Frank Allen Assistant Deputy Minister Ministry of Finance Frost Building North, 4 th Floor 95 Grosvenor Street Toronto, Ontario M7A 1Z1 FPlanning.consultation@ontario.ca Dear Mr. Allen, The Canadian Securities Institute (CSI) is pleased to submit the following remarks in response to the Ministry s request for comments on the initiative titled Investigating the Merits of More Tailored in Ontario. CSI is the leading provider of accredited financial services proficiency learning solutions in Canada. We have been setting the standard for world-class, life-long education for financial professionals for more than 40 years. We are IIROC s exclusive proficiency partner and offer all proficiency courses/exams for securities licensing purposes. Our expertise extends from securities to mutual funds, from banking and trust to insurance, from portfolio management to financial planning and wealth management. CSI also offers specialized financial services designations including the Personal Financial Planner (PFP ). In this comment paper we will focus on the current regulatory oversight of advisor proficiency requirements and improvements we feel could be made going forward. Specifically we will: 1. Identify the various levels of financial advice including financial planning and why the ministry should take these various levels into consideration during the review process. 2. Provide an overview of the current regulatory structures in place to oversee financial advice proficiency requirements and explain why a new SRO for financial planning is not required. 3. Expand on the concept of attaining an appropriate standard of competency for the level of advice being offered and how competency standards have been raised and can continue to evolve under the current regulatory framework. 4. Demonstrate how voluntary designations can complement regulatory standards and oversight. 200 Wellington Street West, 15TH Floor, Toronto, Ontario M5V 3C7 TEL 416 681-2221 FAX 416 364-8952 www.csi.ca
Consultation Paper Page 2 5. Present how existing regulators and designation-granting organizations can appropriately oversee the use of titles. 6. Recommend improvements to existing proficiently standards for mutual fund representatives, life insurance agents and pension plan advisors. Continuum of Advice and Appropriate Levels of Proficiency The Ministry has stated that as part of this review it will be important to understand whether regulation of financial planning will broaden consumer/investor choice, promote more informed decision-making and generally enhance consumer/investor protection. To do so, if the Ministry is to consider setting out regulation to oversee financial planning as an area of advice, it is important to first to define financial planning within the continuum of the financial advice space. There are many different levels of advice that a consumer may seek. These levels of advice reflect the needs of the client which can be very basic or complex depending on financial circumstances and life stage goals as well as the complexity of products and services being sought. To provide context, we have set out the below a (somewhat subjective) continuum which begins with basic advice and moves to the more complex. Basic Banking Services (credit cards, loans, mortgages, savings account) Basic Financial Advice (RRSP, RESP, TFSA) Risk Management (life, accident, illness insurance) Investment Advice (mutual funds, securities, alternative investments) Comprehensive Financial Planning Discretionary Portfolio Management Wealth Management Estates and Trusts Planning and Management Regardless of the level of advice being provided, advisers must meet appropriate standards, possess the required competencies and be subject to and apply the concepts of knowing the client (situation, needs, goals and risk tolerance) and knowing the product (benefits, risks, suitability and disclosure) as these are critical to providing appropriate advice and protecting consumers. Although there is overlap, each level of advice has different knowledge requirements. As such, an individual, for example, who is proving investment advice, while applying some financial planning concepts, should not be held to the same level of proficiency as those providing comprehensive financial planning services. By the same token, comprehensive financial planners should not be expected to demonstrate the level of investment knowledge that an Investment Advisor possesses.
Consultation Paper Page 3 Current Regulatory Oversight of Financial Advice With a few exceptions, financial advisors are overseen by the existing national or provincial regulatory frameworks. This oversight has evolved significantly as a result of increasing concerns about the vulnerability of clients, particularly ones who are nearing retirement, in a financial services marketplace that has become increasingly sophisticated. The focus of oversight is no longer solely on product sales - but also advice. Specifically, the regulators currently overseeing financial products and advice include: License/Registration Securities (including stocks, bonds, mutual funds, options, futures and discretionary portfolio management) Mutual Funds, Exempt Market Securities, RESPs Life Insurance Mortgage Brokers Regulator Ontario Securities Commission (OSC) - National Instrument 31-103 Investment Industry Regulatory Organization of Canada (IIROC) - Regulation 2900 Ontario Securities Commission (OSC) - National Instrument 31-103 Mutual Fund Dealers Association (MFDA) - Rule No. 1.2 Financial Services Commission of Ontario (FSCO) - The Insurance Act of Ontario Financial Services Commission of Ontario (FSCO) - Mortgage Brokerages, Lenders and Administrators Act The vast majority of advisors are overseen by at least one of the regulators listed above. Each of these regulators sets out specific standards for proficiency to provide advice on products and each regulator has the enforcement authority, organizational structure, policies and procedures in place to oversee the individuals providing advice as well as the financial services firms they are employed by or affiliated with. Furthermore, regulators continue to address consumer protection and the competence and supervision of advisors. Some recent efforts include:
Consultation Paper Page 4 The OSC, IIROC and the MFDA have made significant reforms by implementing the Client Relationship Model which addresses many important areas of the advisory relationship. IIROC in particular has over the years shown progressiveness and flexibility in developing what is now a robust and appropriate level of proficiency required for advisers that fall within its oversight. Its commitment over the years to raising the bar by requiring proficiency standards for a broad range of approved persons, as well as continuously increasing the standards that must be met, show that the current approach is working well in the securities area. The proficiency bar for life insurance agents was significantly raised with the introduction of the Life License Qualification Program (LLQP) in the early 2000s. Insurance regulators are presently going through the process of updating the standard to ensure it reflects current national best practices. In 2009, under NI31-103 the Canadian Securities Administrators (CSA) introduced the exempt market dealer registration category and imposed proficiency requirements on individuals in this category many of whom were previously unregulated. FSCO in 2007 raised the licensing proficiency standards for mortgage brokers and agents in Ontario and have recently improved upon this standard by introducing mandatory re-licensing education requirements for 2014 licensing purposes. These examples show that regulators are broadening their mandates and increasing proficiency requirements for financial advice. As a result of these progressive steps, the existing structure will continue to become stronger. As such, the focus should be on ensuring the existing proficiency requirements continue to evolve to meet both industry and client needs rather than introducing a new SRO. The addition of another level of oversight would be duplicative and costly for regulators, firms and individuals and we believe would not provide for any additional protection of the consumer. To further support this view we refer the Ministry to a study undertaken by the United States Government Accountability Office (GAO) which addressed the issue of additional oversight of financial planning in the United States. The resulting report released in January 2011 found that:
Consultation Paper Page 5 In general a majority of the regulatory agencies, consumer groups, academics, trade associations and individual financial service companies did not favour substantial structural change in the regulation of financial planners. Few groups supported an additional oversight body which was generally seen as duplicative of existing regulation. The GAO report specifically noted that with the current discussions amongst regulators that more time should be given to allow for the existing opportunities for greater enforcement to come out of the current changes being under taken by existing regulators. IIROC An Example of Evolving Proficiency Standards Since the 1960 s, IIROC has set out the proficiency standards for Investment Advisors (Registered Representatives) in the securities industry. Today s proficiency requirements are based upon an industry approved competency profile that sets out the standards to be met by an IIROC Investment Advisor. Initially the proficiency requirement was one course - the Canadian Securities Course - which was very product and regulation focused. However, as IIROC has been applying a progressive approach to proficiency, the standards have been raised significantly over the years. IIROC Rule 2900 now sets out four base level requirements; the first three of which must all be completed prior to registration to sell securities (i) Canadian Securities Course (products, capital markets), (ii) Conduct and Practices Handbook Course (ethics, regulation and compliance); and (iii) 90-day training requirement (corporate internship/training). The fourth requirement is the Wealth Management Essentials Course (financial planning, investment management) which must be completed within 30 months of the original registration date (known as the 30 month requirement ). While this last requirement was put in place in 2006, it should be noted that the concepts of financial planning were introduced to the IIROC proficiency model in the mid-1990s. IIROC recognized the need for rising advisor standards when it introduced the 30-month requirement which at that time consisted of a choice between robust courses on financial planning or on investment management. The introduction of the Wealth Management Essentials course as the sole 30-month requirement recognizes that IIROC Investment Advisors should have strong competencies in many elements of both financial planning and investment management and be able to integrate each into an appropriate level of advice for clients. Following completion of these base requirements, continuing education is mandated and additional courses are required for advisors that want to provide advice on more complex products or to offer discretionary portfolio management.
Consultation Paper Page 6 Beyond Licensing Requirements Professional Designations Beyond licensing requirements, individuals have the opportunity to voluntarily earn a professional designation that is granted in an area of specialized financial advice and many advisors in recent years have made this commitment. To be credible, financial advice designations such as the Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Personal Financial Planner (PFP), Registered Financial Planner (RFP) and Chartered Investment Manager (CIM) must meet rigorous standards. Each of these recognized designations have set standards, based upon a professional competency profile, that include significant education, a certification examination, relevant experience, on-going professional development and adherence to a code of ethics. While most of the individuals who hold one of these recognized designations also hold a product license or are registered with one or more regulators, they have chosen to be held to an additional standard that has been developed to complement the regulatory requirements. It is the responsibility of the organizations that grant a designation to ensure that the certification being granted reflects the competency level required and achieved by the advisor. Reputable certifying organizations must have appropriate oversight and complaints processes in order to uphold the public s confidence in the designation. There is a role for regulatory oversight pertaining to designations that helps ensure that the designations and the organizations that offer them are credible. Recently, IIROC has shown increased focus on titles and designations by releasing its guidelines for comment on the use of titles and designations by IIROC member firms and the publication of its glossary of financial designations. The guidelines titled The Use of Business Titles and Financial Designations by Financial Advisors has put the onus upon the firm to ensure that if an employee is holding out as a specialist, that the employee has met the competency requirements for providing such specialist advice. The proposed guidance states: Dealer Members and their representatives have an overarching regulatory obligation to deal fairly, honestly and in good faith with clients. No IIROC approved person should hold his or herself out the public in any manner, including without limitation, by the use of a business title or designation or qualifications or professional experience that deceives or misleads, or could reasonably be expected to deceive or mislead, a client or any other person as to the proficiency or qualifications.
Consultation Paper Page 7 In summary, we feel regulators have generally demonstrated progressiveness and flexibility in determining and setting appropriate standards for registered advisors within their jurisdictions. IIROC in particular has been quite pro-active in raising proficiency standards reflecting the change in the retail securities business from a transaction to an advice focus. We also feel that the current regulators can enforce strict title and designation rules, as IIROC has, with the firms and advisors that they oversee. Additionally the grantors of designations must ensure that the designations they grant meet high standards and that those standards are maintained and enforced for their designation holders. Potential Areas of Improvement While we believe that the current regulatory framework is evolving to address client needs, we see three specific areas that may be considered for improvement. Mutual Fund Representatives The Ontario Securities Commission sets proficiency requirements for mutual fund representatives in National Instrument 31-103. The basic requirement today is one of two exams (offered by CSI and the Investment Funds Institute (IFSE)). These courses and examinations primarily cover product knowledge and regulations. There is very limited information on financial planning concepts. This is an area that could be reviewed by the OSC, MFDA and the exam providers in order to raise the requirements of financial planning concepts in the existing courses and examinations or by adding post-licensing requirements (such as the IIROC 30-month requirement or continuing education). While most mutual funds representatives do not provide comprehensive financial planning they are required to know their client and know their product and therefore additional advisory and financial planning skills may be beneficial to meet their client needs. This could be done in tandem with the adoption of the Client Relationship Model principles and regulation. Life Insurance Representatives FSCO, as a member of Canadian Insurance Services Regulatory Organizations (CISRO), is taking a very active role in reviewing and adjusting proficiency requirements for insurance agents. The curriculum for the LLQP exam is presently being fully reviewed as part of a pan-canadian effort to standardize proficiency. Regulators could leverage this review to ensure that proficiency requirements related to advice and financial planning fundamentals are incorporated. Life insurance
Consultation Paper Page 8 agents not only provide advice on life insurance but also on investments via segregated funds (or mutual funds as many are dual licensed). Pension Plan Advisors FSCO also has oversight for pension plans in the Province of Ontario. At this time there are no proficiency standards for individuals who are working in this area. With the aging of the Ontario population, the growing dependency on defined contribution pension plans and Group RRSPs and the recent introduction of the Pooled Registered Pension Plans (PRPP), the ministry may consider steps to ensure that those dealing with pension funds are competent to do so. We suggest that the Ministry consider assessing the competency standards for pension plan advisors. In Summary 1. Advice is based upon client needs and the more complex the needs the higher the competency standard required of the advisor. Advisors should meet the competency level required to provide the type of advice being offered to the client. While some elements of financial planning are central to any client-advisor relationship, most advisors do not require the level of expertise in comprehensive financial planning that the CFP, RFP and PFP designations demand. 2. The current regulatory structures should be leveraged to ensure all areas of financial advice are appropriately overseen without the creation of a new SRO to oversee financial planning. 3. Regulators have demonstrated the need to improve proficiency standards over time. IIROC in particular has shown that evolving and robust proficiency requirements combined with rigorous supervision of financial institutions and registrants ensures that consumers are well served in accessing the appropriate level of advice. Other regulators can look to this model to ensure their standards continue to evolve with client needs. 4. Organizations offering voluntary designations that complement regulatory standards must be reputable and meet high standards for their designations. They must be responsible to ensure that the certification granted reflects the level of expertise being certified and carry appropriate oversight for the use of the designation.
Consultation Paper Page 9 5. No matter what title is used, if an individual is providing financial advice they must be competent to do so. Current SROs, financial institutions and professional designation granting organizations have the responsibility and the ability to oversee to ensure the consumers are not mislead by titles and professional designations used by advisors. 6. Under the current regulatory framework, we believe there can be improvements made to the proficiency requirements for mutual fund representatives, life insurance agents and pension plan advisors by expanding coverage of fundamental financial planning concepts. To conclude, we feel there are many different levels of advice and that individuals who provide any level of advice should have the knowledge and competence to do so. We feel that regulators generally and IIROC in particular have been flexible and progressive in ensuring that standards are appropriate for the level of advice being offered. Looking forward, we agree that evolving standards will be essential to a healthy financial advice industry but that if standards are to be changed or new standards introduced, these must not only be practical, appropriate and attainable, but also affordable while providing sufficient consumer protection. Using the existing regulatory frameworks will serve the consumer well and will help to ensure that Ontarians have access to the advice they require by competent professionals. CSI is looking forward to our further participation in these discussions. Please contact me if you wish to discuss these recommendations further. Regards Marc Flynn Senior Director Regulatory Relations and Credentialing Canadian Securities Institute (CSI) cc: S. Parmar, Managing Director, CSI D. Bell, Associate Director, CSI