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Banks Push Back on Investor Protection Reform

Banks Push Back on Investor Protection Reform

October 3, 2021

Banks and regulators at odds on proposed reforms aimed at protecting investors, writes Peter Watson.

New reforms designed to provide better protection of individual investors has hit a major speedbump.

Starting at the end of 2021, financial advisors are required to have a better understanding of the investment products they sell. This includes understanding alternative investment products that might be more suitable for a client.

The proposed reforms have come from the Capital Markets Modernization Taskforce. It reported that 95 per cent of mutual funds sold by bank branches are proprietary products.

This creates a conflict of interest regarding remuneration. It is more profitable for a bank to sell its own mutual funds than that of a competitor.

If a bank was aware that a competing fund was better or similar but less expensive, it would have to recommend the other fund. That is a significant change to the current business model. The bank would lose significant revenue.

In a bold move, three banks announced they will no longer sell competitors mutual funds at their branches. This includes RBC, TD and CIBC.

That is a strategy to avoid the reforms. Just advise clients you only sell funds of the bank a client deals with. An aggressive move that the banks say no thanks to the proposed reforms.

The banks could argue that according to the task force report there are 60,000 different investment products currently sold through bank branches and a requirement to fully understand that many is unmanageable.

In my opinion, the regulators will have strong push back to the action of the three banks.

If the goal is to reduce conflict of interest this can easily be done. Restrict banks from selling preparatory products. That eliminates the conflict of interest.

Also the standard of care between an advisor and client could be elevated to fiduciary. That requires the client’s interest be put ahead of the advisor.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.