30 Eglinton Avenue West, Suite 306 Mississauga ON L5R 3E7 Tel: (905) Website:

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1 30 Eglinton Avenue West, Suite 306 Mississauga ON L5R 3E7 Tel: (905) Website: February 7, 2014 Mr. Frank Allen, Assistant Deputy Minister Ontario Ministry of Finance Securities Reform Division Frost Building North, 4 th Floor 95 Grosvenor Street Toronto ON M7A 1Z1 Submitted by FPlanning.Consultation@ontario.ca Dear Mr. Allen: Subject: Investigating the Merits of Regulating Financial Planners in Ontario Independent Financial Brokers of Canada (IFB) is submitting its written comments as a follow-up to the roundtables held by the Ministry of Finance on January 10 th and January 14 th, IFB attended both sessions and made a presentation at the January 10 th roundtable. We appreciate the Ministry inviting comment at this early stage and in advance of any policy decision. Who we are IFB is a national not-for-profit trade association representing approximately 4,000 duly licensed financial professionals across Canada. Our members choose to belong to IFB because it is the only association that exclusively supports advisors who operate as self-employed business men and women. IFB members are not employees of banks or insurance companies. The majority of our members live and work in Ontario running their own community based business and serving the financial needs of their clients. Theirs is a trust-based business, and client relationships often span decades and generations of families. Their livelihood depends on attracting and retaining clients and on their clients referrals. While our members are independent, they are subject to all the same regulatory rules and standards as any advisor working within the financial services industry. This means that their recommendations, trades and standards of market conduct are regulated and subject to oversight, approval and disciplinary action by their dealer and regulator(s). Financial Advisors and Financial Planners Some participants at the Ministry roundtables questioned whether the current standard of professionalism amongst financial advisors is adequate. Some suggested that all advisors should be held to a standard equivalent to lawyers or doctors. We would argue that most financial advisors consider

2 IFB Comments to Ministry of Finance: Consultation on regulating Financial Planners themselves to be professional but urge caution when applying such a broad brush approach, as there are important differences. Just as not everyone who seeks medical attention needs a specialist, not everyone who seeks financial advice needs or wants a full review of their financial situation or to acquire a comprehensive suite of investment products. In fact, many clients of our members start in the early years with small acquisitions of life/health insurance and/or mutual fund investments that are affordable but set them on the road to building savings and risk protection for themselves and their families in the event of disability or death. Consumers can access a range of investment advice including no advice at all - from a variety of sources, depending on their needs. Securities registration categories have been designed to recognize these differences. Also, while doctors and lawyers operate largely autonomously in their daily practices, mutual fund advisors, securities retail representatives and life insurance brokers do not. They are subject to ongoing scrutiny and their files are audited by dealers, SROs, MGAs and insurance companies on a regular basis. To suggest that the majority of licensed advisors operate in some kind of Wild West environment does not reflect the reality of the regulated marketplace. It is important that this discussion distinguish between the titles Financial Planner and Financial Advisor and be limited to examining possible regulation of Financial Planners. It is worth noting that while Australia introduced legislation in 2013 to restrict the use of the titles financial planner and financial advisor, it did not have a comparable regulatory structure of SRO oversight, equivalent to the MFDA and IIROC, already in place. We have also been asked to comment on whether to restrict the use of the title financial planner to those who are properly accredited. We agree that individuals holding out to the public calling themselves a Financial Planner should have the appropriate experience and proficiency standards to do so. From a consumer protection point of view, this makes good sense; the public should be able to rely on a consistent standard. Financial Planners Financial planners fall into 3 distinct groups those who have a financial planning designation and do not sell products or provide product advice; those who call themselves a financial planner but have no credentials to do so; and those who have a financial planning designation and who provide investmentrelated advice and recommend/sell products. The first 2 groups operate outside of the current regulatory regime. In principle, we do not object to CFPs and other accredited professional financial planners, who provide non-product specific advice, being subject to oversight by their regulating body. These planners operate outside of a securities or insurance regulator today and require no license to practice. If the Ministry finds that this represents a gap in consumer protection then some action is warranted. The last group is regulated and licensed, often by more than one provincial regulator (e.g. the MFDA for mutual funds and FSCO for life insurance). Our remarks will focus on this group. Financial planners who are licensed to provide investment-related advice IFB has a significant interest in the discussion of this group of financial planners for several reasons. First, over 20% of IFB members have earned a CFP designation. Still others are in the program but have not yet completed it. A large number hold other financial designations, such as the CLU, RFP, etc. All are licensed to offer advice and product recommendations most frequently related to life/health insurance and/or mutual funds. Page 2 of 5

3 IFB Comments to Ministry of Finance: Consultation on regulating Financial Planners Second, our members are already highly regulated, and we are wary of adding to the existing regulatory burden without sufficient proof that it will address a gap in investor protection. i) Impact of growing regulatory burden is reducing choice in the marketplace Our members compete for clients alongside large financial institutions and, while we fully support consumer choice, we also advocate for a level playing field. A competitive marketplace is good for consumers. Indeed, IFB was founded on the principle that choice is the cornerstone of consumer protection. Increasingly, however, over-regulation is reducing the choices that will be available for consumers who want to deal with an advisory channel outside of the banks. A huge concern expressed by IFB members today is that the burden of regulation has increased their operating costs and the time they spend on compliance to the point that it is becoming increasingly difficult to continue serving clients with small accounts. This is worrisome because it runs counter to the body of respected research which links the value of professional advice to greater wealth accumulation and stability for those who use an advisor and that the earlier this relationship starts the better the long-term results. We add IFB s voice to those at the roundtable who expressed concern about the impact of reduced competition arising from increased costs, mergers and the dominance of the banks. No bank representatives attended these roundtables which makes us wonder whether this large population of advisors will operate outside of any potential regulation imposed on other advisors. IFB on many occasions has cautioned against government and regulators creating a regulatory system so burdensome that only large financial institutions can absorb the associated costs, or to inadvertently create a marketplace where only the wealthy can afford to obtain personalized financial advice. In our view, either of these would be a disservice to both consumers and the industry in general. ii) Professional development IFB supports the ongoing professionalism of its members, and non-members, by providing well-regarded continuing education events throughout the year and across Canada. Continuing education is a recognized means to promote ongoing professional development and ensure updated proficiency standards. In Ontario, advisors who hold a life insurance license are required by regulation to undertake a minimum of 30 hours of CE in each 2 year licensing period, and random audits are conducted in order to ensure compliance. Similarly, IIROC retail representatives must complete 12 hours of compliance education and 30 hours of professional development/product knowledge training every 3 years. Advisors who hold a CFP designation or equivalent have additional educational requirements. These standards compare favourably with Ontario s law society requirements for lawyers and paralegals. In place since January 1, 2011, its CE requirement is set at 12 hours per year of which 3 must relate to ethics, professional responsibility or practice management. Currently, there is no regulatory requirement for CE for mutual fund representatives, although we note that many MFDA approved persons recognize the value of continuing education and attend IFB educational events in order to keep their knowledge current on a voluntary basis. The Ministry has stated one reason to hold this consultation is that financial decisions and products are complex and becoming increasingly so. We agree, and in response to these marketplace challenges, IFB has seen dramatic shifts in the last 20 years both in the type of education advisors seek at these events and in the type of content that regulatory bodies will accredit. Increasingly, IFB looks to engage Page 3 of 5

4 IFB Comments to Ministry of Finance: Consultation on regulating Financial Planners regulators, lawyers and industry experts to address issues confronting the industry and market conduct expectations. This shift of focus reflects the trend away from regulating product sales to regulating suitability of advice, ultimately enhancing advisor education through acquiring a broader knowledge and understanding of the marketplace. iii) The shift from prescriptive to principle-based regulation The implementation of National Instrument : Registration Requirements, Exemptions & Ongoing Registrant Obligations marked a significant shift in securities regulation, away from a strictly rulesbased response to market conduct, and procedures which concentrated on control and accountability, to a greater focus on desired outcomes and standards of expected behaviour. This modernization continued with the introduction of the Client Relationship Model. The Client Relationship Model (CRM) mandates processes which increase the level of disclosure clients receive and greater transparency. Implementation is phased in, and by July 2016 clients will receive detailed breakdowns of account fees, commissions and trailing fees, and performance information in their statements. Many broker/dealers are implementing these changes ahead of the deadline. IIROC and the MFDA have issued multiple notices, bulletins and guidance to their dealers/advisors to clarify the implications of NI and in some cases the SRO expectations go beyond what the CSA mandated. In support of CRM, IFB developed a client bulletin in June 2013, as a tool to help members explain accounts costs and their fees to their clients and engage clients in an open discussion. It has been well received by members. For some time now, investors who purchase mutual funds or segregated funds have been provided with Fund Facts (and for segregated funds an additional Key Facts document). Delivery of these documents is mandated by regulators and they are designed to make it easier for investors to compare the costs, risk level and past performance of the fund, or funds, they are considering. iv) Overlapping regulation The Ministry received feedback at the roundtables from a wide range of industry stakeholders and consumer advocates. The discussion is complex given the highly regulated industry financial advisors and the majority of financial planners operate within. At issue for us and where we do not see a gap in consumer protection - is that those certified professional planners who provide advice related to products must be licensed and subject to the oversight of securities regulators, such as IIROC or the MFDA and/or the insurance regulator, FSCO. If another SRO is recognized that overlaps jurisdictionally with these existing SROs, we believe it will lead to confusion for these planners, their dealers and clients. Today, the existing regulatory bodies have the ability to fine, discipline, suspend and/or revoke the planner s license to conduct business. Clients have access to various complaint mechanisms and restitution, including coverage under the advisor s, and firm s professional liability insurance. By regulation, life insurance agents are required to conduct a needs analysis with clients as part of establishing the suitability of their recommendations, and for which they are held accountable. Similarly, mutual fund advisors are required to complete Know Your Client forms and take other measures to support the suitability of their product recommendations. We would not want new rules to restrict these advisors ability to conduct an appropriate level of financial analyses. If it did, it could lead to an unintended consequence of reducing the existing level of consumer protection and/or lead to confusion for brokers and dealers if there is no bright line around what constitutes financial planning versus conducting a suitable KYC/needs analysis. Page 4 of 5

5 IFB Comments to Ministry of Finance: Consultation on regulating Financial Planners Concluding remarks To summarize, if the Ministry investigation into financial planning finds merit in considering amendments to existing regulation or the creation of new regulation, we strongly advise its impact be limited to unregulated entities. The Ministry asked for suggestions for improvement of the current regulatory system. Ontario has taken steps to improve the public s level of financial literacy, but we believe more could be done. Financial literacy is the key to reducing a consumer s risk of becoming a victim of financial fraud, as well as helping them better judge whether the advice they receive is appropriate and competent. Informed consumers will be better able to recognize red flags, and assess risks in the financial marketplace. IFB, along with many others in the industry, supports financial literacy, and educating the public of the importance of dealing with an individual who is regulated and how to check an advisor s registration and disciplinary history. Beyond this, we see a role for government and regulatory bodies to supplement their digitally-based financial literacy information by undertaking an active print and media campaign. Many investors, especially older Canadians, do not rely on the internet for their information. A campaign using radio, television and newspapers would be an effective adjunct to the digital and webbased approach to consumer education, and be seen to be from a non-partisan source. We note that regulators in BC have been running a series of television ads to combat fraud especially aimed at seniors. IFB thanks the Ministry for the opportunity to offer our comments. We welcome the opportunity to contribute to this discussion further, as required. Please contact the undersigned or Susan Allemang, Director of Policy & Regulatory Affairs (sallemang@ifbc.ca) should you wish to discuss our comments further. Yours truly, Nancy Allan Executive Director allan@ifbc.ca Attach: IFB Code of Ethics Page 5 of 5

6 Code of Ethics of Independent Financial Brokers of Canada This Code of Ethics applies to all financial transactions, without regard to the product category, the type of intermediary, or the means by which the purchase of a product or service is transacted. If any principle or practice is inconsistent with a provision of an applicable law or regulation, the applicable law or regulation will take precedence. 1. Interests of Client It is paramount that a broker shall place the interest of his/her client ahead of all other interests. 2. Needs of Client Before giving advice or making recommendations, a broker shall make a diligent effort to learn the client's needs, objectives and circumstances, and to then offer products or services to fulfill them. A broker must not recommend the replacement of any insurance policy unless he/she believes that such a replacement is in the best interest of the client. 3. Legitimacy of Client and Transaction A broker shall collect enough information about the client and the proposed transaction to reasonably determine the identity of the client and that the transaction is lawful. The broker must not act on behalf of a client when there are reasonable grounds to believe that the transaction is of an unlawful nature. A broker must not knowingly submit information on an application for insurance to an insurer that is inaccurate or misleading. 4. Professionalism of Broker A broker should possess an appropriate level of knowledge relating to his/her particular business and meet high standards of professional ethics, including acting with honesty, integrity, fairness, due diligence and skill. Continuing education should be pursued as a means of keeping skill and knowledge levels current in accordance with regulatory requirements. A broker must ensure that his/her financial records are properly maintained and follow sound business practices. A broker must ensure that all financial obligations are met and strive to meet all regulatory requirements for professional liability insurance, errors and omissions insurance, trust accounts, deposits or other fiduciary measures.

7 5. Disclosure of Broker Information A broker must not misrepresent his/her education, qualifications or experience, and should inform the client of the business licenses and registrations held, as well as the business name(s) of firm(s) under which he or she is licensed to operate. He/she should ensure that all references to his/her business activities, services and products are clear, descriptive and not misleading. 6. Disclosure of Financial Products Information When recommending a transaction to a client, a broker must disclose all relevant facts, considerations, costs and risks necessary for an informed decision which are reasonably available to the broker. This disclosure should be in writing, and a written receipt obtained from the client. A broker may not be misleading as to the terms, costs, benefits, or risks of any proposed course of action. In addition to clearly describing the product or service for the client and the ways in which the transaction will fulfill the needs of the client, the broker must disclose important assumptions underlying any illustrations or examples that have been provided to the client, as well as the fact that actual results may differ significantly from those shown. The broker should avoid using examples or illustrations which he or she knows, or ought to know, are based on unusual results or a period that generated much better than normally anticipated performance. A broker must deliver all policies, amendments and other documents in a timely manner and must advise the client, in writing, if an issued policy is materially different from the policy applied for. 7. Confidentiality Client and policy information may not be disclosed to any individual or company without express written permission of the client. 8. Conflicts of Interest A broker must disclose to a prospective buyer of life insurance all conflicts of interest associated with any recommendations and transactions and the client should then be given the opportunity to halt the transaction, to seek professional advice or complete the transaction. 9. Behaviour A broker must act in good faith at all times, and meet high standards of professional ethics, including acting with honesty, integrity, fairness, due diligence and skill. He/she may not engage in behaviour that is likely to be detrimental to the public professional image of insurance, mutual fund or other financial brokers. A broker must deal directly with all formal and informal complaints or disputes, or refer them to the appropriate person or process, in a timely and forthright manner. Complaints must be reported to the errors and omissions insurer as soon as is practicable.

8 10. Independence An IFB broker must maintain his/her independence within IFB membership requirements.