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Banks’ product shelf restrictions face scrutiny at Advocis event

Michelle Schriver, Advisor’s Edge 

November 17, 2021  – Banks restricting product shelves at the branch advice level came under fire on Tuesday during a panel discussion on the client-focused reforms.

The panel — featuring Ontario Securities Commission chairman, CEO and commissioner Grant Vingoe and investor advocate Ken Kivenko, president of Kenmar Associates — was part of Symposium 2021, hosted virtually by the Financial Advisors Association of Canada (Advocis).

The client-focused reforms (CFRs) come fully into effect on Dec. 31, and aim to better align registrant and client interests by requiring advisors and firms to address conflicts and comply with enhanced know-your-client, know-your-product (KYP) and suitability obligations, so that recommendations put clients’ interests first.

In preparation for the KYP reforms, some of the big banks ended new purchases of third-party products.

Kivenko said he’s concerned about “how you will be able to say that you’re acting in the best interest [of the client] when you can’t look at a range of products.”

Advisor professionalism and a client-first standard require product choice, Kivenko said. “We don’t believe it’s possible to be [CFR] compliant and have a restricted shelf.”

To address the conflict of proprietary products, Vingoe said, the CFRs require that firms have controls to ensure products are in clients’ best interests.

The reforms suggest that a proprietary shop could ensure its products are competitive by, for example, conducting periodic due diligence on comparable third-party products.

Regulators didn’t ban proprietary products, Vingoe said, in part because of the difficulty in defining when such products are “damaging” and when they’re not.

For example, small firms such as exempt market dealers are manufacturing their own products, he said.

Still, “It’s another thing for the principal distribution channels in this country to be eliminating choice from their offerings,” he said.

“We’re equally worried that that phenomenon can spread,” Vingoe said, if the full-service channel limits independent products as a way to achieve financial efficiencies that may not be in clients’ best interests.

When the panel discussed product costs, Vingoe said cost also “contributes to our worries about the restricted shelf issues.”

That’s because cost is a determining factor in choosing a product when two funds have similar performance characteristics, he said. “Diminished competition [on product shelves] will just drive up costs.”

Vingoe also made clear that restricted shelves weren’t the inevitable result of increased KYP obligations.

“We expected to see changes in behaviour based on the conflict and suitability principles [in the CFRs] that would have required a rigour associated with the banks’ shelves that would point to the inclusion of independent products,” Vingoe said.

Regulators will examine firms’ controls associated with proprietary products, he said, “to see how the controls have operated and how the conclusion’s been reached that the shelf can be constricted to proprietary products.”

Ultimately, the industry should expect regulatory will to prevail regarding proprietary products.

If bank shelves don’t change to include independent products, “we’ll have to use other tools to bring [that change] about,” Vingoe said.

Kivenko also raised the issue of registrant titles in the context of proprietary shelves. He noted that Ontario’s Capital Markets Modernization Taskforce suggested that registrant titles should ensure clients aren’t deceived about proprietary products.

The task force said it’s “critical” that investors are aware they’re not receiving independent advice when purchasing in the proprietary channel.

Using the title “salesperson” instead of “advisor” for registrants in the channel would enable clients to instead choose firms that were CFR-compliant, Kivenko said.

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