The CFA Institute has called for a one-size-fits all investment advice regulatory model that removes the distinction between wholesale and retail individual clients.
In a new review of managed fund sales practices in four countries the CFA says regulatory “arbitrage may arise when different standards apply to different client segments”.
“It is important for regulators to adopt a holistic approach and minimize such arbitrage,” the review says. “In this regard, the treatment of and protection accorded to investors with a larger amount of investable assets should not be different from that given to retail investors.
“…Just because an investor is relatively wealthy, however, it does not necessarily mean that they are more financially sophisticated or knowledgeable and that the duty of care should be lower.”
In NZ individual investors can opt-out of the Financial Markets Conduct Act (FMC) protections by self-selecting (via several routes) as ‘wholesale’ clients.
The recommendation was one of six included in the CFA ‘Sales inducements in Asia Pacific’ report following the group’s wide-ranging probe into fund distribution trends across Australia, Hong Kong, Singapore and India.
As well as standarising investor protection rules, the CFA review says advice regimes need to apply “consistent regulatory principles” to all investment products, impose clear ‘duty of care’ rules for advisers, require better and more useful disclosures, promote financial literacy, and align remuneration with long-term client needs.
The CFA report says regulations built to these requirements would support investment advice regimes that meet six key goals of:
- sound investor protection;
- access to affordable, quality advice and products;
- a high degree of professionalism;
- transparency on fees;
- avoidance, mitigation, management and disclosure of conflicts of interest, as appropriate; and,
- a culture of accountability.
“Such a market can support a range of different fee- and commission-based business models,” the review says.
Despite its stance against “conflicted” sales incentives, the CFA says investment advice rules based on the above principles “can support a range of different fee- and commission-based business models”.
“Banning commissions does not automatically safeguard investor outcomes, as seen in Australia. This is the result of many factors, including, for example, dilution of original legislation, grandfathering arrangements, and weak enforcement,” the review says. “To achieve the legislative intent of eliminating conflict of interest and safeguarding investor outcomes, it is equally important to have strong systems in place to monitor, surveil, and enforce.”
But the CFA study says trail commissions must be governed carefully, too, if governments ban upfronts.
“Reducing the reliance on trailer fees and mandating their disclosures would go one step further in reducing mis-selling incentives,” the report says.
Bank-dominated fund distribution channels in the four jurisdictions covered by the CFA review have been linked to higher costs, “lack of product innovation, and limited investor choice”.
However, regulations aimed at shaking up the status quo could easily backfire.
“Perversely, the increased regulatory burden placed on the selling process has meant higher costs of service provision, and smaller players may not have the resources to make the necessary investments in systems and processes to stay in business,” the CFA says.
To date, robo-advice and online fund platforms have not carved out significant market share in the four countries examined by the CFA, the report says, although “many remain hopeful”.
“Interestingly, technology may have a bigger role to play in emerging markets where businesses and investors are less beholden to entrenched systems,” the study says.
As NZ readies to move away from an individual licensing regime for investment advisers to an entity-based approach under the Financial Services Legislation Amendment Act (FSLAA), the CFA provides a pertinent observation on how a similar system played out in Australia.
“Australia lacks an individual licencing regime for financial advisers. Licenced firms often struggle to monitor appropriately the conduct of their representatives,” the study says. “Offenders find it relatively easy to continue practicing, by switching firms and registering with different professional organizations.”
The study was based on a “literature review” and a series of 45 industry players such as “regulators, intermediaries, distributors, financial advisers, private bankers, robo-advisers, investors, fund supermarkets, and academics”.
“Our focus has been on the sale and distribution of mutual funds, although we acknowledge that the sale and distribution of insurance and other complex alternative products may potentially be problematic,” the report says.
In addition to an in-depth review of the investment advice systems in the four main countries, the CFA report also briefly reviews the rules in a number of jurisdictions including NZ.
The report was compiled by a slew of experts including CFA Institute Asia Pacific head of advocacy, Mary Leung.