropriate practices and relationships between banks who provide investment loans (including related institutions) and registrants, where consumers may be encouraged to take out loans while they are still in their advisor's office. In particular, we recommend that regulators undertake targeted compliance reviews and canvass dealer member firms to determine the extent of this problem.
FAIR Canada wishes that regulators would address the issue of inappropriate recommendations of leveraged investing to retail consumers in order to provide an adequate level of protection. Leveraged sale of mutual funds, segregated funds and other high-fee financial products is not investment; it is speculation and clearly not suitable for the great majority of consumers.
