Reining in Canada’s Financial Giants – Are Consumers Getting a Fair Break?


While arm’s-length regulators at both the provincial and federal levels do the heavy lifting when it comes to regulating Canada’s financial services, it is ultimately politicians such as Ontario Finance Minister Charles Sousa and Federal Finance Minister Bill Morneau, who are accountable for protecting the interests of consumers in their dealings with Canada’s banks and other  financial institutions.


In an important piece in the July 31 issue of the New Yorker Magazine on the decline in the prosecution of white collar crime in the U.S., author Patrick Radden Keefe cites a telling 2002 incident involving ex-FBI director James Comey. Keefe relies on the description of the incident contained in the journalist Jesse Eisinger’s recently published book, “The Chickenshit Club”.

Keefe writes:

When James Comey took over as the U.S. Attorney for the Southern District of New York, in 2002, Eisinger tells us, he summoned his young prosecutors for a pep talk. For graduates of top law schools, a job as a federal prosecutor is a brass ring, and the Southern District of New York, which has jurisdiction over Wall Street, is the most selective office of them all. Addressing this ferociously competitive cohort, Comey asked, “Who here has never had an acquittal or a hung jury?” Several go-getters, proud of their unblemished records, raised their hands.

But Comey, with his trademark altar-boy probity, had a surprise for them. “You are members of what we like to call the Chickenshit Club,” he said.

What Comey was saying, of course, was that avoiding risky prosecutions aimed at reining in Wall St. might have been seen as career enhancing under the previous U.S. Attorney responsible for keeping an eye on Wall St. but with Comey as boss, such an approach was going to be a career killer.

This post is the first of a series of Canada Fact Check investigations asking the question: does Canada have a Chickenshit Club problem when it comes to the development and enforcement of financial services regulation?

The answer for impatient readers? The next 12 – 18 months will tell and Canada Fact Check will be there to tell the inside story.

Here’s what we know now.

Finance Minister Morneau’s response to CBC investigations of hyper-aggressive bank sales practices

On March 6, the CBC’s Erica Johnston broke the first of a number of CBC stories on shady sales practices in Canada’s banking industry. The CBC reports revealed a constant pattern amongst big banks and credit unions of signing consumers up for products or services without providing all the required information, particularly about fees, costs and penalties related to the products. In many cases, bank employees were signing people up for products without even notifying them.

On March 15, in response to the CBC reports, Finance Minister Morneau turned to the Financial Consumer Agency of Canada (FCAC) and announced that the Agency would be conducting a separate industry review to examine Canada’s financial institutions’ sales practices. The FCAC has the primary mandate to represent the interests of consumers on “systemic” policy matters effecting federally regulated financial institutions such as banks, trust companies, life insurance companies and property and casualty (auto, property, etc.) insurance companies.

The FCAC has indicated that it expects to publish its initial findings by the end of 2017. Furthermore, FCAC officials expect to conclude the review of bank sales practices in June, 2018 and will publish a final report soon after. Finally, FCAC may conduct additional specific investigations flowing from the industry review. For example, if a FCAC  follow-up investigation determines that a specific violation has occurred, the Commissioner may make public the nature of the violation, which financial institution committed it, and the amount of any monetary penalty levied by the FCAC on the financial institution.

House of Commons Committee hearings on bank sales practices

Also in response to the CBC reports, on May 3, 2017 the House of Commons Standing Committee on Finance adopted a motion to examine the practices of Canada’s Schedule I banks  (TD, Royal Bank, etc.) in relation to four topics: sales practices and incentives for employees; opportunities for redress; codes of conduct; and penalties for breaches of codes of conduct.

On June 5th, 7th and 12th, the Committee held public hearings during which it heard from the Financial Consumer Agency of Canada, as well as from two former financial sector employees and representatives of the Small Investor Protection Association, the Canadian Bankers Association and the country’s six largest banks.

The committee did not issue a report nor offer any recommendations in response to the testimony but did say that:

“The Finance Committee continues to be interested in this topic and, on June 14th, adopted a motion regarding a meeting with the Financial Consumer Agency of Canada so that it (the FCAC) can present its findings to the Committee. According to the motion, if required based on these findings, the country’s six largest Schedule I banks will be invited to appear in order to discuss the measures that they will take to implement any recommendations that the Financial Consumer Agency of Canada may make.”

In other words, a promise of a further meeting between the Finance Committee and the FCAC was the only real outcome of the Committee hearings. Moreover, it is not clear whether that meeting will take place once the FCAC’s preliminary findings on banks’ sales practices is completed at the end of 2017 or if it will take place following the FCAC’s completion and publication of its final report after June, 2018.

The Ombudsman for Banking Services and Investments (OBSI) and the issue of victim compensation awards – turns out the banks and dealers can ignore them

While the FCAC has the responsibility for “systemic” consumer issues in federally regulated financial services, the Ombudsman for Banking Services and Investments (OBSI) is the federal recourse for individuals who feel they have been wronged by their bank or investment dealer – perhaps as a result of the kinds of aggressive sales tactics described in the CBC reports.

More specifically, OBSI resolves disputes between complainants and particpating banking services and investment firms after they have exhausted the bank or securities dealer’s internal complaint process – often a complex and multi-stage endeavor. But if the complainant remains dis-satisfied with the financial institutions final decision, they do have the right to bring their case to OBSI.

If OBSI decides that a financial firm is in the wrong and money was lost by a customer as a result, it can issue a recommendation to the offending firm to restore the victim’s financial position to where it should have been. OBSI may also recommend other types of non-financial compensation when appropriate.

There are currently 3 key issues facing OBSI:

  • There is a cap on OBSI awards against banks and dealers of $350,000;
  • While OBSI will make public the name of any firm that refuses a recommendation (“name and shame”), OBSI awards are non-binding on banks and dealers meaning the financial institutions can ignore OBSI redress awards if they so choose;
  • Banks (although not securities dealers) can opt out of OBSI oversight altogether and retain their own private ombudsman. Both TD and the Royal Bank have taken this private route.

On June 6, 2016, OBSI released the results of an independent evaluation of its operations and practices for investment (as opposed to ordinary banking) related complaints. Two key recommendations of the independent evaluator were:

  • OBSI is unlike other comparable international financial sector ombudsmen in that it does not have the authority to bind firms (banks and securities dealers) to comply with its compensation  recommendations (awards to wronged customers) . This drives its operating model and prevents it from fulfilling the fundamental role of an ombudsman – namely securing redress for all consumers who have been wronged.
  • OBSI should be enabled to secure redress for consumers.

On Dec. 6, 2016 the OBSI board agreed with the Independent Evaluator and issued a response to the evaluation. A key paragraph in the response reads:

Another fundamental recommendation of the external reviewer was that OBSI be enabled to secure redress for customers, preferably by empowering OBSI to make awards that are binding on the firm. OBSI supports this recommendation, which is consistent with the recommendations of previous external reviews and with our organization’s public position for many years. However, OBSI does not have the power to unilaterally determine its powers.”

In other words, OBSI agrees with the Independent Evaluator and wants the power to make its victim compensation awards binding on dealers but doesn’t have the authority to make this change in its mandate.

So who does have the power to give Canada’s banking ombudsman the authority to issue binding awards on investment dealers if not the OBSI board?

In terms of recommending whether or not OBSI has the power to issue binding decisions, the formal answer is an entity called the Joint Regulators Committee (JRC) which includes representatives of the CSA’s (Canadian Securities Association) members (Alberta Securities Commission, British Columbia Securities Commission, Autorité des marchés financiers, and Ontario Securities Commissions), IIROC (the self-regulating body of securities dealers) and the MFDA (the self-regulating body of the mutual fund industry).

OBSI meets with the JRC on a regular basis to discuss a wide range of governance and operational matters – including issues related to OBSI’s mandate. Presumably there have been a number of JRC/OBSI meetings since the release of the Independent Evaluator’s report in which the question of binding decisons has been discussed. However, as of this writing, more than a year after the Independent Evaluator recommended that OBSI be given the powers to issue binding redress awards on investment dealers and eight months after the OBSI board concurred with the recommendation, the JRC has made no recommendation on giving OBSI the right to issue binding awards.

In terms of actually implementing a decision giving OBSI the power to issue binding decisions, the answer (again, on the investing side) is the individual provincial regulators such as the Ontario Securities Commission. And sure enough, in the OBSI section of the OSC’s 2017-18 Statement of Priorities, there is a line that reads “With the OBSI Joint Regulators Committee, develop a regulatory response to the recommendations in the independent evaluator’s report, particularly the recommendation for binding decisions”. According to the OSC, once the OBSI “regulatory response” is published, it will go out for further comment. The OSC would not give a date for a final decision.

The behind the scenes political dynamics of this issue will be explored in greater detail in a subsequent Canada Fact Check post.

Efforts to update consumer protection provisions in the Bank Act fall apart

On December 12, 2016 Finance Minister Bill Morneau removed a consolidation of consumer oriented provisions in the Bank Act from his latest budget bill (Bill C-29) in response to strong objections from Quebec, some Senators and consumer groups. The original intention of the consolidation was to strengthen consumer protection in the Bank Act. By the time Morneau withdrew the provisions, there was considerable evidence that if anything, the new provisions would weaken consumer financial protection.

The Quebec government’s opposition to the bank consumer provisions of Bill C-29 was rooted in the federal government’s claim that it had exclusive jurisdiction over Canada’s banking sector. Quebec insisted that provinces have constitutional authority in areas such as consumer protection for bank customers and warned the bill would impose weaker standards than those currently in place provincially in Quebec.

Several consumer groups (and many Senators) agreed with the Quebec position and a number of parties recommended that any new consumer protection provisions in the Bank Act use the Quebec provisions as a starting point for consumer protection reforms.

At the time Minister Morneau agreed to withdraw the provisions, he instructed the Financial Consumer Agency of Canada (FCAC) to undertake a comprehensive review of Bank Act consumer code issues in order to facilitate a comprehensive, consolidated consumer protection chapter in the Act as promised in two Liberal budgets.

The FCAC was to report back to the Minister by May 31. That report was completed and submitted to the Minister but has not been made public And FOI requests to obtain a copy of the report has been denied by the FCAC.

At the time of the withdrawl of the Consumer Code amendments, Minister Morneau also committed to re-introducing the updated consumer provisions as a separate bill.

No legislation related to updating of the Consumer Code provisions of the Bank Act has been tabled to date.

As with a number of initiatives included in this post, the Bank Act Consumer Code updating discussion has been going on for many years and in fact the Department of Finance initiated a formal consultation on the subject in late 2013. The discussion paper and stakeholder submissions from the 2013-14 consultation can be found here.

A majority of Canada’s regulators abandon best-interest standard initiative

On May 11, as the CBC continued to publish stories revealing a deeply rooted culture of overly aggressive marketing at all major Canadian banks, a majority of Canada’s financial regulators abandoned an ongoing consultation on a “best-interest” standard that would have strengthened the obligations financial advisors owe to their clients. In essence, the new standard would have made clear to financial customers whether they were dealing with truly independent financial advisers that were legally obligated to give them the best possible financial advice or with sales people being paid on commission to steer unsuspecting customers towards the proprietary investment products of their employer – whether they were the best financial products available for the clients or not.

In more legalistic terms, the issue is rooted in the fact that while provincial securities’ acts obligate “advisers” (spelled with an “e”) to act in a client’s best interest, the investment industry often calls their sales people financial “advisors” (spelled with an “o”). Research by the Small Investor Protection Association found that the vast majority of registered advisers/advisors are actually registered as “dealer representatives” – or sales people for their employer’s financial products with no legal obligation to offer advice in the best interests of their clients.

Only the Ontario Securities Commission (OSC) and New Brunswick’s Financial and Consumer Services Commission decided to continue with the best interest standard initiative.

Moreover, it should be noted that the final OSC Statement of Priorities for the Year Ending March 31, 2018 only commits the OSC to “Publish rule proposals for comment (on) regulatory provisions to create a best interest standard” and to “conduct a regulatory impact analysis of proposed regulatory provisions to create a best interest standard”.

In other words, the OSC is only promising to publish (as opposed to enact) regulatory reforms to define a best interest standard – and then engage in yet another round of consultation with stakeholders. The OSC can legally proceed on its own (i.e. without the participation of other provincial regulators) in implementing a best interest standard for Ontario but clearly its final 2018 Statement of Priorities suggests that this is not the plan – at least for the year ending March 31, 2018. The content of the “regulatory impact analysis of implementing a best interest standard” is also unclear.

Canada’s regulators have been formally consulting with financial industry stakeholders on a best interest standard since 2012 and the idea has been under consideration in one form or another for much longer.

Almost all major financial industry stakeholders strongly oppose a best interest standard.

Review of federally regulated financial institutions releases consultation papers

On August 16, 2016, the federal Ministry of Finance kicked off its review of the federally regulated financial sector. This followed the extension of the sunset provisions under the Bank Act, the Insurance Companies Act and the Trust and Loan Companies Act from 2017 to 2019. The legislated extension of the sunset provisions was necessary because a review of Canada’s financial services framework is required by law every 5 years and the last review was completed in 2012. According to Finance officials, the completion date for the 2017 review was pushed forward 2 years so that there would be sufficient time to undertake a detailed, fundamental look at the state of Canada’s financial services sector.

The kick-off consisted of the release of a vague, high-level consultation paper and the launch of the first stage of a two-stage consultation process. The stated objective of the consultation paper was to solicit feedback in order to determine whether the current legislative and regulatory framework for financial services met the federal government’s three core policy objectives. In the paper, these core policy objectives were defined as:

  • The sector is safe, sound and resilient in the face of stress;
  • The sector provides competitively priced products and services, and passes efficiency gains to customers, accommodates innovation, and effectively contributes to economic growth; and
  • The sector meets the financial needs of an array of consumers, including businesses, individuals and families, and the interests of consumers are protected.

Consistent with defining the policy objectives of the review in the broadest possible terms, the consultation paper contained no specific proposals for changes in the legislative or regulatory financial framework and almost nothing in the way of analysis of specific shortcomings in the framework.

This initial consultation period ended November 15, 2016 and received over 50 written submissions – predictably most from the financial services sector. These submissions can be found here.

On Aug. 11, 2017 Finance Canada released a second consultation paper. While this paper was a bit more specific in terms of proposals for reform, the one-page consumer section simply re-iterated that consumer oriented studies were underway and that any future consumer oriented changes would be informed by the findings of these studies.

In addition to the FCAC studies cited above, the consumer section of this  second consultation paper alluded to an OSFI study and stated:

“OSFI is reviewing domestic retail sales practices at domestic systemically important banks, and is focusing on risk culture, the governance of sales practices, and how banks manage the potential reputational risk inherent in sales activities”.

The deadline for submissions commenting on this second consultation paper was September 29. A future Canada Fact Check post will take a closer look at the second stage of the review.

The OSC’s no-contest settlements on banks’ overcharging of customers

On June 27, Royal Bank became the last of Canada’s five big banks to get slapped with a multi-million dollar penalty by the Ontario Securities Commission for charging bank customers excess fees for investment products like mutual funds. In some cases, clients were unknowingly overcharged for more than a decade.

The bank will reimburse affected customers $21.8 million worth of investment fees and pay $975,000 to the Ontario Securities Commission (OSC) to cover the investigation and other charges.

The Royal Bank joins eight other major financial firms including BMO, Scotiabank, TD and CIBC which in recent years have all been hit with similar OSC penalties for overcharging investor clients.

All told, the OSC has recouped $342 million worth of fees from banks and other financial institutions that investors shouldn’t have been charged as part of the OSC’s latest investigation.

In all cases, the banks paid back the money and the OSC approved no-contest settlements, meaning, in legal terms, the OSC found no evidence of dishonest conduct.

While ordinary investors will certainly benefit from the no contest settlements, this approach to dealing with overcharging by financial institutions raises some troubling issues. Professors Anita Anand and Andrew Green of the U of T law school, along with law student  Mathew Alexander, put it succinctly when they wrote in a recent Globe and Mail Op-Ed:

“Many people will praise these settlements for returning money to clients. Even the financial institutions penalized under the settlements may feel like winners because they do not need to admit guilt or other forms of culpability. Indeed, no-contest settlements are an attractive option for those who wish to avoid taking the hit to reputation that often accompanies an OSC prosecution. However, no-contest settlements raise important questions of process and law that suggest their use may not be in the public interest.”

“After the no-contest settlement with TD Waterhouse Private Investment Counsel Inc. and related entities became public at the end of 2014, six other major financial institutions reached settlements based on near identical issues and proposed compensation plans. The odds that each of these institutions independently undertook “routine compliance reviews” and detected the same issues in the same short time span seem low.”

The fees you paid but never knew about – regulators take another look at dis-continuing embedded fees

On January 10 of this year, the CSA released a  consultation document on how financial advisers, dealers and fund managers are compensated. The focus of the document was on dis-continuing embedded fees.

An example of an embedded fee is the mutual-fund trailer fee. This fee is a portion of a fund’s management expense ratio. These commissions are paid out to investment advisers for the length of time an investor holds a fund and depending on the type of investment fund, can range from 0.5 per cent up to 1.5 per cent. Both the investment firm and the individual adviser who sold the fund share in these commissions.

Needless to say, the average individual investor in mutual funds has little knowledge of such fees, much less how they work. Britain and Australia have already banned the use of trailing fees.

A bit of background on disclosure of compensation in the mutual fund sector may be helpful at this point.

Up until January 1 of this year, Canadian investors in mutual funds had no way of knowing what the myriad of fees they were paying to buy and hold mutual funds were. What changed as of Jan.1, 2017 (after many years of consultation) was that client statements under the so-called Client Relationship Model Phase 2 (CRM2) reforms, now disclose how much investors  pay to their financial advisers and their firms.

But this figure falls well short of the total costs of investing for the average investor. Among the fees and commissions required on CRM2 compliant statements to clients, the bulk of fees Canadian investors pay on mutual funds are not included. This is because there is no obligation for mutual funds to detail their management fees on client statements under the new guidelines.

This is a serious problem. Canadian mutual funds have long carried some of the highest management fees in the world. Canada has ranked dead last on fee levels in four consecutive Morningstar reports on the global fund investor experience covering the past eight years.

The combination of high fees and investor blindness to them can in part be blamed on how the financial industry has traditionally disclosed the costs of investing. Put bluntly, the variety of embedded commissions and fees on investment products has largely been hidden from the average investor. This is beginning to change but at a painfully slow pace.

However, the nature of the fees allowed have not changed – this is the issue being fought out in the CSA initiative on banning embedded fees.

The deadline for submissions on banning embedded fees was June 9. Those submissions can be found here. The CSA has said it will publish a discussion paper with policy options next spring.

The CSA is currently reviewing the submissions and will conduct a roundtable discussion on Sept. 18 in Toronto to examine the potential impacts of discontinuing embedded commissions.

Consumer groups come out against the proposed Cooperative Capital Markets Regulator (CCMR)

Unlike other industrialized countries, Canada does not have a national securities regulator. This is a function of the way the courts have interpreted s.92(13) of the Constitution Act which gives the provinces jurisdiction over securities regulation.

As a result, Canada has 13 sets of rules and regulations administered by 13 different provincial and territorial securities regulators. This is not considered ideal by most market participants but decades of federal-provincial discussions have yielded only patchwork solutions to the problem.

The current proposal for reform of Canada’s securities regulatory structure is referred to as the “Cooperative Capital Markets Regulator” (CCMR). The CCMR involves the federal government and British Columbia, Ontario, Saskatchewan, New Brunswick, the Yukon and Prince Edward Island. Under a Memorandum of Agreement, these governments have agreed that a new securities regulator will come into existence before July 1, 2018 and existing individual securities regulatory authorities in each of the participating jurisdictions will cease to exist.

On May 18, consumer groups FAIR Canada and CARP announced that they believed the proposed Cooperative Capital Markets Regulator (CCMR) was not in the interests of ordinary Canadians. The rationale for their rejection is contained in a separate “white paper” commissioned by Fair Canada and written by U of T law professor Anita Anand. In the abstract of the paper, professor Anand writes:

“This white paper highlights investor-related concerns with the proposed Cooperative Capital Markets Regulatory System (“CCMR”). In both its governance structure and substance, the CCMR is not in the interests of investors. It does not contemplate the creation of an investor office or investor advisory panel, and no investor representative sits on the board of directors. In terms of substantive law, the contemplated legal regime does not contain a statutory best interest duty, a prohibition on embedded commissions or a regime with financial incentives for whistleblowers. From the perspective of Ontario investors, it makes little sense to exchange an investor-focused securities regulator (the OSC) for one that institutionalizes a governance structure in which investor representation is effectively nil.”

Separately, professor Anand states: “I have long been in favour of a reformed model of securities regulation in Canada. But given the fundamental mandate of investor protection, any proposed model must have at least the same level, if not more, protections in place for investors. The CCMR is not there yet which is the key message of the white paper.”

Letters of Support for the white paper position came from Stan Buell, President of the Small Investor Protection Association (SIPA), John Lawford, Executive Director and General Counsel of the Public Interest Advocacy Centre (PIAC), and Ken Kivenko, President of Kenmar Associates.

From FSCO to FSRA – Ontario takes first steps in reforming its financial services regulation

In June, 2016, the Ontario Ministry of Finance released  a final report by an expert panel recommending the creation of the Financial Services Regulatory Authority (FSRA). This recommendation was one of 44 recommendations contained in the Review of the Mandates of the Financial Services Commission of Ontario (FSCO), Financial Services Tribunal (FST) and the Deposit Insurance Corporation of Ontario (DICO). The report from panel members George Cooke, James Daw and Lawrence Ritchie made specific recommendations related to the proposed FSRA’s mandate; governance; structure; tools, means and regulatory approach.

On November 16th, 2016 the Ontario government introduced enabling legislation to establish a new financial services and pensions regulator, the Financial Services Regulatory Authority Act, 2016, as part of an omnibus budget bill (Bill 70).

The new FSRA is intended to have broad regulatory authority across multiple financial sectors including: pension plans, pooled registered pension plans, co-operative corporations, credit unions, insurance companies (including auto insurance), loan and trust corporations, and mortgage brokers and agents.

The new financial regulator would essentially replace the Financial Services Commission of Ontario (FSCO) – the current provincial regulator in the above areas.

The expert panel report specifically proposed an Office of the Consumer and independent consumer groups made (and continue to make) a strong pitch for designated consumer representation on the FSRA’s board of directors as well as an independent statutory consumer advisory panel similar to the OSC’s.

None of the three consumer provisions were included in the Bill 70 legislation creating the FSRA.

On June 30, 2017, the Ontario Ministry of Finance announced the initial 3-member Board of Directors of the FSRA. The announcement suggested that the  government expects to introduce legislative amendments regarding FSRA’s mandate and governance structure, by the end of 2017. If there are to be explicit consumer provisions in the FSRA mandate and governance, they are likely to be contained in the promised 2017 legislation.

However, there was no specific mention in the June 30 announcement of an Office of the Consumer, consumer representation on FSRA’s board of directors, or of an independent statutory consumer advisory panel.


Ontario looks at  regulating the financial advisory and financial planning industry

In April 2015, the Ontario Minister of Finance appointed an independent Expert Committee to consider financial advisory and financial planning policy alternatives. The Expert Committee was mandated to provide advice and recommendations to the Ontario government regarding whether and to what extent financial planning and the giving of financial advice should be regulated in Ontario and the appropriate scope of such regulation.

In mid-March, 2017, the government released the final report of the Expert Committee. The report described the challenges facing average investors seeking reliable financial advice and is worth quoting at length:

“More than ever, Ontarians rely on financial planners and financial advisors to help them achieve their financial goals. According to research published by members of the CSA, 49 per cent of Canadians had a financial advisor in 2012, up from 42 per cent in 2006. In 2016, nine out of ten mutual funds were purchased through a financial advisor. In 2014, 70 per cent of new life insurance protection purchased in Canada was bought on an individual basis (by personal or family decision) usually through a life insurance agent. This reliance is compounded by the knowledge asymmetry between advisors and consumers: in 2016, research suggests that 43 per cent of all investors relied almost solely on their advisor as a source for investing information.”

Yet today there is no general regulatory framework for Financial Planning or Financial Advice in Ontario. This leads to two significant consumer protection issues.

First, there is a clear regulatory gap. Regardless of their qualifications, people can call themselves a “financial planner” or “financial advisor” in Ontario. Unless they also sell financial products, they are not regulated….Yet without regulatory oversight, consumers have no way of determining which individuals or firms warrant their trust or are qualified to provide these services.

Second, those under regulatory supervision are regulated for their product sales activities, not their financial planning or advice services per se. The regulatory framework focuses on whether the financial planning or advice process leads to a suitable product sale, not on the quality of the financial planning or advice itself.”

The report’s three main recommendations include: a new, harmonized regulatory framework for those who work in the industry; imposition of a duty to act in the best interests of clients (the best interest standard discussed above above); and upgraded and simplified titles and credentials for financial advisors based on heightened proficiency requirements.

In a March 31 speech to the C.D. Howe Institute, Ontario Finance Minister Sousa responded to the report and addressed each of the three main recommendations.

In terms of the new regulatory framework, as indicated above, on November 16th, 2016 the Ontario government introduced enabling legislation to establish the new financial services and pensions regulator – the FSRA. That legislation passed as part of the government’s budget bill but this enabling legislation included nothing in the way of consumer protection mechanisms and the subsequent June 30 announcement of the 3-person interim Board of Directors for FSRA was also silent on consumer proposals.

On the issue of the all-important best interest standard endorsed by the Expert Panel report, the Minister was extremely careful saying only that “Moving forward, the government will rely on both the report and the outcome of the CSA’s consultations (now really the OSC’s consultations) as we examine the feasibility of a statutory best interest duty in Ontario.”

And on the question of having clear titles as to who is a qualified financial planner and who is not, the Minister would only say that “We will also be taking steps to curb consumer confusion by working with regulators to restrict the use of titles related to financial planning.”

Here again, things are clearly moving very slowly on the consumer front.

Insurance regulators consult on disclosure improvements in “segregated” funds

On August 30, the Canadian Council of Insurance Regulators (CCIR) announced that it would be beginning the second stage of its review of the regulatory framework of segregated funds to identify whether disclosure changes are necessary, particularly in light of recent regulatory reforms – the Client Relationship Model initiative by securities regulators – affecting similar investment products such as mutual funds and exchanged-traded funds. Specifically, the provincial insurance regulators are looking to improve disclosure documents for the sale of segregated funds, particularly improvements explaining to investors the costs and performance of their insurance investments.

As many aspects of insurance are regulated provincially (although not by the securities regulators such as the OSC), the CCIR is essentially the Canada-wide equivalent to the Canadian Securities Association.

Segregated funds are similar to mutual-fund investments with a built-in insurance contract. Policy holders are given a guarantee on a portion of their principal investment, while at the same time being able to invest their dollars in an investment portfolio made up of underlying mutual funds.

The first stage of the review was initiated with a discussion paper in May, 2016.

In the fall, the CCIR intends to publish a position paper outlining its recommendations and expectations and will refer to issues such as the delivery of the Fund Facts document for subsequent transactions, risk-classification methodology, oversight of sales, needs-based analysis, updating of client records and know-your-product due-diligence requirements.

Over all, net assets in segregated funds have reached $116.8-billion as of June, 2017, according to the July 2017 Insurance Advisory Service report by Strategic Insight.

The CCIR will also publish a prototype disclosure document, identifying minimum required information on performance as well as on fees and charges. The prototype document is expected to be released in 2018.

The fact that a financial product such as a segregated fund that is very similar to a mutual fund is regulated by completely different regulators under a completely different regulatory regime, suggests the complexity of the Canadian financial regulation landscape.


The financial service industry lobby groups

This introductory post paints a picture of a fragmented, staggeringly complex financial service regulatory structure gingerly testing the waters on a number of inter-related consumer protection measures. Sometimes these consumer protection initiatives are abandoned entirely (eg. the abandonment of the best interest standard by a majority of regulators), sometimes they move ahead incrementally (eg. the improved disclosure of how much investors  pay to their financial advisers) but more often than not governments and regulators kick key decisions down the road by consulting…and then consulting again…and again….

But who exactly are they consulting with?

Governments and regulators, of course, will say “the public”. The truth, however, is that the general public has little expertise in the highly complex matters under discussion while the financial industry has at their disposal a tightly knit group of institutional players that collectively possess immense technical expertise – far more than even the regulators on many of the issues under discussion in this post.

Tier 1 in the industry’s lobbying machinery are the formal industry trade associations. There are many such groups but the most important are: the Canadian Bankers Association (the lobbying arm for Canada’s large banks); the Canadian Life and Health Insurance Association (the lobby group for Canada’s life and health insurers); the Investment Funds Institute of Canada (the key lobby group for Canada’s mutual funds); the Investment Industry Association of Canada (IIAC – the securities dealers lobby group); the Insurance Bureau of Canada (the lobby group of Canada’s Property and Casualty Insurers) and the Financial Advisors Association of Canada (generally referred to as Advocis – the largest association of financial advisors and planners in Canada).

But the official lobby groups are only the tip of the financial industry lobbying iceberg. These formal lobby groups not only work closely with each other but also with their individual members’ internal government relations and legal departments. They and their members also retain many of the country’s elite government relations firms, blue-chip corporate law firms, and largest consulting firms (Deloitte, KPMG, etc.), to support their lobbying efforts. Finally, they are also strong supporters of corporate-oriented “think tanks” (eg. the C.D. Howe Institute) which often (although not always) publish papers consistent with the views of the financial services industry.

Also of importance in understanding the dynamics related to the various consultation initiatives is the role of industry self-regulating organizations (SRO’s): the two most important being the Mutual Fund Dealers Association of Canada (MFDA), the organization  that provides oversight to dealers that distribute mutual funds and exempt fixed income products and the IIROC (Investment Industry Regulatory Organization), the self regulatory body for securities dealers. Canada’s  securities regulators rely on the work of these two national self-regulatory organizations for many aspects of regulation of their member firms (securities dealers, etc.) and their individual employees. Accountability for securities regulation ultimately extends from the securities regulator to the Minister responsible for securities regulation (generally the Minister of Finance).

Finally, it must be remembered that the securities regulators (OSC, etc.) themselves are funded by “market participants” – not governments. Market participants include securities dealers, publicly traded companies, mutual funds and marketplaces (e.g. the Toronto Stock Exchange).

To be fair, the situation in Quebec is somewhat more favourable to financial consumers.

There are also small, underfunded groups such as FAIR Canada and the Public Interest Advocacy Centre (to name a few) who do heroic work on behalf of ordinary consumers/investors. But the excellent work of these small consumer groups simply does not carry the weight of the intense lobbying done by the financial industry trade groups, the self-regulating organizations, the corporate law firms, the large consulting firms and the government relations firms – who on issue after issue produce work (of course, much of it paid for by the financial services industry) aligned with the interests of Canada’s financial giants.


This post has attempted to describe the key issues impacting Canadian financial consumers as well as the political terrain on which these issues will be fought over the next 12-18 months.

While the CBC reports on aggressive bank marketing practices have garnered wide-spread public attention, numerous government reports, independent expert panels and regulator proposals, have come to similar conclusions: the existing playing field in financial services is tilted strongly in favour of the financial services industry and against ordinary financial consumers.

To return to the question posed in the introduction to this post: does Canada have a Chickenshit Club problem when it comes to the development and enforcement of financial services regulation?

Stay tuned to future posts at Canada Fact Check to find out.




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Financial Planners have maintained for over thirty years Self Regulatory Organizations the FPSC and the IAFP that confer the CFP and RFP and uphold the highest ethical and practice standards for financial planners. The new FSRA in Ontario will have to remain objective in determining who can hold out as a Financial Planner.

John Burns
John Burns

Financial Planners have maintained for over thirty years Self Regulatory Organizations the FPSC and the IAFP that confer the CFP and RFP and uphold the highest ethical and practice standards for financial planners. The new FSRA in Ontario will have to remain objective in determining who can hold out as a Financial Planner.