1 — Financial Advisors and Planners: In Search of Regulatory Principles

FINANCIAL ADVISORS AND PLANNERS: IN SEARCH OF REGULATORY PRINCIPLES

Michael Trebilcock, Anita Anand, and Francesco Ducci*

Given increased life expectancies and more limited and often non-existent private pension plans, individuals face increasing challenges in saving and investing adequately for their post-retirement years, implying an increasingly important role for financial planners and advisors. However, in many jurisdictions the regulation of financial planners and advisors is disorganized and lacking in any clear over-arching principles, exacerbating information asymmetries facing consumers in choosing an advisor. In this paper, in the light of recent reform experience, especially in European jurisdictions, the paper proposes some basic regulatory principles for this sector: first, the creation of a mandatory public registry of all financial advisors who provide financial advice to individuals on an individualized basis, whatever the label or designation they hold themselves out under, where all relevant credentials of the advisor would be listed; second, a voluntary government-accredited certification regime where professional bodies that meet government-specified minimum standards for their members can certify them as certified by a government-accredited professional body; and third, a distinction should be drawn between certified independent financial advisors and certified non-independent financial advisors to mitigate the conflict of interest problem that arises where financial advisors have an interest in promoting particular financial products.

I. — INTRODUCTION: THE NATURE OF THE REGULATORY CHALLENGES

Financial advisory and planning services are a growth industry in most parts of the developed world, reflecting a proliferation of various categories of financial advisors and planners as well as available investment vehicles and financial products. The demand for financial planners and advisors reflects a combination of factors. People on average enjoy much longer life expectancies than in the relatively recent past.1 Their longevity requires them to provide for themselves for a longer period of post-retirement, including expenses relating to healthcare, in-home care, and nursing home care associated with a more protracted aging process. In addition, while a basic state-provided retirement pension is available in most developed countries, this benefit will typically fall well short of individuals’ pre-retirement incomes. With respect to private retirement plans, employers are widely shifting from defined benefit to defined contribution plans, which impose more risk on individual employees, and in other cases no private pension benefits at all, as part-time and precarious employment is on the rise. Finally, many individuals tend not to be financially literate;2 low financial literacy is often compounded by psychological biases reflecting myopia or inertia in planning for long-term contingencies, borne out by behavioral economics research suggesting that people tend to save and invest far less than they have reason to.3

In many developed countries, individuals seeking financial planning or advisory services with respect to long-term savings and investment strategies are likely to confront formidable information asymmetries in choosing an appropriate and competent financial advisor/planner who will act in their best interests in providing such planning or advisory services. First, in many jurisdictions there is a jumble of confusing titles and designations often associated with private professional or industry associations that provide weak signals of relative competence. Second, many financial advisors and planners are subject to an inherent conflict of interest in that they are advising on investments and products in which they or their employers have a direct interest, and their compensation is often in part determined by their success in steering clients to in-house products, leading to advice that may not be in the best interests of the client.4 In this article, we argue that the endemic information asymmetry problems and frequent risks of conflicts of interest that characterize the market for financial advice require the following set of regulatory interventions: (a) the creation of a government-accredited voluntary certification regime for financial advisors and planners who meet minimum ex ante and ex post standards of competence and integrity, which would grant the title of Certified (government-accredited) Financial Advisor; (b) a mandatory distinction between independent and non-independent certified advisors, with independent advisors being subject to a duty to act in the best interests of their clients; (c) the creation of a public registry and database to include prescribed information such as: the individual advisor’s formal educational credentials; job or employment experience; whether the individual is certified as a financial advisor by a government accredited professional organization and if so whether as a certified independent or non-independent financial advisor; whether the individual holds a license related to the sale of any financial products; and disciplinary complaints and civil liability claims and dispositions relating to that individual’s financial advisory services.

Our proposals have two objectives. First, we attempt to identify regulatory best principles for jurisdictions that currently lack or fall short of having a coherent regulatory framework relating to financial advisors and planners, on the basis of recent international regulatory experiences in selected jurisdictions (Australia, Canada, Europe, New Zealand, the United Kingdom, and the United States). Second, while our proposals are often informed by positive lessons drawn from this comparative evaluation, we provide a general critique of exclusive licensing regimes as the predominant approach followed by many jurisdictions that have implemented regulatory reforms for financial advice. We argue instead in favour of a more flexible government-accredited certification regime coupled with a public registry as a way to address asymmetric information problems while avoiding the negative supply-side effects implicit in licensing schemes. Hence, our policy proposals are an attempt to rationalize the different approaches in the current regulation (or lack thereof) relating to financial planners/advisors across jurisdictions, as well as the discordances that can be found within the regulatory landscape of specific jurisdictions.

In part II below, we review the menu of available regulatory options. In part III, we provide a brief comparative review of regulatory experience in selected jurisdictions. In part IV, we provide a brief case study of the Ontario experience, where the provincial government is currently contemplating major regulatory initiatives. Section V presents some proposed regulatory approaches that we consider would enhance regulatory coherence in a field in which it has hitherto been singularly lacking. Section VI concludes.

II. — THE MENU OF REGULATORY OPTIONS⁵

As indicated in part I above, it is useful to divide regulatory options into ex ante and ex post options: ex ante forms of regulation are directed to the entry qualifications of those seeking to provide a professional service (such as financial planning/advice), while ex post forms of regulation address post-entry forms of conduct. Most regulated professions have historically placed more emphasis on ex ante forms of regulation than ex post regulation, i.e., input rather than output or outcome regulation.

With respect to ex ante regulation — in the case of financial planners/advisors — three broad regulatory options are available: (a) exclusive licensure of a defined category of professional services; (b) certification of certain classes of service providers as meeting prescribed entry qualifications, while not precluding non-certified providers from the category of service in question, (i.e., exclusive or reserved titles rather than exclusive or reserved fields of practice); or (c) registration, where all individuals providing services in a given field are required to register in a publicly accessible central registry, but without any entry qualification requirements, although registrants could be required to provide information on the registry of formal education and training, relevant job experience, organizational and professional affiliations (if any). In part I, we briefly reviewed each of these regulatory options in terms of their strengths and weaknesses.

An obvious threshold issue pertains to all the major regulatory options identified above: defining the field of financial planning/advice to which any of the chosen regulatory options would apply. In this respect, clearly function should prevail over form, so that whatever label or designation financial advisors/planners choose to apply to themselves does not unilaterally determine the application and extent of appropriate regulatory obligations.

III. — A COMPARATIVE OVERVIEW OF REGULATORY REGIMES FOR FINANCIAL PLANNERS

1. — Introduction

In this part, we evaluate how financial advisors/planners are regulated across selected jurisdictions, using as a sample for our comparative overview Australia, Canada, Europe, New Zealand, the United Kingdom, and the United States. As set out in this part and in the appendix, there are clear similarities, recurrent policy issues, and analogous consumer protection concerns underpinning regulatory approaches to financial planning/advice. At the same time, there are often substantively critical differences that emerge across countries, which are relevant because they shed light on general regulatory best principles. In particular, we highlight different approaches on the basis of the following three pillars of regulation: who is regulated and under what title; how is access regulated and what are the associated prerequisites for access; how are conflicts of interest addressed.

Some jurisdictions appear to use “financial advisors” and “financial planners” as interchangeable titles, while some use financial advisor as a general category that covers financial planners as a sub-category or specialization (respectively Australia and New Zealand); other regimes use “investment advisors” and “financial planners” as distinct but often overlapping professional categories (United States). Some jurisdictions lack a regulatory scheme for financial planners and advisors and largely base regulation on the sale of specific financial products as opposed to advice or planning (Canada, with the exception of Québec), while others regulate investment advice but not planning (United States). Some countries instead regulate financial advisors and planners directly and distinctly from the sale of specific financial products, often distinguishing between “independent” and “non-independent” advisors and subjecting them to different rules (for example, Australia and the European Union). Countries that regulate financial advice and planning generally do so through licensing and specific access and standing requirements (including minimum education requirements, continuing professional development requirements, and so on), although with some variations across regulatory regimes and terminology (for example, terms like “authorization” or “registration” are often used to describe an exclusive right equivalent to licensing).

Moreover, all jurisdictions address conflicts of interest through a combination of specific standards of conduct and rules on remuneration, but critical differences emerge in the way conflicts are regulated. Strict regimes apply a “best interest of the client” standard together with bans on both conflicted remuneration and commissions that apply to all advisors (Australia). Looser regimes either lack a best interest standard (Canada, except for Québec) or apply inconsistent regimes depending on the service and financial product (United States). Other intermediate forms of regulating conflict of interest include qualified standards of conduct (United Kingdom), or partial as opposed to comprehensive bans on commissions that apply exclusively to independent advisors (various European countries).

2. — Australia

In Australia, financial advice is regulated under the Corporations Act.6 According to official reports, “financial planner” and “financial advisor” are used as interchangeable titles,7 and advice is classified as either independent (non-aligned) or aligned. A financial planner/advisor can use the term independent only when he or she operates without any conflict of interest arising from associations or relationships with a product issuer; an aligned advisor is instead usually employed by a financial institution such as a bank or a wealth management services provider, or tied to a product provider via vertical ownership structures, contractual relationships, and other forms of remuneration. The advice can also be distinguished between personal (when the advisor has considered one or more of the client’s objectives, financial situation, and needs)8 and general (any financial advice that is not personal).

The current regulatory regime, which is the result of reforms in force since January 2019, imposes restrictions on who can call themselves a “financial planner” or a “financial advisor.” In particular, a financial planner or advisor must: (a) hold an Australian Financial Services (”AFS”) licence or operate under an exemption to this licensing requirement (for example, by providing financial services as a representative of an AFS licensee); (b) obtain and comply with the following specific requirements related to education, training, and ethical standards set by the Financial Advisers Standards and Ethics Authority (”FASEA”):9

• Have a relevant bachelor or higher degree, or equivalent qualification;
• meet continuing professional development (”CPD”) requirements each year;
• complete a year of work and training (professional year);
• comply with a code of ethics that includes a “best interest of the client” standard.

The current regulatory principles governing the provision of financial advice in Australia have also been shaped by a number of prior reforms between 2007 and 2017.10 In particular, the 2012 Future of Financial Advice Reforms (”FOFA”) bill introduced:

• a “best interests” obligation that requires all financial advisors to act in the best interests of their clients when giving personal advice;11
• a ban on conflicted remuneration (including commissions, volume payments and non-monetary benefits) when financial product advice is provided to retail clients;12
• increased transparency through enhanced disclosure of fees and a requirement that providers of financial advice obtain client agreement to ongoing advice fees.

Other reforms introduced in 2014 created a professional Register established by the Australian Securities & Investment Commission (”ASIC”), and further regulatory changes in 2018 targeted specific conflict of interest in life insurance remuneration schemes.13 The government has committed to further reforms; among other things, it is seeking to rename “general advice” currently not covered by the best interest of the client standard.14

3. — Canada

According to the Financial Consumer Agency of Canada, a financial advisor is a general term that can be applied to anybody who helps a client manage money, which could include an employee of a financial institution, a stock broker, or an insurance agent. A financial planner is a type of advisor who helps clients create a plan to reach long-term financial goals, including help creating a budget, identify ways to save money on taxes, help planning for retirement, or provide estate-planning advice.15

There are varying degrees of regulation pertaining to financial advisors/planners in Canada. In Ontario, as we discuss in more detail in part III, individuals using the title “financial planner” or “financial advisor” in Ontario are not governed by a specific regulatory regime, and regulatory requirements for financial services remain tied to the sale of specific financial products or services, such as insurance, securities or mortgage brokering.

Similar concerns over possible regulatory gaps have been raised in other provinces. For instance, while British Columbia has a higher regulatory standard than Ontario — a registration regime for professionals who trade in, underwrite, or advise on securities imposes a duty to act fairly, honestly, and in good faith16 as well as some restrictions for individuals holding themselves out as financial planners17 — the province still lacks a comprehensive regulatory regime for financial planners and advisors. In this regard, the Financial Advisors Association of Canada has recently noted that while a license is required to sell financial products, there is no minimum education requirement to provide financial advice in the province despite the fact that almost half of British Columbians believe that the title “financial advisor” is regulated similarly to lawyers, doctors and other professionals.18 A similar mismatch between lack of regulation and consumers’ expectations is reported in Alberta and other provinces.19

In contrast, Québec imposes a strict regulatory regime. Only certain trained individuals are permitted to use the title “financial planner” or “planificateur financier” (”Plan. Fin.”). These titles can be used by individuals who are holders of a diploma issued by the Institut Québécois de Planification Financière (”IQPF”) and are authorized under a certificate issued by the Autorité des Marchés Financiers (”AMF”). As a result, financial planners in Québec must comply with the following requirements:

• specific academic training, usually a personal financial planning university program approved by the IQPF or equivalent programs;
• a mandatory IQPF’s Professional Training Course;
• IQPF exam leading to the issuance of an IQPF diploma;
• continuing professional development requirements;
• Code of Ethics, which includes the duty for a financial planner to guide and enlighten the client with objective professional judgment always keeping in mind the interest of the client, and avoiding situations of conflict.20

4. — European Union

Financial advice is regulated across Europe through a mix of regulations and directives at the European level, as well as national legislation in individual member states. General principles have been laid out in the 2007 Markets in Financial Instruments Directive I (”MiFID I”) and in the 2018 Markets in Financial Instruments Directive II (”MiFID II”).

Since 2007, MiFID I introduced various disclosure requirements and a statutory requirement to act honestly, fairly, and professionally in accordance with the best interests of clients. This standard, defined as a “best execution” obligation, requires that all appropriate steps must be taken to obtain the best product for the client, considering all the costs entailed in the service and various options for remuneration. MiFID II added further requirements for advisors, in particular a distinction between independent and non-independent (or tied) advisors, which requires advisors to disclose whether the advice is provided on an independent basis, or on a more restricted analysis of the market.21 In order to qualify as independent advice:

• the independent advisor must consider a sufficiently large number of financial instruments available in the market (by type, issuer, and product provider) and the advice should not be limited to financial products issued or provided by entities that are linked with the advisor;
• the independent advisor must not accept or receive any commissions, or monetary or nonmonetary benefits from any third parties, such as product providers.

Other more specific requirements are imposed by national legislation in individual European member states with regard to access to the profession, types of advice available, credentials, and rules on remuneration.22 For instance, some countries, including Germany and France, implemented the new MiFID II rules by adopting the partial ban on commissions only for independent investment advice. This is not the case in the Netherlands, which like the United Kingdom, went further by adopting a stricter full ban on commissions for all financial advisors. Access is generally based on a licensing regime (sometimes referred as “registration” or “authorization” with a designated supervisory body) subject to specific requirements that can include certain education prerequisites, professional exams, compliance with a code of ethics and continuing professional development. In Italy, for instance, there is a professional register divided in specific sections for providers offering independent and non-independent advice. No specific degree is required except for a high school diploma, but access to the profession and registration is conditional upon passing an exam set by the designated professional supervisory body. In France, a financial investment advisor must join a professional association authorized by the Autorité des Marchés Financiers. After fulfilling the associated professional prerequisites to join an association, each advisor must be listed in a public register.

5. — New ZealandUntil very recent reforms that took place in April 2019, the regulation of financial planners in New Zealand had been based on complex and detailed distinctions between different kinds of “financial advisors” depending on the service provided and specificities of different financial products. In particular, while the Financial Market Authority defined “financial advisors” broadly as people who give advice about investing and other financial services and products — including financial planners, mortgage and insurance brokers, and banks that provide advice, products and investments — regulation prior to the reforms set different regulatory requirements for various sub-categories of advisors.23

For example, a “Registered Financial Adviser” (”RFA”) could only give financial advice for specific, less complex products, and would be limited to non-personalized service to retail clients or services to wholesale clients. Regulatory requirements for RFAs simply included registration on the Financial Service Providers Register. An “Authorized Financial Advisor” (”AFA”) in contrast could provide, in addition to the services as an RFA, services for more complex financial products, as well as investment planning services. Regulation imposed an authorization regime for AFA — a more demanding regime that required registration as well as meeting specific eligibility requirements, such as minimum competence prerequisites and compliance with a code of professional conduct, including a duty to give priority to clients’ interests. Other sub-categories included “Qualifying Financial Entity Adviser” (an employee or a nominated representative of a qualifying financial entity) and brokers, each subject to specific registration, conduct and disclosure obligations.

The Financial Services Legislation Amendment Bill introduced in 2019 a new regulatory regime for financial advice that covers a wide range of activities (including specific advice, holistic investment planning, and digital advice) and simplifies these complex distinctions by requiring that all financial advisors comply with the requirements prescribed by the Financial Advisers Act 2008. First, the new regime requires a “Financial Advice Provider” licence granted by the Financial Markets Authority.24 Second, the new regime establishes a level playing field by:

• simplifying the regime and the terminology by removing the categories of Authorized Financial Advisors (”AFAs”), Registered Financial Advisors (”RFAs”) and Qualifying Financial Entities (”QFEs”);
• 6. — United Kingdomintroducing a Code of Conduct for Financial Advice, which include duties to give priority to a client’s interests and new disclosure requirements on remuneration (although no comprehensive bans on remuneration have been introduced);
• expanding the minimum standards of competence, knowledge, and skill to all categories of people giving financial advice to retail clients;
• removing the requirement that only a natural person can give financial advice, to allow for the provision of online advice (”robo-advice”); and
• amending the requirements to be registered on the New Zealand Financial Service Providers Register to prevent its misuse.25

6. — United Kingdom

Following the 2006 Retail Distribution Review (”RDR”), regulation of financial advice in the United Kingdom imposes minimum qualifications and specific requirements on titles, disclosure, and remuneration.

In particular, regulation is based on the following principles:

• A mandatory disclosure requirement as to whether the advice is independent or restricted.26
• All advisors have to be registered with and approved by the Financial Conduct Authority, subject to qualification requirements and compliance with prescribed standards of professionalism.
• Advisors are required to hold an approved qualification (similar to one year of a completed university degree), and need to have an annual Statement of Professional Standing (”SPS”) issued by an FCA-accredited body.
• Each type of advisor must comply with the Code of Ethics, which requires them to “act honestly, fairly and professionally in accordance with the best interests of clients.”
• A ban on commission for all advisors, with the minor exception of basic advice.27

Some features of the U.K. regime are worth highlighting. First, there is no regulatory distinction between financial advisors and financial planners; however, many financial planners in the United Kingdom are Chartered Financial Planners (”CFPs”) — a title granted by a professional body and considered the gold standard qualification for planners. CFP status requires a diploma and at least five years of professional experience, and also imposes a code of conduct including a “best interests of the client” principle. Second, although advisors have been subject since 2007 to a requirement to “act honestly, fairly and professionally in accordance with the best interests of its client”,28 the U.K. Financial Services Authority appears to interpret this as a qualified standard29 that applies flexibly to various business models and forms of investment advice.30 The comprehensive ban on commission for all types of financial advisors appears to be the central tool against conflict of interest. Third, the terminology used to denote access to the profession is “authorization”, but the associated pre-conditions are akin to licensing. Finally, a 2015 financial market review31 concluded that although RDR reforms have improved the integrity and competence of advisors, future reforms must mitigate an identified “advice gap” by improving affordability and accessibility of financial advice in the U.K. market.

7. — United States

The U.S. financial services industry is characterized by specific regulatory regimes that apply to different types of advisors depending on the nature of the service and product provided. In particular, there are three types of professionals related to financial planning and advice, each governed by their own specific and distinct rules:

A. Investment advisors (”IAs”): IAs are generally individuals or firms that provide investment advice about securities for compensation. IAs are regulated both at the federal level and at the state level.32 IAs are subject to a fiduciary standard, which requires them to act in the best interest of the client. Access to the profession requires a license and a bachelor’s degree.

B. Broker-dealers (”BDs”): BDs are providers offering recommendations for specific securities products and offering brokerage services such as buying or selling stocks, bonds, or mutual fund shares. BDs are subject to broker-dealer regulation at the federal and state level33 and are generally subject to a lower “suitability” standard, which simply requires providers to reasonably believe that the products are suitable for the customer. Access to the profession is based on a licensing regime and a set of rules set by the Financial Industry Regulatory Authority (”FINRA”), a non-governmental self-regulatory body.

C. Insurance agents: Insurance agents are regulated at the state level and provide recommendations for insurance products and the sale of insurance products including fixed and indexed annuities. For insurance agents, access requirements and standards of care vary by product and by state.

Financial planners are not directly regulated. Rather, they are governed by the specific rules of IAs, BDs, and insurance agents, depending on the nature of the service provided. Most frequently, financial planners are regulated as investment advisors; however, in so far as they provide specific recommendations and sell securities and products offered by broker-dealers, or insurance and other financial products provided by insurance agents, they can also fall within the regulatory schemes of IAs or BDs, or both.34

There has been extensive debate in the United States as to the desirability of creating a more comprehensive and integrated regime for financial planners and advisors. On the one hand, many believe the current system is adequate and covers most activities in which financial planners engage.35 On the other hand, there are concerns (raised among others by the Financial Planning Coalition)36 that the current patchwork approach creates a regulatory gap where integrated financial planning remains unregulated, and consumers cannot rely on governmental authorities to verify providers’ qualifications (despite the presence of voluntary professional designations such as the “Certified Financial Planner” certificate). Critics of the status quo in particular argue that:

• too many professional designations generate confusion among consumers;
• some components of financial planning are subject to no regulation at all when they do not fit under the existing regulatory schemes of specific professionals;
• regulated service providers may lack the skills and competence for integrated planning services;
• planners are subject to different standards of care depending on their specific activity (fiduciary standard as investment advisors, suitability standard as broker-dealers, and various standards as insurance agent), as a result creating risks of regulatory arbitrage.

Following a 2012 Study by the U.S. Securities and Exchange Commission (”SEC”),37 which recommended a uniform fiduciary standard for all types of financial professionals — including broker-dealers — while allowing retail investors to continue to have access to various fee structures, the U.S. SEC adopted in 2018 a package of proposals that creates a new “Regulation Best Interest” standard for broker-dealers and imposes a standardized, mandatory short disclosure form (explaining the type of services offered, applicable legal standards, and conflicts of interest). The new standard requires broker-dealers “to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.”38 The SEC proposals follow a prior attempt by the Department of Labor (”DOL”) in 2016 to adopt new rules for broker-dealers who provide services to retirement plans, which required them to be fiduciaries.39 However, these rules were first postponed by the Trump administration and then vacated by the Fifth Circuit Court of Appeals in 2018.40

IV. — ONTARIO CASE STUDY

The Province of Ontario, Canada represents one jurisdiction in which inconsistent and fragmented regulation is manifest. In this section, we set out the salient attributes of this regime as it relates to financial advisors and financial planners.

Canada has a federal constitutional system based on an explicit division of powers in the Constitution Act, 1982.41 Under the Constitution, certain matters fall within the jurisdiction of the Government of Canada while others fall within the jurisdiction of the provinces and territories. For example, the regulation of banking is within the jurisdiction of the Government of Canada, while the day-to-day regulation of securities and mortgage brokering is a matter of provincial and territorial jurisdiction. Regulation of insurance companies is generally split between federal and provincial and territorial jurisdiction.42

In addition, the sale of financial products by individuals employed by or associated with securities dealers, insurance agencies, mortgage brokerage firms, and mutual fund firms is generally a matter of provincial and territorial jurisdiction. Some banking activities, such as deposit-taking services and the provision of banking services such as credit and lending, remain a matter of federal jurisdiction, though the Federal government has proven loath to pre-empt provincial regulation in this area for non-bank institutions.

Thus, in Canada, much of financial product sales and services and associated financial planning or financial advice is a matter of provincial and territorial jurisdiction. As a result, provincial and territorial agencies and regulatory bodies have been constituted to regulate these financial firms and their activities. In Ontario, these agencies are the Ontario Securities Commission (”OSC”) and Financial Services Commission of Ontario (”FSCO”). The Province of Ontario also recently established the Financial Services Regulatory Authority (”FSRA”), which consolidates FSCO and the Deposit Insurance Corporation of Ontario (”DICO”).43 FSRA was established in June 2017 and has subsumed the responsibilities of FSCO and DICO.44

Additionally, various self-regulatory organizations (”SROs”), such as the Investment Industry Regulatory Organization of Canada (”IIROC”) and the Mutual Fund Dealers Association of Canada (”MFDA”) on the securities side and the Registered Insurance Brokers of Ontario (”RIBO”) on the insurance side, have specialized expertise and knowledge. These bodies are delegated by government to regulate the activities of their members.

The current fragmented regulatory environment stems from the fact that financial service firms originally functioned in silos based on activity and products sold.45 Historically, these firms were not today’s conglomerates, each with diverse business lines and products. Rather, banks, insurance companies, securities dealers, and mortgage brokers were separate companies operating in different sectors, and regulators were established for each of those sectors.46 To this day, despite some efforts towards regulatory consolidation, this “siloed” framework still stands.47 Regulators focused on regulating the transaction itself; they did not regulate the relationship between the salesperson and the consumer, because the relationship was only a function of the specific transaction.48 One consequence of this splintered regulatory sphere is the absence of a uniform scheme concerning the titles held out by service providers and the qualifications they possess. A 2015 exercise conducted by the OSC, IIROC, and Mutual Fund Dealers Association of Canada (”MFDA”) observed 48 different business titles in use in Ontario, a panoply that highlights the difficulties consumers face when confronted with fragmented regulation.49

In recent decades, the financial services landscape has changed in several ways. First, firms have expanded horizontally across the previously siloed industry sectors. Banks, insurance firms, securities dealers, and mortgage brokers can now exist within a single corporate structure.50 Second, the financial products themselves have also often converged across sectors (e.g., financial derivatives).51 Third, the relationship between salespersons and customers has shifted from an emphasis on its transactional nature toward a holistic advisory relationship. There are no longer “salespersons” and “customers”, but “advisors” and “clients.”52 Fourth, the relationship between salespersons and their employers has taken a more independent, contractual type shape.53 Lastly, technological shifts in the industry have led to increased online financial advising, further de-emphasizing the transactional nature of the “advice.”54 This technological change will likely continue, requiring an adaptable and innovative regulatory scheme.55

As the 2018 FSRA Progress Report stated: “Regulating and establishing consistent standards for ‘horizontal’ activities and characteristics common across all industry sectors will be critical.”56 Financial planning is an important example of this. Financial planners, and individuals who hold themselves out as such, exist across the financial services industry as a whole.57 But there are no horizontal regulations that ensure consistency across those who hold themselves out to be financial planners or advisors.58

In 2015, the Ontario Minister of Finance constituted an Expert Panel to propose reforms to create a strengthened and harmonized regulatory framework. The Expert Committee proposed a comprehensive regulatory scheme established and implemented by expanding the mandates of the current financial service regulators; restrictions on the use of the “Financial Planner” and “Financial Advisor” titles; and, a universal statutory best interest duty.59

In its 2019 Budget Measures Act (Bill 100), the Ontario government included the Financial Professionals Title Protection Act which would implement several of the Expert Committee’s recommendations.60 If enacted, the proposed legislation would restrict the use of the titles “Financial Planner” and “Financial Advisor” to those with the appropriate credentials. This financial planning credential must be obtained from an approved credentialing body, as determined by the Chief Executive Officer of the FSRA.

V. — GENERAL REGULATORY PRINCIPLES

Our primary regulatory principles are addressed to jurisdictions (like Ontario) that are characterized by a diffused and discordant pattern of regulation and that are contemplating major regulatory reform initiatives related to financial advisors and planners. These should usefully be informed by reform experience in other jurisdictions. At the same time, our policy principles also attempt to provide a critique of regulatory approaches predominantly based on various forms of exclusive licensing, which for reasons identified in this section we view as excessively restrictive and likely to reduce access and raise costs.

1. — Defining the Field that Should be the Focus of Regulatory Attention

In defining the scope of regulatory initiatives addressed to financial advisors and planners, two preliminary points seem compelling: (a) the regulatory framework should not be defined by product categories, e.g., insurance, mutual funds, etc., or personnel associated with selling or promoting such products, given the dramatic blurring of product and organizational boundaries in the financial sector in recent years; and (b) the regulatory framework should not be centrally dependent on the particular designation or title that an individual chooses to assume in providing financial planning or advisory services, given that this will obviously encourage regulatory arbitrage through adopting different titles or designations to circumvent the regulatory framework. Thus, a functional, not formal, definition of the financial planning/advisory field is required for regulatory purposes. We have in mind a definition that would apply to any individual offering, or holding themselves out as providing, planning or advisory services to individuals on an individualized basis with respect to existing or potential investments in any form of financial security or instrument, where the provider of such services is remunerated, directly or indirectly, for providing such services to individual consumers.

Several points need to be noted about this definition: (a) it applies only to advice to individuals, and not to organizations such as businesses or institutional investors; (b) it would exclude various forms of advice such as informal non-remunerated communications between individuals; (c) it would exclude books, newspaper columns, blogs and the like offering financial advice on a non-individualized basis; (d) it would exclude credit counselling, debt consolidation, and bankruptcy services, which do not address actual or potential investments and financial securities or instruments; (e) while attempts are sometimes made in the financial services industry to distinguish financial planning from financial advising, this distinction is not robust even within the industry and certainly not amongst the general public. Hence, we prefer the more capacious term “financial advisor” as the focus of regulatory attention.

2. — The Case for a Public Registry of Financial Advisors

Reversing the hierarchy of ex ante forms of regulatory intervention reviewed in part II above, and applying a “least restrictive means” test in seeking to vindicate the normative rationales for regulation, the case for a public registry of all financial advisors, however designated, that fall within the foregoing definition seems comfortably to meet this test.

Such a public registry would render information about individual financial advisors readily accessible to members of the public and should include prescribed information, in particular:

• the individual advisor’s formal educational credentials;
• job or employment experience;
• organizational affiliations;
• professional affiliations;
• whether the individual is certified as a financial advisor by a government-accredited professional organization;
• if so, whether the advisor is certified as independent or non-independent;
• whether the advisor is subject to any licensing regimes related to the sale of financial products;
• disciplinary or civil liability claims relating to that individual’s financial advisory services and their disposition.

Such data on the public registry should be made available on-line at no cost to consumers, and registration should be mandatory for all individuals offering financial advisory services as well as any professional service related to the sale of financial products, including professionals that are already covered by specific licensing schemes (such as broker dealers, insurance agents, etc.). There is also an important question of whether consumers of financial advisory services should be given the option of providing online ratings of service providers that they have used.61 In principle, we favour this option as long as rating mechanisms are designed to minimize gaming of any such rating system.

More generally, we believe that a priority for a public registry and related instruments that attempt to mitigate information asymmetries on the demand-side is that they should be designed to be user-friendly, so that investors can proactively use these tools in order to make educated and informed decisions. In particular, the development of the public on-line interface should attempt to minimize investors’ information overload and confusion, by providing a clear and concise explanation of relevant regulatory distinctions — for example, a simple description of relevant differences between certified and non-certified advisors, as well as independent and non-independent certified advisors — in order to help consumers choose the service that best suits their needs. This emphasis on the creation of a public registry and accessible information is consistent with the essence and purpose of securities regulation and its disclosure-centric focus.

We note that proposals to create a public registry and data-sets have been implemented in various countries as part of their respective reforms, including the United Kingdom, New Zealand, and Australia. In many respects this proposal also closely follows the recent proposal by the Ontario Expert Committee on Financial Advisory and Financial Planning Policy, but has not been acted upon to date by financial regulators or government.

3. — The Case for a Certification Regime

With the alphabet soup of titles and designations that presently prevails in many jurisdictions, simply creating a public registry of all financial advisors, alongside this jumble of designations (some regulated, many not), is likely to have only a modest impact on reducing consumer confusion in obtaining competent financial advisory services. Hence, elevating one notch on the least restrictive means spectrum, the next option is to super-impose on a public registry system a broadly cast government-accredited certification regime whereby individual financial advisors must meet duly-specified entry credentials to hold themselves out as, e.g., a government-accredited certified financial advisor (certification issued by X professional association, a government-accredited certification organization).

This approach would require oversight by a government financial regulatory agency in accrediting professional self-regulatory bodies as certification agencies, subject to meeting specified minimum ex ante and ex post membership requirements. Ex ante membership requirements would relate to minimum required forms of formal education, training, and professional examinations; and ex post requirements pertaining to continuing education and minimum requirements for codes of conduct and disciplinary procedures for cases of alleged non-compliance with these ex ante and ex post requirements.

In this regard, we note that private forms of certification already exist in various countries, and that in some cases these private certification regimes are considered the gold standard for financial planners and advisors. Hence, we see virtues in enhancing these market-created solutions to information asymmetries by requiring government-accreditation of certification regimes subject to minimum ex ante and ex post standards. Such a regime would reduce the heterogeneity of the information base available to consumers of financial planning/advisory services in the public registry, while still contemplating some diversity of ex ante and ex post certification requirements by different government-accredited certification self-regulatory organizations.

4. — The Case for Caution in Adopting a Universal Licensure Regime

In considering elevating the regulatory options to the most restrictive option in the hierarchy of options reviewed in part II above — occupational licensure — we are cautious as to both the desirability and the feasibility of implementing a universal licensure regime, with presumably a common set of ex ante and ex post licensing requirements, across the entire landscape of financial advisory activities. We see a number of shortcomings in exclusive licensing schemes as opposed to a voluntary government-accredited certification regime.

First, proposals to introduce exclusive licensing are likely to provoke sharp and protracted debates amongst different groups of financial advisors, with very different formal education, training, and job experience profiles as to appropriate universal requirements. Second, they also ignore the fact that, in many jurisdictions, sub-classes of financial advisors are already often subject to licensure regimes, e.g., mortgage brokers, insurance brokers, mutual fund dealers, etc. Although universal licensure would impose more homogeneous standards across these different regulated sub-categories, it would at the same time increase the regulatory burden and add further complexity with overlapping licensing schemes. Third, exclusive licensing is likely to create supply-side effects that may be detrimental in terms of affordability and accessibility of financial advice. For example, the U.K. Financial Advice Market Review published in 2016 found that reforms had positive effects on the quality of advice available to those with larger amounts to invest, but also that changes may have contributed to widening the so-called “advice gap”, whereby consumers with lower incomes or investible amounts may be unable to pay for advice. The same reasons that were identified in part I above as main drivers of increasing demands for financial advisory services also highlight the importance of promoting affordable access to services of central and increasing relevance to many consumers and investors.

On balance, we believe that the combination of a public registry system along with a government-accredited certification regime is likely to significantly ameliorate information asymmetries between providers and consumers and promote a race to the top in the market for financial advisory services, while avoiding the inflexibilities and ensuing inter-professional conflicts that a universal licensure regime is likely to engender.

5. — Addressing the Conflict of Interest Issue

As we have noted above, many financial advisors are directly or indirectly affiliated with particular classes of financial securities or investments which it is in their interest to promote, either as employees, agents, or recipients of commissions or referral fees. While imposing on all financial advisors a duty to act in the best interests of their clients has compelling virtues, in many contexts it may be difficult to specify exactly what such a duty would entail. For example, in the case of a financial advisor employed by a bank or other major financial institution that also sells mutual fund products, and may be partly compensated on the basis of the sale of such in-house products to consumers of financial advisory services, it seems unrealistic to expect such a planner or advisor to recommend that a consumer or client pursue mutual fund investments with a competing bank.

Hence, we propose by way of a refinement to the certification regime proposed above that certified financial advisors by a government-accredited professional self-regulatory organization should be identified in their certification as either independent or non-independent financial advisors. Independent advisors should be subject to a duty to act in the best interests of their client as well as related specific restrictions — independent advisors should have no employment or other affiliation or commission or referral arrangements that may compromise the objectivity of their advice and the best interests of their client. For financial advisors who are able to meet this test of independence and charge clients simply a fee for their advice, we would hence contemplate that the certification regime would identify them as certified independent financial advisors (certified by X professional self-regulatory organization, government-accredited). For non-independent certified financial advisors, we see merit in the requirement that their certification characterize them as certified non-independent financial advisors (certified by X professional self-regulatory organization, government accredited), although such advisors would still be under a regulatory obligation to disclose to clients the nature of their employment, affiliation, and commission or referral arrangements that may influence the objectivity of their advice.

In many respects, this proposed distinction follows recent developments in the regulation of financial advisors in the European Union, Australia, and the United Kingdom, reviewed in part III above. We note that there are various possible ways of implementing this critical distinction. One option is to prescribe this choice ab initio (an individual is certified as either an independent or a non-independent advisor). Another option is to operationalize this distinction through subsequent reliance on disclosure (a certified individual can offer independent advice to some clients and non-independent advice to other clients, but the individual must disclose whether particular advice is provided on an independent or non-independent basis subject to specific restrictions once the advice is disclosed as independent). In our view, the potential risks of conflict of interest that are at play in this market are better addressed by requiring initial certification as either independent or non-independent financial advisor.

6. — Transitional Arrangements

Each government-accredited certification self-regulatory organization for financial advisors should be required, as a condition of certification status, to adopt transitional arrangements whereby non-compliant members are provided with opportunities to upgrade their credentials through top-up or bridging requirements to qualify for certification (as with foreign-trained members). These transition arrangements would be modest under our proposed certification regime, as financial advisors may always choose to opt out and settle for the public registry listing (unlike a universal licensure regime).

After a government-accredited certification regime is implemented for financial advisors, non-government accredited private professional bodies or trade associations should have no authority to confer certification status on their members for any functions falling within the defined field of financial advising to which the public registry and government-accredited certification regime applies — members of such bodies would still be required to list themselves on the public registry but would be identified and held out only as a member of a private association that lacks governmental accreditation (and not as certified, registered or accredited). The government financial regulator in charge of the public registry and government accreditation regime should be equipped with statutory enforcement powers to address non-compliance with regulatory requirements, including failure to register on the public registry and the provision of misleading or false information on the registry. Effective enforcement of these requirements is of central importance in our proposed regime.

VI. — CONCLUSION

Our aim in this case study has been to provide principles which, if adopted, would lead to the creation of a more coherent legal regime in the area of financial advising and planning. To that end, we have examined, from a comparative perspective, possible regulatory options applicable to financial advisors and planners and have identified significant variations across jurisdictions, some following strict exclusive licensing regimes, other lacking any form of regulation or based on a patchwork quilt of regulatory schemes related to the sale of specific financial products as opposed to advice and planning. In light of the identified asymmetric information problems and conflicts of interest that characterize the relationship between financial advisers and their clients, we propose both ex ante and ex post regulation based on a voluntary, government-accredited certification regime that distinguishes between independent and non-independent financial advisors, and a mandatory public registry or database which contains easily-accessible information about all financial advisors. Our policy approach avoids the shortcomings of exclusive licensing while remaining consistent with the emphasis on disclosure as the basis of securities regulation. We believe that if adopted, these measures will promote a more rational regulatory regime for the benefit of all market participants.

Appendix Regulatory Approaches Across Jurisdictions