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CSA rules on incentives inadequate, IOSCO finds

Canadian securities regulators are falling short of global standards designed to prevent the mis-selling of complex financial products, according to a report issued Thursday from an umbrella group of global regulators.

The International Organization of Securities Commissions (IOSCO) released the report, which reviews regulators’ compliance with IOSCO’s nine principles designed to prevent firms from improperly selling complex products to retail investors.

The review found that regulators in Ontario and Québec meet IOSCO’s standards in eight categories, but the provinces fall short when it comes to their rules on industry incentive policies.

“The regimes in Ontario and Québec appear to address incentives broadly through high-level guidance, while having specific regulations to address incentive-related conflicts in the contexts of mutual fund distribution and underwriting,” the report noted.

As a result, the review concluded that the Canadian regulators’ rules in this area don’t fully meet IOSCO standards, which aim to ensure that industry remuneration practices prioritize customers’ best interests and don’t create incentives to recommend complex products when other products would better meet clients’ needs.

“A ‘fully consistent’ regime would have rules or principles addressing standards for remuneration or incentive policies and would require senior management engagement,” the report said.

While the Canadian regulators currently fall short of IOSCO standards when it comes to incentive structures, the review noted that these deficiencies may be remedied in forthcoming rule proposals, such as the client-focused reforms, which were initially proposed by the Canadian Securities Administrators (CSA) in June 2018.

“Ontario and Québec reported that they have commenced work on targeted reforms that will address this principle. This involves rule amendments and detailed guidance regarding conflicts of interest,” the IOSCO report said.

Recently, Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers (AMF), indicated that the regulators are aiming to publish their revised proposals by the end of September.

In the meantime, IOSCO recommended that regulators ensure that they have adequate mechanisms in place for overseeing and enforcing their rules in this area, noting that “jurisdictions must have effective supervisory and enforcement mechanisms to support suitability regimes for complex products and… ensure that intermediaries take corrective action where their behaviour falls short of supervisory or regulatory expectations.”

IOSCO also called on regulators to “consider enhancing disclosure requirements to help customers make informed investment decisions and understand the advice they receive from intermediaries.”

Source: Investment Executive