Best interest standards…not a recent movement

As per Bill Rice’s recent keynote speech (to the IIROC – CLS Compliance Conference 2013), there is a mistaken assumption that the global movement towards best interest standards has occurred as a result of the most recent financial crisis, and that because Canada emerged relatively unscathed (although I would argue that Canada’s consumer debt dynamics would suggest otherwise) that best interest standards are an ill conceived knee jerk reaction to problems which do not exist in the Canada.

In point of fact, regulation in the UK has been focussed on issues of best interest standards for a much longer period of time. 

According to “Regulating Independent Financial Advisers: Current Trends and Reform Proposals, between the EU and the National Level”, Riccardo De Caria, Università degli Studi di Torino February 22, 2012:

In the UK, the notion of Independent Financial Adviser (IFA) dates back to 1987, when the Securities and Investments Board (SIB) – the former City regulator, established by the Financial Services Act 1986 – «ruled that there should be only two types of advisers: independent ones, who could advise across the range of products, and tied agent/company representatives who were restricted to advising on the products of just one company. This division became known as ‘polarisation’».

With polarisation, which came into effect in 1988, IFAs were therefore one of the two categories of professionals providing for financial advice, and their distinguishing feature was that they «acted as investors’ agents and, in compliance with a ‘best interests’ requirement, advised on the market range of products». The SIB had also coupled polarisation with disclosure requirements, according to which the advisers of both categories had to «disclose their status to the consumer at the outset of the advice process.

The argument for best interests standard for retail financial services, where it is clear that investors are contracting for financial advice as opposed to self initiated transaction requests and where investors are dependent on advisers’/ors’ suitability processes and expertise, is independent of outcomes derived from extreme economic and market conditions.  

Arguments that seek to attach imperative to recent financial crises are both misconceived and ignorant of the underlying fundamental need for such standards.

One thought on “Best interest standards…not a recent movement

  1. This is a comment from Ken Kivenko:
    Let us not forget the eye opening Stromberg reports of the nineties and Julia Dublin’s pioneering work on the Fair Dealing a Model over a decade ago.

    Industry lobbyists have delayed and blocked all attempts at reform but the tide is turning as abuses become larger and more frequent.The recent KYC breakdowns and attacks on seniors just cannot go on. An industry deserves the amount of regulation it receives and the asset gathering financial services industry deserves a lot of regulation and maybe even some prison time.

    Retail investors have lost billions on Bre-X,Sino-Forest, Trapeze…

    The advice industry needs to be professionalized and fast.

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