Ontario regulator says rule reforms not meant to stop banks selling third-party mutual funds

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The Ontario Securities Commission said it has contacted Canada’s big banks to ask for more information about their plans to stop selling other companies’ investment funds.

Fred Lum/The Globe and Mail

Ontario’s securities watchdog says new regulations that will soon require advisers to have deeper knowledge of the funds they recommend to clients should not have prompted banks to halt the sale of third-party investment funds.

The Ontario Securities Commission said on Monday that it has contacted Canada’s big banks to ask for more information about their plans to stop selling other companies’ investment funds in favour of narrowing their focus to their own proprietary shelves of funds. The banks are making the switch in response to new rules that require advisers to ensure they are providing products that are appropriate for clients.

“The intention of the client-focused reforms is to give investors access to products that best serve their needs – not to cause a move to proprietary shelves,” OSC spokesperson Kristen Rose said in an e-mail to The Globe.

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“To reiterate this expectation, we have sent a communication to the banks to confirm how each understands and intends to approach this area.”

Big bank policy on third-party funds sabotages advisers and serves investors badly

The OSC’s communication comes a week after The Globe reported that several of Canada’s largest banks have halted sales of third-party investment products from their financial planning arms.

Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce all recently notified clients in their financial planning businesses that third-party funds will no longer be sold for any investment portfolios.

The changes do not apply to any of the banks’ full-service brokerage accounts or do-it-yourself investing clients.

“We are continuing to work with the regulator to ensure we are in compliance as client-focused reforms come into effect and that we are meeting the needs of our clients,” Michael Walker, head of RBC Financial Planning, said in an e-mail.

TD and CIBC declined to comment on the OSC’s latest communication.

The new set of rules – known as the client-focused reforms (CFRs) – are slowly being rolled out to the industry in stages. Changes to the “know-your-product,” or KYP, rule will come into effect at the end of 2021, and will require wealth management firms – and their investment advisers – to have a greater understanding of any investments that are bought, sold or recommended to a client.

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The rules are intended in part to address conflict-of-interest concerns such as an adviser’s compensation being linked to proprietary products. Firms will have to create procedures to ensure advisers are putting a client’s interests first when making a suitability determination.

As a result of the rule change, investment firms are looking to reduce the array of products on their shelves, which can require advisers to be trained on thousands of investment funds across multiple asset classes.

RBC, TD and CIBC said in letters sent to clients that they will not remove any existing third-party products already held in investment portfolios, and may accept transfers of funds for new and existing clients, but no new purchases will be allowed going forward.

Dan Hallett, vice-president and principal with HighView Financial Group, says the new rules shouldn’t affect any bank’s product shelf because they already have expertise in fund research for their securities-licensed brokerages that can be utilized across the entire bank umbrella.

“They would not have to start doing due diligence on the thousands of third-party funds from a clean slate as they already have had that available for decades,” Mr. Hallett said in an interview. “It doesn’t make sense that they can’t just broaden that resource to the branch-based planners if it is truly the CFRs being the issue.”

There are approximately 60,000 different investment products held by clients through mutual fund-licensed investment firms, of which the majority are sold through bank-owned distribution channels, according to a recent report by the Capital Markets Modernization Taskforce.

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The task force expressed concerns that bank-owned shelves “incentivize the sale of proprietary products” and “restrict access to other independent products,” which may particularly affect smaller fund manufacturers.

“Client-focused reforms and the associated recommendations of the Capital Markets Modernization Taskforce were designed to ensure that the wealth of Canadians is adequately safeguarded with the opportunities for growth inherent in a competitive offering of products, “ task force chair Walied Soliman said in an e-mail to The Globe.

“Our regulators and financial institutions need to come together immediately to ensure these objectives are adequately met.”

According to the task force report, bank-owned distribution channels are generally sold by branch-based advisers, or deposit takers, and approximately 95 per cent of deposit takers’ mutual-fund assets are comprised of proprietary products.

“The banks are using the KYP requirements as an excuse to make more money by selling more proprietary products,” Cindy Tripp, former founding partner and co-head of trading at GMP Securities LP and a member of the task force, said in an interview. “And it is unclear to me how a bank can sell that proprietary product and then identify and mitigate the conflict of interest it if they are unwilling to compare their own product against their competitors.”

-with a file from James Bradshaw

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