Co-authored with John Chapman, JD student, University of Toronto Faculty of Law.
Did you know that your investment adviser is not bound by an explicit legal duty to act in your best interests? Surprising? Yes, but more curious is the intense debate about whether this duty should be made explicit in the law. Those who represent investors should be bound by an express fiduciary duty. Alas, such is not the case.
First, let’s be clear that the relevant law is a mess. The standard of conduct is cobbled together from provincial securities regulations, common-law principles and industry requirements, so it is difficult to say when a fiduciary duty applies without evaluating each relationship on a case-by-case basis, which often requires a full trial. Another reason that a national securities regulator is a good idea.
Second, the IEF found that while 70% of investors believe that they are protected by a best interest standard, only 1% of them actually are. OSC Rule 31-505 requires dealers and advisers to deal “fairly, honestly and in good faith” with their clients. Some commentators believe that this is the same as a best interest standard. But no court has recognized this argument so far, and the CSA takes this to mean that the current standard falls short of a best interest standard. Even if the Rule establishes a best interest standard, there is no apparent drawback to acknowledging this fact explicitly. The law would be clearer and easier to understand.
Some argue that establishing a uniform fiduciary standard will increase the costs of providing advice, negatively impacting certain business models. It is true that more stringent regulations carry greater compliance costs and some of these costs may be passed on to investors.
But investors pay a price for investments that may not be in their best interests, given that advisers are required only to recommend a suitable investment rather than the best one. We believe that most investors would be willing to pay a higher up front cost for the imposition of an explicit fiduciary standard that requires their advisers to place the client’s interest ahead of their own in all circumstances. Regardless, costs should be transparent, and shared amongst investors generally, rather than concentrated amongst the unlucky that have been steered into bad investments. And, while cost is an important consideration, it alone should not drive the discussion.
In implementing the standard, Canada can look to examples from other jurisdictions to minimize the cost to the investment industry. The EU, US, UK and Australia have all implemented a higher standard of conduct for investment professionals, and some of these countries had higher standards to begin with. International examples also show that a “uniform” standard can be carved to respond to industry concerns as in the UK.
Regardless of whether the standard changes, the law is due up for clarification. Statutory regulations should set forth the current standard, so investors and advisers can turn to one place to determine the relevant standard of conduct. Investors should not need to consult their lawyers before signing on with an investment adviser.
Provincial securities regulators have investor protection as a central mandate. A default fiduciary standard for investment advisers is the best way to protect investors and needs to be explicitly enacted - now.
Anita Anand is a Professor of Law and John Chapman is a JD Student at the Faculty of Law, University of Toronto.
