Canada has had a series of high profile investment advisor scandals. It is perhaps no coincidence that the Canadian Securities Administrators ("CSA") have launched a consultation in connection with their recommendation that a statutory "best interests" duty be imposed on advisors and dealers in Canada in connection with advice to their clients.
This is intended to bring Canada in line with similar statutory duties that exist in the United Kingdom and the EU, and which Australia is to implement later this year.
The proposal is that each advisor or dealer providing advice to retail clients with respect to investing, buying or selling securities or derivatives shall act in the best interests of the retail client.
This is an additional duty besides the obligation to exercise a degree of skill and care that a reasonably prudent person or company would exercise in the circumstances. It is also considered by the CSA, which is the national association of securities and investment regulators in Canada, to be more demanding than the duty imposed on registered advisors and dealers to deal "fairly, honestly and in good faith" with their clients under existing securities legislation in Canada.
As described by the CSA in its proposal, the statutory "best interests" duty is to heighten the existing obligation of good faith and fair dealing into a qualified fiduciary obligation.
In many other jurisdictions, the relationship between investment adviser and client has been characterized as fiduciary in nature. However, Canadian Courts, when dealing with claims between investment advisors, brokers and their clients, have been bedeviled by disputes as to whether or not the relationship is a fiduciary one or not. The courts apply an ad hoc analysis, leaving considerable uncertainty. The consequences are significant, as fiduciary relationships bring with them the full range of equitable remedies and potentially lower causation thresholds and more generous measures of damages.
The objectives of the CSA are to enhance investor protection and to harmonize the obligations across Canada. As the investment adviser and broker-dealer professions in Canada are effectively self-regulating through self-imposed regulatory bodies, the CSA has often taken the lead in these matters.
Many investor groups have been vocal about the poor record of recoveries by investors and the lack of framework in Canada. The higher duties imposed by such a 'best interests' duty would strengthen the basis of complaint. It would also bring the legal framework into line with the fact that polls of retail Canadian investors demonstrate that investors believe such obligations already exist.
Besides bringing the common law provinces in line, such a provision would have the affect of harmonizing the common law provinces with Quebec civil law jurisdiction, where it is recognized that the investment advisor relationship brings with it an obligation of loyalty that the courts consider to be akin to the fiduciary duty (Laflamme v. Prudential-Bache Commodities Canada).
The benefits of harmonization are clear but if it is enacted, and this is far from certain, there are both commercial and legal complications to be faced.
Concerns have been raised by the securities industry in Canada that greater costs will be imposed, that there will be a negative impact on investor access, and that it will have an uncertain affect on compensation practices. Notably, it is arguable that compensation structures based on commission are incompatible with a fiduciary duty, as the latter precludes profit-making from the opportunities of the client. Ultimately, fee-based compensation is more neutral and less prone to difficulties.
The CSA also recognizes that any such standard will have to be tailored to reflect the different business models. The statutory 'best interests' duty applicable for a fully discretionary stock broker will be different from the standard applicable to a mutual fund advisor or discount brokerage, who has significant restrictions on what they can sell and also have limitations on what advice, if any, they can provide. This will require significant guidance as to its application.
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