FAIR Focus
January 2023
Happy New Year!
We kick off this issue of our newsletter by reviewing important policy and investment industry issues for investors that were front and centre in 2022. To name a few, some of these issues include: the increasing interest and the risks involved in crypto investing, improving the complaint-handling process for investors, understanding investment fees, and so much more. We also highlight some of the key priorities FAIR Canada will continue to focus on this year to help advance investor rights and protections.
2022 Year in Review – Highlighting Key Investor Issues
Crypto Calamity
 
Investing in crypto assets became part of the mainstream this year. Backed by A-list celebrity endorsements, the spectacular implosion of key players, such as crypto exchange FTX, was a reminder that crypto investing is not for the faint of heart. The other takeaway from this year’s turmoil is that the crypto space needs strong regulatory oversight to protect investors. Canadian securities regulators have been very active on this front. Key developments included:
 
  • Steps to ensure that crypto asset trading platforms operating in Canada become registered under securities laws.
 
  • Enforcement action against crypto trading platforms that fail to register and comply with securities laws.
 
  • According to a Financial Post report, intervention by Canadian regulators limited FTX’s access to the Canadian market, which helped Canadian investors escape the worst of the fallout from FTX’s collapse.
 
What the crypto sector will look like when the dust settles from the FTX debacle remains to be seen. The lesson for investors (big and small) is clear—investing in crypto is a very risky endeavour.

Improving Complaint Handling
 
The complaint-handling process for financial consumers has been a key issue for FAIR Canada for more than a decade, and 2022 was no exception.
 
In February, on behalf of a coalition of consumer advocates, we wrote to Minister of Finance and Deputy Prime Minister Chrystia Freeland. We called on her to establish the Ombudsman for Banking Services and Investments (OBSI) as the single ombudsperson for financial consumers in Canada. We also urged Minister Freeland to empower OBSI with the authority to issue binding decisions, when resolving disputes between consumers and financial firms. In October, we issued a joint press release with other consumer advocates asking governments and regulators to do the same.
 
Decision-makers have responded slowly to this important consumer protection issue. Encouragingly, in 2022, independent experts continued to recognize that improvements are needed. In June and September, Professor Poonam Puri released the results of independent reviews of OBSI and ADR Chambers Banking Ombuds Office. Professor Puri added another compelling voice to the repeated calls to establish a single ombuds service with binding authority. In October, we were pleased to see the Canadian Securities Administrators’ (CSA) announcement that they plan to publish a proposal in 2023 to make OBSI’s decisions binding. FAIR Canada will continue to advocate on this important consumer protection issue and push government and regulators to establish concrete measures as soon as possible.
What is a Financial Advisor?
 
In March 2022, Ontario rolled out a new regulatory framework that set certain minimum ethical and educational standards for anyone calling themselves a financial planner or financial advisor. While this is meant to reduce confusion and protect consumers, it may have the opposite effect, particularly when it comes to financial advisors. This is because the advisor only needs to be knowledgeable about one type of financial product. Imagine a world where someone could call themselves your financial advisor, even though their only experience is selling life insurance products!

Recognizing these concerns, in July, Saskatchewan’s Financial and Consumer Affairs Authority indicated it is considering departing from Ontario’s approach by requiring higher standards for financial advisors in the province. The guiding principle would be to align standards with what consumers reasonably expect, when dealing with individuals using these titles. We applaud Saskatchewan for taking a thoughtful approach to this important issue, and continue to urge Ontario and other provinces to follow suit by raising the bar for financial advisors. Read our coalition press release calling on governments to take action.

Nationwide Ban on Unfair Mutual Fund Fees Finally Arrives

On June 1 2022, the long-awaited ban on deferred sales charges (DSCs) and certain trailing commissions for mutual funds finally came into force everywhere in Canada, including Ontario.

The bans represent a major achievement in our advocacy efforts to protect ordinary investors from these unfair fees. As a result of the bans, your advisor or firm is no longer able to charge DSCs and, in the case of do-it-yourself investors, trailing commissions. This is a big win for investors and the decade-long advocacy efforts by groups, such as FAIR Canada and others.
Read more details on the DSC and trailer bans.

If They Post It, Will You Access It?
 
In April and September 2022, the CSA issued proposals to adopt an access equals delivery (AED) model for providing certain documents (e.g., financial statements and certain management reports) to shareholders and mutual fund/ETF investors.
Essentially, instead of delivering documents to investors, or notifying them each year when they are available and that they can request copies, these documents will be considered delivered by a company if certain conditions are met:

  • The documents are posted on SEDAR – an electronic database that few investors know about or use.

  • A press release issued indicating, among other things, that the documents are posted.

  • In the case of mutual funds/ETFs, the documents are posted on the fund company’s website.

FAIR Canada agrees there is room to modernize how documents are delivered to investors. But relying on a press release and SEDAR, instead of delivering or providing notice, is not the answer. Particularly, if it may mean that fewer investors will see this important information.

We continue to encourage the CSA to take a broader approach to modernizing how documents are delivered. The focus should be on finding ways to not only reduce costs, but also encourage a transition to electronic delivery. There should also be respect for investor preferences on how they wish to receive information from the companies and funds they own. At a minimum, we believe investors should be able to subscribe to receive these documents electronically. Read our detailed comments on this issue to the CSA.
Understanding the Costs of Your Investments

No one likes to pay hidden fees and costs. And no one, if they’re being honest, would argue that keeping them hidden from consumers is somehow fair. And yet, when it comes to investment products, most ordinary investors in Canada would be surprised to know that not all the fees and costs related to their investments are included in the annual cost reports they receive. 
 
While regulators in Canada are currently working on rules to address this issue, the effort has been decades in the making. Nonetheless, there were some signs of progress this year. In April, Canadian securities and insurance regulators proposed rules to improve transparency in fee statements provided to investors. The proposal would require these statements to include all your investment fees and costs. It also included valuable research on how best to present this information to investors so that it is not only comprehensive, but clear and easy to understand.
 
This is an important proposal that needs to be implemented without further delay. Lack of cost transparency is not only unfair, but it means investors are missing key information needed to make appropriate investment decisions.

New Self-Regulatory Organization
 
In September 2022, members of the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) approved the amalgamation of the two self-regulatory organizations. Effective January 1, 2023, the MFDA and IIROC became one organization that will temporarily be called the New Self-Regulatory Organization of Canada (New SRO).
 
We are pleased to see that the New SRO is based on a clearer public interest mandate and better governance structures. Also, the New SRO includes two new enhancements: an Investor Office that supports investor education and rule development; and an Investor Advisory Panel to provide advice on investor issues. 
Looking Ahead to 2023
At FAIR Canada, some key areas we plan to focus on this year include:

  • Ongoing crypto asset risk – In line with the commitments in the CSA’s 2022-2025 Business Plan regarding crypto assets, we will continue to raise awareness of crypto-related risks. We’ll also urge regulators to take proactive steps to protect investors from this growing asset class.
 
  • Ban on sales charges that harm investors – The Canadian Council of Insurance Regulators and the Canadian Insurance Services Regulatory Organizations intend to ban new DSCs for segregated fund contracts, beginning June 1, 2023. The ban aligns with the ban on DSCs for mutual funds. In line with our commentary to the insurance regulators, we will also be looking out for a possible ban on the use of advisor chargebacks in segregated fund sales. Read our commentary here.

  • Environmental, social and governance (ESG) reporting standards – Investors continue to show an interest in investments that consider ESG factors. This heightened interest exposes investors to the risk of “greenwashing”—when a company spends more on marketing itself as ESG-focused, than it does on actually being ESG-focused. The absence of globally accepted standards for reporting ESG-related information exacerbates the risk of greenwashing. We will be looking for the CSA to finalize its proposed climate-related disclosure standards to provide consistent and comparable disclosure to investors.
 
  • New SRO’s public interest mandate and promise to enhance investor protection – Among other things, we will be looking for the New SRO to proactively engage with investor groups for their input on strategic priorities and policy initiatives, and to prioritize investor compensation for those that have been harmed due to rule violations.

  • Rising do-it-yourself investors and the impact of finfluencers and gamification – The use of finfluencers and gamification of trading apps, often intended to encourage frequent trading, or steer investors to make particular investments, can negatively affect decision-making and lead to poor outcomes. We will be looking out for regulatory responses to these increasingly troublesome trends.
 
  • Promoting fair outcomes for investors – Last February, we urged the Ministry of Finance (Ontario) to ensure regulators put more focus on promoting fair outcomes for investors. We believe it should be one of the main objectives of securities regulation, alongside the existing objectives of promoting capital formation and competition. In the United Kingdom (UK), financial firms are required to show that the fair treatment of customers is at the heart of their business model. Recent reforms have raised the bar even further by introducing a new Consumer Duty, which requires UK firms to act to deliver “good outcomes” for retail customers. We will continue to follow consumer-related developments like those in the UK, and advocate for a more consumer-focused culture within Canada’s financial services industry.
We’d Love to Hear From You!
 
Do you have feedback on our newsletter or suggestions for topics you’d like us to write about? Your input is valuable and will help us improve our newsletter content for loyal subscribers like you. Please email us at info@faircanada.ca with your comments and/or suggestions.
 
Remember to follow us on LinkedIn and Twitter!
Support FAIR Canada