21 st Century Regulatory Environment of the Financial Advisor

1. 21st Century Regulatory Environmentof the Financial Advisor Kris Birchard, CFP, CLU, TEP - Vice Chair, Board of Directors Banff School 2007

2. Objectives • Regulatory landscape of the financial advisor • Recent developments • Challenges • Proactive initiatives • Regulatory pressure points • Implications of recent regulatory trends • Protecting advisors

3. Regulatory Landscape Companies (Insurers, funds, banks) • Federal Dept. of Finance • OSFI • Provincial Superintendents of Financial Services Dealers / MGAs • MFDA • IDA • Superintendents of Insurance Federal policy • Bank Act • Anti-money laundering • Privacy • Do-not-call list Evolution of complex financial products • Regulation of hedge funds, PPNs • Know your product Provincial Regulators • Provincial Securities & Insurance Acts • Financial Commission & Insurance Council rules • Securities Commission rules & regulations Designations • Highest practice standards • Meaningful continuing education • Priority of the client’s interest Financial Advisor

4. Recent developments • Bank marketing & distribution of insurance • Bank Act review • Supreme Court of Canada • Mandatory provincial licensing • Managing conflicts - product suitability for insurance intermediaries • Principles based approach to regulation • Incorporation • Moving in the right direction • Do-Not-Call List Rules • Advocis obtains concessions for advisors

5. 2006 Bank Act Review • Consumer protection • Sales pressure • Privacy • Separation of health and banking information • Level playing field for all insurance intermediaries • Banks’ unique position in the marketplace • Banks’ attempt to skirt provincial regulatory authority • Supreme Court of Canada case

6. The banks’ position • CBA recommended four specific changes to the Bank Act: • Distribute brochures and other promotional material about insurance products within their branches • Provide customers with information about specific insurance products • Pass on relevant client information to “an insurance professional”, with the consumer’s consent • Make referrals to “an insurance professional” outside of the branch • Some banks called for the ability to sell insurance in their branches

7. Advocis campaign • Banks undertook massive lobbying effort • Advocis neutralized this with an effective grassroots campaign • Advocis’ landmark survey conducted by POLLARA • White Paper released June 2006 • Legislative proposals released in November 2006 – Bill C37 • Advocis asked for and received commitments from all federalist parties to maintain restrictions • Bank Act received Royal Assent March 29, 2007

8. Supreme Court of Canada • Issue: Are federally regulated banks exempt from provincial licensing requirements to distribute credit insurance products from their branches and through other channels like telemarketers? • Advocis appeared as an intervener on April 11, 2006 • Canadian Western Bank et al. v. Alberta • Advocis argued for uniform standards of professional conduct • Banks argued that the province does not have jurisdiction to regulate banks in this area as they are regulated federally under the Bank Act

9. Supreme Court of Canada • Advocis applauds the decision of the Supreme Court of Canada released on May 31, 2007 • Court unanimously dismissed the banks’ appeal to by-pass provincial regulation • Major victory for Canadian consumers and advisors • Places consumers’ interests first • Preserved a level playing field for financial advisors • Advocis the only association given leave to argue as an intervener • Court’s decision ensures a level playing field in other financial services • E.g. securities

10. Managing Conflicts of Interest • CCIR / CISRO Industry Practices Review Committee reviews of the industry • Commenced in 2004 • Problems arising from US fraud cases • No illegal practices uncovered in Canada • Options for regulation: • Commission Disclosure • Restrict incentives • Legislate priority of the clients’ interest

11. Insurance Regulators Are Listening! • IPRC recommendations released February 2006 • Favours a principles-based approach and wants to harmonize best practices across the industry • Extremely encouraging from an advisor’s standpoint • Insurance regulators were considering at the onset of their consultations introducing layers of prescriptive regulations and even commission disclosure

12. IPRC’s Recommendations (February 2006) • Priority of the client’s interest • An intermediary must place the interest of policyholders and prospective purchasers of insurance ahead of his or her own interests • Disclosure of conflict or potential conflict of interest • Consumers must receive disclosure of any actual or potential conflict of interest that is associated with a transaction or recommendation • Product suitability • The recommended product must be suitable for the needs of the consumer

13. Product Suitability Principle • Principle: Recommended product must be suitable for the needs of the consumer • Broker / agent should conduct fact finding appropriate to the circumstances of the client’s needs • Needs assessment should be flexible • Underlying risk • Client’s objectives • Complexity of product • Not to be mistaken with ‘product suitability’ in the securities / mutual fund context • Non-prescriptive in nature • Advocis develops tools and templates to assist advisors

15. Industry Must Continue to Drive Solutions • Regulators will continue to monitor • Should problems arise, regulators will consider taking further steps including prescriptive rules • Each provincial regulator will determine how best to implement • Legislation / regulation still an option • Newfoundland an outlier • Ontario surveying agents on principles implementation • Ongoing dialogue with regulators and provincial governments essential • Encourage harmonization across Canada • Work with key industry stakeholders essential to ensure consistency of principle emerges

16. Incorporation • Regulators in 4 provinces have extended suspension of MFDA Rule 2.4.1 until end of 2008 • BC, Saskatchewan, Ontario, Nova Scotia • New Brunswick and Manitoba likely to follow suit • Alberta continues to oppose • Permanent rules not in place • Inconsistency across financial products, across jurisdictions

17. Do-Not-Call List Rules • Legislation passed in 2006 • Bill C-37, An Act to amend the Telecommunications Act • Canadian Radio-Television and Telecommunications Commission (CRTC), the regulator, begins developing rules • CRTC originally did not contemplate impact on advisors in connection with: • Existing business relationship • Referrals • Large multi-faceted conglomerate versus small financial services provider • Transfer of book of business • Does it constitute an “existing business relationship?” • Penalty regime • Individual ($1,500) vs. Corporation ($15,000)

18. Do-Not-Call List Rules • CRTC Releases final rules July 2007 • To take effect when DNCL registry up and running • Timing still uncertain • A number of important Advocis recommendations adopted! • Existing business relationship • Limited to legal entity • Victory for small advisors on basis of level playing field • Ability to contact someone where consent is given • Must be express consent versus blanket consent, which is how advisors operate • Transfer of book of business • Does not constitute telemarketing and is therefore exempt

19. Challenges • Client Relationship Model • Saskatchewan segregated fund marketing guidelines

20. Client Relationship Model • Formerly the Fair Dealing Model • OSC driven • Prescriptive regulation of financial advice • Duty to act honestly, fairly and in good faith • Marginalizes designations • Potential for significant increase to compliance cost • Little known benefit to consumers • Advisors shut out of policy development process

21. Client Relationship Model • Registration Reform Rule – Proposed NI 31-103 • Registration requirements • Client relationship rules and principles • Account opening, know-your-client and suitability • Relationship disclosure (relationship disclosure document) • Record keeping • Compliance system • Complaint handling • Conflicts on interest provisions • Referral arrangements • New more onerous MFDA / IDA rules to be put in place

22. Saskatchewan Segregated Fund Marketing Guideline • Insurance Council of Saskatchewan interprets existing by-laws as they apply to segregated funds • Segregated funds = mutual funds as an investment vehicle • MFDA style compliance on sale of segregated funds • MGAs to play an active role in compliance / supervisory role • Analogous to mutual fund dealer under MFDA • Spill over into other provinces? • Possible

23. Proactive initiatives • Independent Owner Operator (IOO) • Registration categories / business structures • Advanced status for CE • Formal recognition of designations • Recognition of the APA • Regulatory recognition of the Best Practices Manual • Product suitability for insurance intermediaries • Anti-money laundering guideline for advisors

24. Regulatory Pressure Points Federal regulators • FINTRAC • CRTC Federal departments • Finance • Industry Canada National Umbrella Regulators • Joint Forum • CCIR / CISRO • CSA Recognized SROs • MFDA • IDA Provincial regulators • 13 Financial Commissions / Insurance Councils • 13 Securities Commissions 13 Provincial / Territorial Ministries • Finance • Government Services • Financial Services Superintendents

25. Regulatory pressure points • Financial advisors are on equal footing with companies and dealers in the eyes of financial services regulators • Little interest in differentiation when drafting regulatory policy • Serious repercussions for compliance costs on small advisor • Principles vs. Rules tug of war • Convergence to insurance regulatory regime OR towards securities based regulation?

26. Implications of recent trends • Regulatory harmonization • Good, if it works in your favour • Strengthening of supervisory oversight • E.g., Client Relationship Model • Relevancy of designations? • Professionalism being challenged

27. Independent channel / small businesses at risk • Compliance costs • Consumer access to financial products and services • Especially at lower incomes • Barriers to entry

28. Protecting advisors • Advocis at the table • However, regulators have resources and time • Other stakeholders have deep pockets • Political engagement a core competency

29. Grassroots • Members engaging politicians • Federal • Bank distribution of insurance • Provincial • Political Advocacy Committees • Opportunity for involvement

30. Provincial Political Advocacy Committees • Formally established • BC, Manitoba, Ontario, Newfoundland • Ongoing development • Slated for 2007-08 • Alberta, Saskatchewan, Atlantic provinces • Chapter engagement • Political activism / contact network • Legislature days

31. Stay Informed • Advisor Voice issued monthly • Advocacy update in FORUM magazine • Advocacy updates at Chapter meetings • Visit www.advocis.ca regularly • Advocacy page • Send us an email at: regulatoryaffairs@advocis.ca

32. If not Advocis then who? Thank you www.advocis.ca