What next for FAIR Canada?

The prognosis for Canada’s foremost investor advocacy group does not look good – can self-regulators step in to fill the void?

4 February, 2020 | 1:40 AM
Yan Barcelo, The Morningstar

The story so far

At the end of September 2019, investment icon Stephen Jarislowsky resigned from FAIR Canada, the foremost investor advocacy group in the country. Following that, on the 18th of October, FAIR returned $2.4 million to the Jarislowsky Foundation because it was unable to meet a 200% matching condition that accompanied the foundation’s $2 million donation for an Endowment Fund for FAIR Canada in support of its public service mission in 2012.

Jarislowsky’s resignation letter levelled harsh words against regulators and the industry. “It is my view that neither the governments nor the financial services industry take seriously their obligation of investor protection. Industry and government do not want to support a professional organization (FAIR Canada) with such a mandate that has independence.”

FAIR was initially created in 2008 by IIROC’s ancestor, the IDA (Investment Dealers Association). “We’re perplexed,” says Douglas Walker, deputy director of FAIR. “Is it a siege mentality? Maybe have they lost confidence in us, yet they still invite us to engage in public commentary”. For Harold Geller, attorney at MBC Law Professional Corporation, “if FAIR is unable to continue its advocacy, IIROC’s mandate will be undermined due to the loss of this crucial voice on behalf of investors.”

In response, IIROC says that it is in no way married to FAIR. “The Restricted Fund must have sufficient funds to support the disciplinary process and has never been intended for the exclusive benefit of any single organization, no matter how laudable its objectives,” IIROC writes.

It says that it has donated $250,000 in 2018 to the advocacy group, offering $125,000 more if FAIR could demonstrate having secured funding commitments from other sources. Those sums are quite far from the $3.75 million and $700,000 handed over in 2008 and 2012.

Does FAIR matter?

“The financial industry does a pretty good job of looking out for itself,” points out Dan Hallett, vice-president and principal of Highview Financial Group. In consultations, there’s always a long list of asset management firms (who submit memorandums). Investors don’t have a dedicated group – apart from FAIR.”

Investors need someone to look out for their interests, whether from an organization like FAIR, or any investor advocacy group. “Of course, we would like to see an effective feedback loop between a well-established investor advocacy group and regulatory bodies. In a highly concentrated market like Canada where over half the assets invested in mutual funds and ETFs reside with just seven companies, it is imperative that the investor’s voice is well represented for a fair and efficient market to thrive,” points out Morningstar’s director of Investment Research, Ian Tam.

There are other small groups or individual advocates active here and there, like Ken Kivenko and the Small Investor Protection Association (SIPA) Hallett recognizes, but he characterizes these as “labours of love”, who have little staying power and minimal resources. FAIR is a dedicated group staffed with professional securities lawyers. “At some point, you need that, he notes, because you’re dealing with the intricacies of legislation.”

Canada vs. The World

All developed countries have large financial lobbies representing banks, investment firms and insurance companies, but few investor advocacy groups. However, some advocacy groups carry significant influence. In the UK, for example, the Financial Services Consumer Panel is an official body, composed of 11 professionals, appointed and subsidized by the Financial Conduct Authority, the country’s main financial regulator. The FCA has a statutory requirement to consult independent panels representing consumers and practitioners.

In the United States, the Consumer Federation of America has an investor advocacy sub-group, with a staff of two. The CFA self-supports through membership fees, donations, fundraisers, conferences, etc. “We receive no money from government,” says Micah Hauptman, financial services counsel.

The key differentiator between countries holds in the strength of their securities regulators, claims Mark Lokanan, associate professor, forensic accounting and financial crimes, at Royal Roads University. “The SEC, he notes, has very strong oversight over FINRA (the main financial self-regulatory organization in the U.S). Compared to the Ontario Securities Commission, it is night and day. For example, the SEC deals proactively with financial crime and will often prosecute it directly. The OSC is essentially reactive.”

The strength of that regulatory structure determines if investor rights are well represented and protected. In the UK, the FCA is expected to consult with investor advocates. In the US, though the sub-group Hauptman belongs to at the CFA is tiny, investor advocates have a long reach. “The SEC (Securities Exchange Commission, the main financial regulator in the U.S.) has an advisory committee on which sits Barbara Roper, director of investor protection at the CFA, and other investor advocates, and it must consider their propositions,” says Hauptman.

FAIR Canada has no such privileged and statutory access to regulators. The Canadian Securities Administrators (CSA) has no investor advisory panel, with the single exception of the Ontario Securities Commission that has one. At the level or self-regulating organizations (SRO), nothing forces these to consult with investor advocates. In fact, asserts Walker, “during the past year, IIROC senior management advised FAIR Canada that they do not wish to re-establish the practice that was in place for many years of holding regular consultation & information sharing meetings between our two organizations. IIROC has not provided an explanation for taking this position.”

Can self-regulators step in?

Some in the industry have suggested that self-regulatory bodies like IIROC and the MFDA could step in to fill the void of investor protection if FAIR were unable to. At present, there is no formal process of engaging with investor advocates at the self-regulators, which leads some to question how effective a role the regulators could play in investor advocacy going ahead.

There are no directors with investor representation experience at IIROC and at the MFDA. IIROC’s board of directors has six representatives from the financial industry, and six “independents”. However, most of the independents are former executives of financial firms.

“The decisions of self-regulatory organizations are controlled by the securities industry firms that they regulate,” asserts Walker. “Their rulemaking advisory committees exclude the participation of investor advocacy organizations speaking on behalf of the interests of individual investors.”

“Governance is where it all starts,” asserts Ken Kivenko, president of Kenmar Associates and long-time investor advocate. “Boards of SROs don’t have the voice of investors and someone who understands retail investor issues.”

This is not good news for investors, as evidenced in situations such as the controversy around the ban of embedded commissions – or the DSC ban.

The DSC debacle

Inexplicably, the proposed ban on the unpopular deferred-sales-charge option for mutual funds was rescued by Ontario’s majority Conservative government led by Doug Ford. In doing so, it opposed not only its own Ontario Securities Commission, which played the lead role in crafting mutual-fund reforms, but also rejected the unanimous agreement of the Canadian Securities Administrators (CSA), representing regulators across Canada.

As a result, on December 19th, 2019, the Canadian Securities Administrators (CSA) announced that in most provinces, the use of deferred sales commissions (DSCs) will be banned in 2020, with a phase-out period estimated to be about 2 years. The final amendments to the policy will be released in early 2020.

This puts most of Canada on par with Australia, India, the Netherlands, and the United Kingdom, countries where the use of deferred sales charges is also banned (outlined in Morningstar’s Global Investor Experience survey). From Morningstar’s perspective, this is a very welcome change and will serve investors well once implemented. All in all, very good news. Unless you live in Ontario, where DSCs continue.

This underscores the need for a neutral and independent body that looks out for investors’ interest. “Investors on the whole need representation that is separate from government and large financial institutions – and federally mandated, asserts Tam. The lack of funding for groups representing investors means they can’t get the proper legal representation required to facilitate change in regulation and further enhance investor protection.”

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