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Why the investment industry should prepare for more rigorous regulations – The Globe and Mail



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This article is the fourth article in a Globe Advisor series on the client-focused reforms, which will place investors’ interests first in their dealings with financial advisors and dealer firms and have a consequential impact on advisors and the investment industry.

Investment industry firms and financial advisors need to be working proactively on updating their client relationship policies and procedures in order to stay on top of anticipated future changes above and beyond the new client-focused reforms (CFRs) set to take effect later this year, experts say.

As part of the current set of CFRs that the Canadian Securities Administrators are bringing in, firms have until June 30 to comply with new conflict-of-interest rules and until Dec. 31 to meet other requirements for know-your-client (KYC) and know-your-product (KYP) documents, among other changes.

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However, the CFRs don’t include several other proposals that have been discussed in recent years, such as a more rigorous KYP and investment suitability processes and restrictions on referral arrangements, which many industry players believe are coming.

“You just have to look at the continuously rising trend of increased accountability, transparency and professionalism that is happening in other jurisdictions around the world, which are further ahead than we are here in Canada,” says Jason Pereira is a partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm under the IPC Securities Corp. umbrella in Toronto. “The question isn’t if it will happen, it’s the speed at which it will happen.”

For example, he says there’s a “gaping hole” in how referral fees are handled in the industry that he believes should be addressed. Proposals to cap referral payments, prevent the payment of referral fees to unregistered parties and restrict the time period in which they can be made were left out of the changes taking effect this year.

Mr. Pereira believes referral fees should be audited annually to ensure there’s an ongoing service, or clients should be allowed to reapprove the fees on a regular basis.

He would also like to see the elimination of embedded compensation.

“The idea of buried trailers has to die,” he says, believing it will happen “eventually,” as more advisors move to a fee-based structure and investors start to demand more transparency as they have with other consumer products. “Full transparent reporting is something that will happen, it’s just a question of when.”

Ken Kivenko, an investor advocate and president of Kenmar Associates, describes the CFRs as “an incremental step forward.”

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As such, he says that “many good ideas were killed, watered down, deferred or moved into guidance, [which is not enforceable].”

Mr. Kivenko would like to see more aggressive changes in the future, including getting rid of deferred sales charges and updating what he sees as an ineffective and outdated investor-complaint system, among other moves.

“Most retail clients lack the skills to detect material conflicts on their own,” he says. “Progress toward a fiduciary standard is the end goal.”

Mr. Kivenko also believes governments need to get more involved in advocating for change on behalf of investors and encourages regulators to work more closely with investors and advocacy groups to understand the issues they face better.

Stan Buell, president of the Small Investor Protection Association, believes some fundamental issues don’t get addressed in regulatory changes.

“The key issue is fiduciary duty,” he says. “Relying on ‘suitability’ is difficult in that suitability is variable and not the same for everyone. Representatives with a fiduciary duty should be able to select suitable products and provide suitable recommendations.”

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Mr. Buell adds that self-regulation doesn’t provide effective protection for investors.

“A regulator that regulates an industry and is also responsible for client protection is faced with an inherent conflict of interest,” he says.

Dan Richards, chief executive at Clientinsights and an instructor at the University of Toronto’s Rotman School of Management, thinks another potential change could be a move toward mandated financial planning for investors buying investments from their advisors.

“That is something you may very well see coming in five years or sooner … and something that advisors will need to prepare for,” he says. “Because some clients don’t see the value of financial planning, you can’t force it unless regulators mandate it.”

Mr. Richards also expects advisors will need to upgrade their credentials continuously through more education and training.

Michael Thom, managing director of CFA Societies Canada, believes the majority of firms across the country are working on adopting the CFRs and understand there’s likely more regulatory evolution to come.

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For example, the additional clarity and action on title reform provisions in the CFRs, designed to remove misleading titles in the investment industry, will also be coming sooner rather than later. “The progress has been slower than some would like,” he says.

An example is the broad use of titles such as vice-president, which implies a corporate officer position when it may not be the case at some firms. “It will cause a lot of adjustment across the industry,” Mr. Thom says.

He also expects to see changes in the product selection and recommendation processes, with an additional focus on value-added services such as portfolio management and financial planning instead of simply just transactional advice.

“I think there’s room for incremental differentiation there,” he says.

Mr. Thom is also hoping for more work to differentiate and reconcile the difference in duties and requirements between investment and insurance-regulated products.

“I do worry for the potential for regulatory arbitrage and the impact on client experience there,” he says.

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He suggests firms not only implement the minimum requirements of CFRs, but also “embrace the spirit” of the changes.

“I encourage firms to take this opportunity, to the extent it’s not already embedded in their business practices, to re-orient themselves toward their clients and their clients’ interests in everything they do,” he says.

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More China coal investments overseas cancelled than commissioned since 2017



More China-invested overseas coal-fired power capacity was cancelled than commissioned since 2017, research showed on Wednesday, highlighting the obstacles facing the industry as countries work to reduce carbon emissions.

The Centre for Research on Energy and Clean Air (CREA) said that the amount of capacity shelved or cancelled since 2017 was 4.5 times higher than the amount that went into construction over the period.

Coal-fired power is one of the biggest sources of climate-warming carbon dioxide emissions, and the wave of cancellations also reflects rising concerns about the sector’s long-term economic competitiveness.

Since 2016, the top 10 banks involved in global coal financing were all Chinese, and around 12% of all coal plants operating outside of China can be linked to Chinese banks, utilities, equipment manufacturers and construction firms, CREA said.

But although 80 gigawatts of China-backed capacity is still in the pipeline, many of the projects could face further setbacks as public opposition rises and financing becomes more difficult, it added.

China is currently drawing up policies that it says will allow it to bring greenhouse gas emissions to a peak by 2030 and to become carbon-neutral by 2060.

But it was responsible for more than half the world’s coal-fired power generation last year, and it will not start to cut coal consumption until 2026, President Xi Jinping said in April.

Environmental groups have called on China to stop financing coal-fired power entirely and to use the funds to invest in cleaner forms of energy, and there are already signs that it is cutting back on coal investments both at home and abroad.

Following rule changes implemented by the central bank earlier this year, “clean coal” is no longer eligible for green financing.

Industrial and Commercial Bank of China, the world’s biggest bank by assets and a major source of global coal financing, is also drawing up a “road map” to pull out of the sector, its chief economist Zhou Yueqiu said at the end of May.


(Reporting by David Stanway; Editing by Kenneth Maxwell)

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Bank of Montreal CEO sees growth in U.S. share of earnings



Bank of Montreal expects its earnings contribution from the U.S. to keep growing, even without any mergers and acquisitions, driven by a much smaller market share than at home and nearly C$1 trillion ($823.38 billion) of assets, Chief Executive Officer Darryl White said on Monday.

“We do think we have plenty of scale,” and the ability to compete with both banks of similar as well as smaller size, White said at a Morgan Stanley conference, adding that the bank’s U.S. market share is between 1% and 5% based on the business line, versus 10% to 35% in Canada. “And we do it off the scale of our global balance sheet of C$950 billion.”

($1 = 1.2145 Canadian dollars)


(Reporting by Nichola Saminather; Editing by Leslie Adler)

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GameStop falls 27% on potential share sale



Shares of GameStop Corp lost more than a quarter of their value on Thursday and other so-called meme stocks also declined in a sell-off that hit a broad range of names favored by retail investors.

The video game retailer’s shares closed down 27.16% at $220.39, their biggest one-day percentage loss in 11 weeks. The drop came a day after GameStop said in a quarterly report that it may sell up to 5 million new shares, sparking concerns of potential dilution for existing shareholders.

“The threat of dilution from the five million-share sale is the dagger in the hearts of GameStop shareholders,” said Jake Dollarhide, chief executive officer of Longbow Asset Management. “The meme trade is not working today, so logic for at least one day has returned.”

Soaring rallies in the shares of GameStop and AMC Entertainment Holdings over the past month have helped reinvigorate the meme stock frenzy that began earlier this year and fueled big moves in a fresh crop of names popular with investors on forums such as Reddit’s WallStreetBets.

Many of those names traded lower on Thursday, with shares of Clover Health Investments Corp down 15.2%, burger chain Wendy’s falling 3.1% and prison operator Geo Group Inc, one of the more recently minted meme stocks, down nearly 20% after surging more than 38% on Wednesday. AMC shares were off more than 13%.

Worries that other companies could leverage recent stock price gains by announcing share sales may be rippling out to the broader meme stock universe, said Jack Ablin, chief investment officer at Cresset Capital.

AMC last week took advantage of a 400% surge in its share price since mid-May to announce a pair of stock offerings.

“It appears that other companies, like GameStop, are hoping to follow AMC’s lead by issuing shares and otherwise profit from the meme stocks run-up,” Ablin said. “Investors are taking a dim view of that strategy.”

Wedbush Securities on Thursday raised its price target on GameStop to $50, from $39. GameStop will likely sell all 5 million new shares but that amount only represents a “modest” dilution of 7%, Wedbush analysts wrote.

GameStop on Wednesday reported stronger-than-expected earnings, and named the former head of Inc’s Australian business as its chief executive officer.

GameStop’s shares rallied more than 1,600% in January when a surge of buying forced bearish investors to unwind their bets in a phenomenon known as a short squeeze.

The company on Wednesday said the U.S. Securities and Exchange Commission had requested documents and information related to an investigation into that trading.

In the past two weeks, the so-called “meme stocks” have received $1.27 billion of retail inflows, Vanda Research said on Wednesday, matching their January peak.


(Reporting by Aaron Saldanha and Sagarika Jaisinghani in Bengaluru and Sinead Carew in New York; Additional reporting by Ira Iosebashvili; Editing by Sriraj Kalluvila, Shounak Dasgupta, Jonathan Oatis and Nick Zieminski)

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