Overview of the regulatory environment PRESENTED ON October 12, 2017
Disclaimer The opinions expressed by the presenters are their own and do not necessarily reflect the opinions of B2B Bank and/or Laurentian Bank of Canada. The presentation or material are strictly for informational purposes only. The information should not be construed, used or relied upon for legal/and or regulatory advice. B2B Bank will not be held liable for the information presented.
Susan Silma Practice Leader, Client & Industry Strategy, PureFacts Financial Solutions I believe in meaningful transparency. Compliance doesn t have to come at the cost of client experience. As an industry we can do a better job communicating with our clients. With greater transparency, we can build trust and strengthen client relationships.
Agenda Evolving regulatory environment - the never-ending storm CRM2 Is there a CRM3? Proposals for Best Interest Standard/Targeted Reforms Consultation about banning Embedded Commissions Insurance industry and global trends Impact on investors Meaningful transparency, disclosure and trust
Evolving regulatory environment
Regulatory change in the past What the client sees What regulators require
New focus in regulation Meaningful transparency What the client sees
CRM2
Origin of CRM2 Research shows investors have two key concerns: How am I doing? What is it costing me? This is also what they know least about!
Mutual fund fee disclosure under CRM2 Trailing Commission is the only part of the MER disclosed in the CRM2 fee report October 11, 2017
Is there a CRM3?
The evolution of mutual fund fee disclosure? Would include disclosure of whole MER Not a formal regulatory proposal not on the CSA agenda Had been considered by the MFDA; IFIC prepared to discuss October 11, 2017
Proposals for Targeted Reforms / Best Interest Standard
Proposals for Targeted Reforms / Best Interest Standard Consultation paper published in April 2016 Comment period Received ended Sept. 2016 2 separate but linked proposals: Targeted Reforms and regulatory Best Interest Standard over 120 comment letters
Regulatory concerns Clients not getting the value or returns they reasonably expect Expectation gap created by misplaced trust or over-reliance by clients on advisors Conflicts of interest Information asymmetry between clients and dealers/advisors Clients not getting the outcomes the regulatory system is designed to give them
Targeted Reforms: Key details
Targeted Reforms: Conflicts of interest Conflicts of interest Prioritize interests of the client ahead of the dealer
Targeted Reforms: Know Your Client Know Your Client (KYC) Gather more information from client, including tax information Update KYC every 12 months
Targeted Reforms: Know Your Product Know Your Product (KYP) Increased obligations to understand product and how it compares to other products Must consider impact of fees on performance Identification of dealers as offering proprietary or mixed/ non-proprietary product list
Targeted Reforms: Suitability Suitability Increased obligations including: Identify if client would be better served by paying off debt or saving Identify target ROR to meet investment objectives Product recommended must be most likely to achieve the client s investment objectives
Targeted Reforms: Relationship Disclosure Relationship Disclosure Disclose if offer only (or some) proprietary products Disclose if offer only a limited range of products (eg. mutual funds)
Targeted Reforms: Proficiency Proficiency Increased proficiency Including understanding impact of product costs and investment strategies (eg active vs passive) Also an issue for other regulators
Targeted Reforms: Titles Titles Client-facing titles to be considered include: Salesperson Restricted securities advisor
Key themes from industry comment letters Proposal is too prescriptive and overly broad Doesn t recognize difference between business models/ registration categories, or range of client needs Significant unintended consequences, including narrower range of product offerings Regulators should wait to measure the impact of other new regulations, including CRM2 and POS
Key themes from investor advocate comment letters Regulators should move the industry toward a client-centered advice model rather than an incentives-driven model Disclosure is not effective for addressing conflicts of interest
Targeted Reforms: Next steps Regulators agreed to reconsider some reforms: Mandatory collection of basic tax information Requiring investigation of a reasonable universe of products Differentiation in KYP requirements based on whether a firm offers only proprietary products 12-month KYC update absent a triggering event Suitability assessment if there s a significant market event Wording - eg most likely to achieve a client s investment needs
Best Interest Standard: Key details
Best Interest Standard Registrants must act: fairly, honestly and in good faith and in the client s best interests
Best Interest Standard Avoid or control conflicts of interest in a manner that prioritizes the client s best interests Provide full, clear, meaningful and timely disclosure Applies to all registration categories and all business models
Key themes from industry comment letters Concern that it will create uncertainty and significant unintended consequences Concern over lack of harmonization across provinces Concern over how to operationalize or supervise the standard Unclear how it would apply in different business models
Key themes from investor advocate comment letters The higher standard is required as a guiding principle Inequality in the relationship between investors and advisors disclosure not enough to address this Investors already believe their advisors are acting in their best interest this would close the expectation gap
Best Interest Standard: Next steps Only the OSC and NB regulator are working on this; other regulators will NOT be working on it because: Strong concerns about the benefits of a Best Interest Standard in addition to Targeted Reforms Targeted Reforms will meaningfully and practically lead to better investor outcomes Could lead to the standard only being adopted in one or two provinces how to deal with that?
Consultation about banning Embedded Commissions
Consultation on a ban on Embedded Commissions Consultation paper published in January 2017 Comment period ended June 2017 Received over 140 comment letters
Regulatory concerns Embedded commissions: Raise conflicts of interest that misalign the interests of investment fund managers, dealers and representatives with those of investors Limit investor awareness, understanding and control of dealer compensation costs Commissions paid generally do not align with the services provided to investors
Key themes from industry comment letters Ban not required Investors deserve choice Unintended consequences: Limited access to advice for smaller investors Higher fees
Key themes from investor advocate comment letters Ban is overdue Align investor and advisor interests Fees will be in line with the services provided
Embedded Commissions ban: Next steps Regulators considering variations: Cap or standardize trailing commissions Discontinue or implement additional standards for DSC Further enhancements to disclosure Regulators to have interim recommendations in 2018
Implications for the insurance industry
Proposed insurance regulatory changes Insurance regulators (CCIR) also moving to increase disclosure Concerned about regulatory arbitrage by duallylicensed (insurance and mutual fund) advisors Regulatory goal: to ensure equivalent fair treatment of the customer under both regulatory regimes
Insurance regulatory changes: Next steps CCIR will publish: In fall 2017, a paper on: Delivery of fund facts, risk classification, updating client records, KYP In winter 2018, a prototype disclosure document: With performance, and fees and charges; first conducting consumer opinion testing
Expectations for the insurance industry Significant changes in the regulation of segregated funds.. intended to ensure customers better understand the costs and performance of their segregated fund investments.
Global regulatory environment Continuing focus on the client/ advisor relationship Specific focus on fees some have banned or limited embedded commissions Fiduciary Duty/ Best Interest Standard eg. U.S. Department of Labor Transparency in general!
Impact on investors
Performance Disclosure
Fee Disclosure 3 types of fees on a client s annual statement:
Investors still don t understand fees Despite new fee disclosure, investors still aren t clear Only 23% of clients understand the fees they pay to their investment advisers Source: J.D. Power 2017 Canadian Full Service Investor Satisfaction Study
Investor research: Low fee awareness I don t pay my advisor fees. He s a friend of a friend type deal. I don't pay him, but I guess he gets paid somehow. I ve been grandfathered in so there are no charges for their services. Source: FMFD Research June 2017
Investor research: Negotiating fees with advisors Am I even allowed to negotiate? I wouldn t feel comfortable negotiating with my advisor. Source: FMFD Research June 2017
Investor reactions to fee reporting I have no idea what I m getting for these fees. I m shocked by the actual dollar amount. Nobody ever told me that I pay fees.
Investor reactions to performance reporting Is the value of my portfolio up or down? Do my fees pay for performance? How am I doing compared to my goals?
Change in value disclosure Effective: Change in value is visually obvious
Change in value disclosure Effective: Line graph shows change in value over time, good use of colour and client-friendly explanations
Rates of Return disclosure
Rates of Return disclosure Effective: Client-friendly explanation of rates of return, good use of colour, dynamic table
Fee disclosure
Fee disclosure
Fee disclosure Effective: Shows YTD fee reporting specific to the client
Investor research Less is more Clients are unwilling to read long explanations Focus on the key information Conclusion: Words matter!
Meaningful transparency, disclosure and trust
Disclosure Transparency Disclosure is required by regulation Transparency is a choice to help clients We do research with investors and test: words, concepts, and designs understanding The goal: smarter disclosure giving clients information they want in a way they understand
Why does transparency matter? Transparency of performance and fees is the top driver of client trust. October 11, 2017 Source: EY 2016 global survey, The experience factor: the new growth engine in wealth management
Trust arrives by foot and leaves by Ferrari. MARK CARNEY Governor of the Bank of England
Fees matter 80 % Want their advisor to fully disclose fees and other costs SOURCE: From Trust to Loyalty: A Global Survey of What Investors Want, Edelman/CFA Institute 2015
Value matters 71 % Want the fees charged by their advisor to reflect the value they get from the relationship SOURCE: From Trust to Loyalty: A Global Survey of What Investors Want, Edelman/CFA Institute 2015
What the industry thinks matters What actually matters to clients Financial needs assessment To feel I ve been heard and you care about my dreams Detailed financial plan Actions I need to take to meet my goals Comprehensive fee schedule Clear explanation of my fees Big performance returns Knowing that I m on track The right investments in the portfolio Reassurance, confidence, trust
Client conversations What clients are seeking in fee and performance conversations: Clear and proactive communication about fees Connecting fees to the value they receive Connecting performance to their goals Communication through a client lens: hearing about what matters to clients
Connecting fees to value A fee is only a problem in the absence of value.
Thank you Feel free to contact me with questions at susan.silma@purefacts.com October 11, 2017