The point is this, if you set the rules too low and the decision parameters too wide, the lines as to what can and cannot pass become fuzzy and the leg room for inappropriate transactions becomes much too large.
““De Thomasis said his firm did everything by the book:”It’s like you have a big hammer over your head, and you don’t know what to do,” he said. “You follow all the rules, all the regulations, and now what?””
Now the majority of investors are not aware of the niceties of retail financial services regulation. Indeed, the rules regarding what can and cannot pass between the narrowly defined parameters of the know your client form allows in my opinion the unspeakable to pass, at times, between them.
Current rules and regulations do not require advisors to disclose that they are acting as salespersons and not “advisors” acting in their best interests per se. The advice they provide, in terms of what is regulated, is really limited to the product and the product alone, because how they determine suitability is dependent on a narrow set of factors the investor passes to them – risk profile, time horizon, investment objective, capital at hand.
But the promise and the innuendo of course is a vastly different universe! If you want to find out more about the current fight over the introduction of best interests standards in Canada please look at the OSC’s website
In a sense, De Thomas may have passed within the rules as he saw and interpreted them, and as the OBSI report noted, the leverage (although close to 50%) and the repayment burden (not more than 35% of income) all passed within MFDA leverage guidelines as of 2000, although a number of other factors (risk aversion/tolerance) did not. Why he considered a loan of 150,000 as being suitable for a lady well into her 70s who depended on her income and capital to the extent she did, is neither here nor there according to current regulation: it is what you can squeeze through the KYC that matters, not whether or not it is right for the client.
Yes, the retail industry is about product sales and security transactions and not really about advice (although a number of advisors do provide appropriate advice), and even though that is what it often promises (a clear misrepresentation of the actual regulated contract), it is neither set up to do so nor regulated as such. The fault for this also lies with our regulators who have in truth dillied and dallied for eons around how best to protect the investor and to regulate this industry.
The point is this, if you set the rules too low and the decision parameters too wide, the lines as to what can and cannot pass become fuzzy and the leg room for inappropriate transactions becomes much to large. Low standards are just asking for it in the parlance of abuse and regulators surely must have be aware of the risks of such low standards.
There will always be an element of fuzziness in terms of what is and is not suitable, but raising the benchmarks will lift this fuzzy area clear of the depths it is currently inhabiting. Making sure that recommendations are based on much more detailed requirements (actual size and timing of financial needs, other investment assets, more detailed and comprehensive risk assessment) and are properly constructed and planned will take away the leg room and narrow the fuzz around the rules.
What the case clearly shows is that current rules and regulations are inappropriate and allow for too much to pass between them with little or no need for adequate supporting rationale.
In the end, advice is not about what you can get away with, but about what is right and sensible for the client!