Euphemism: regulators still clinging to the past, still unwilling to face the fundamental problem?

Quite frankly I am gobsmacked, but at the same time eternally grateful to the many gifts this communication will provide the public debate on best interest standards.  I of course refer again to the Keynote Address by Bill Rice, Chair Alberta Securities Commission, on December 3, 2013 to the IIROC – CLS Compliance Conference 2013.

In this address he made a number of points that I think are worth pointing out and rebutting:

  • That regulators and the regulated are all on the same side and both have the
    same ends.   He of course fails to mention the investor in this cosy relationship.
  • That it is important that regulators protect intermediaries’ incentives to do business, because what benefits the business, benefits the capital markets.  He conversely fails to mention the consumer and what benefits the consumer though.  In so doing he belies his ignorance over the difference between the market for transactions and the market for advice and the structure and relationships of the two market places.
  • That effective regulation is about balance, but not about stating what that balance is all the while delivering a speech that is devoid of any palpable attempt at balance.
  • That he hears the complaints of the regulated loud and clear, but makes no mention of the complaints of the consumer.  
  • That regulators are focussed on fixing yesterday’s problems and regulation is more concerned with the optics than the impact, when in fact issues such as best interests are intensely structural issues focussed on impact and are highly relevant in today’s retail financial services market place.  Indeed, the problem is that the relationship between the advisor and the client is not one of intermediation, but of advice and a failure to recognise this and regulate in accordance with this is resulting in inefficient market outcomes, not only in terms of advice, but consumer savings capital adequacy and capital market allocation and cost efficiency.
  • That problems identified by international regulators do not exist in Canada, all the while ignoring that best interests is a fundamental universal physical dynamic of the investment advice relationship and core to the structural efficiency of advice based markets.  
  • That the only reason why regulators are focussing on issues of suitability and best interests is because of the lead of US regulators, all the while ignoring the fact that Canadian regulators started to look at these issues back in the late 1990s before financial crisis related issues surfaced, and all the while ignoring the steady development of consumer rights and issues of structural and market fairness in retail financial services by international regulators over the last 3 decades.   Best interest standards have not only recently come to the fore.
  • That he does indeed consider the retail advisory relationship as purely a sales/transaction and not an advice based relationship, that the regulation of the transaction is a less burdensome regime for dispensing retail advisory services than a best interests standard all the while ignoring the heart of the matter: the transaction relationship has long since morphed into one focussed on advice and marketed as such and therefore long since separated itself from one of pure intermediation. 
  • That it is not the standards that are at fault, but the consumer “in too many cases” for failing to understand what they are and the advisor for “often” failing to abide by them.   This is hardly surprising given the representation of a higher level personalised advice based service delivered by the industry.
  • That regulation should retain current transaction standards and that the consumer, based on full true and plain disclosure remains responsible for the investment decision, while ignoring the complex assumptions that need to be satisfied before, indeed, consumers could be deemed to have taken responsibility for the transaction decision.
  • That greater focus be placed on enforcement, in cases of offensive breaches, with reduced focus on rule making and that greater reliance should be placed on self regulation, i.e. greater peer to peer policing of standards, while all the while ignoring that the widening gulf of representation between the pure transaction and advice has been engineered by the same intermediaries he is suggesting are capable of policing a less burdensome regulatory regime.

Bill Rice is concerning himself only with the needs of the major market intermediaries (e.g. banks….savings institutions, credit unions, insurance companies, mutual funds, pension funds, finance companies, and real estate investment trusts (REITS) while ignoring the fundamental dynamics and relationships of retail financial advice.  His is a world where investors and financial institutions meet solely for the purpose of the transaction, where the rights of the institutions almost exclusively trump the rights of the investor.  He willingly ignores issues of fairness, of true balance and of the fundamentals of the investment and suitability decision process and its relationships.   His world is one which facilitates the transaction as quickly as possible without imbuing the process with the costs of accountability and contract and he is certainly not interested in finding out the merits of higher standards.   

“If I were personally to be thoroughly persuaded by industry that a new standard was not required, it would not be through some exhaustive comparison and argument concerning the merits”

I will of course be exploring the above noted issues and comments from the speech in greater depth in later posts.

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